In December 2018, Xi Jinping (習近平) became the first Chinese head of state to visit Panama. Shortly before his arrival, a statue of Chiang Kai-shek (蔣介石) that had stood in the playground of a local Chinese school was yanked from its plinth by a crane.
Panama’s June 2017 recognition of China was meant to be emphatic and final. In a joint communique, Panama recognized that “the government of the People’s Republic of China is the only legitimate government representing all of China, and Taiwan forms an inalienable part of Chinese territory.” So when seven Panamanian lawmakers and their advisors visited Taipei last month, it caused a diplomatic row with the Chinese Embassy in Panama. Although two previously invited deputies backed out of the trip, the remainder received assurances from the U.S. Embassy in Panama.
The five-day visit, the first of its kind for nearly a decade, is a consequence of the shifting U.S. strategy in Central America. It could also cause problems for Panama’s government.
Panama was the first domino in a wave of diplomatic flips in Central America and the Caribbean. Over the next six years, the Dominican Republic, El Salvador, Nicaragua and Honduras followed Panama’s lead in dropping Taipei for Beijing.
There have been three stages to Panama-China relations. In the initial honeymoon period, Panama signed over 40 MOUs with China and became the first Latin American nation to sign on to the Belt and Road Initiative. Chinese firms won contracts for metro lines, major bridges, ports and power plants. The final text of a free-trade agreement was drawn up.
But that trade deal was never signed. In the second stage of the relationship, U.S. back-channel pressure effectively rolled back China’s growing political and economic footprint in Panama. Chinese infrastructure projects were canceled, retendered or suffered interminable delays. Panamanian officials and businessmen with close ties to the Chinese found themselves subject to aggressive interrogation at U.S. airports. Leaked messages from the phone of the Panamanian president who oversaw the diplomatic change, Juan Carlos Varela, suggested his family rum business had received major Chinese purchases. In July 2023, the State Department revoked his visa, accusing him of “significant corruption.”
The return of President Donald Trump ushered in the third stage of China-Panama relations. Following his threats to “take back” the canal, the Panamanian government has made a number of concessions. President José Raúl Mulino said his country would not renew its membership of the Belt and Road Initiative, allowed the U.S. to increase its troop numbers in the country and agreed to Panamanian lawmakers joining the Inter-Parliamentary Alliance on China, or IPAC, an alliance aimed at “confronting the PRC’s rise.” When Beijing blocked the proposed sale of two Chinese-owned ports at the entrance of the Panama Canal, Panamanian lawyers lodged a Supreme Court case claiming the original contracts were unconstitutional.
The visit of the Panamanian lawmakers to Taiwan took place while this third stage of relations was still unfolding. On a packed four-day trip paid for by Taiwan, they met with Vice President Hsiao Bi-khim (蕭美琴) and Foreign Minister Lin Chia-lung (林佳龍). Elvins Santander, one of the organizers, says the goal was to establish ties between democratic parliaments, develop trade opportunities in agricultural products and investigate opportunities for Panama to establish a role in the semiconductor industry as supply chains shift to the Americas. Santander points out that Taiwan and Panama have had, since 2003, a free-trade agreement passed by vote in the National Assembly, which takes precedence over the MOU signed between the two countries regarding the “One China” principle. If lawmakers from Mexico and Colombia (both of which recognize Beijing) can visit Taiwan without comment, he argues, why can’t Panamanians?
Back in Panama, however, the visit has generated controversy. In the days before departure, the delegates received messages from the Chinese Embassy in Panama requesting that they cancel the trip. Some reportedly spoke to the office of the U.S. ambassador, Kevin Cabrera, who expressed his support for the initiative.
President Mulino was less enthusiastic. He told press he hoped the delegates “eat plenty of chow mein,” reminding them that formal foreign relations are the exclusive domain of the executive branch and that the delegates’ discussions regarding trade or investment had no validity. Subsequently, the foreign minister said that Panama had no intention of inviting Taiwan to establish a trade office.
Who benefited from the trade trip? It was a minor victory for Taiwan’s Ministry of Foreign Affairs. Coupled with an election result in Honduras that opens the possibility of re-establishing formal ties, it shows that Taiwanese diplomacy is not a one-way street of ever-shrinking diplomatic presence. The U.S., too, appears prepared to support any attempt to weaken Chinese influence in the Americas, and to openly support such initiatives.
While it is true that Mulino has stated his desire to make Panama attractive to the chip industry, the visit was an aggravation to an already difficult diplomatic situation. Since the beginning of the year, he has been forced to bend to U.S. pressure under the very real threat that Trump could order the retaking of the canal. In Honduras, election candidates can use the Taiwan card to win U.S. diplomatic support at little cost. For Panama, however, angering China comes at a high price.
First, the real beneficiaries of China’s now-stymied infrastructure spend in Panama have been the local law firms and consultancies that greased the wheels of the investment bureaucracy. They would stand to lose out if China decided to pull its investment from the country. Second, the issue of the two ports has not been resolved. Should Xi refuse to sanction a sale, and should Panama’s Supreme Court withdraw the contract from the Hong Kong firm, China would likely pursue a major international arbitration case against the country. That legal case could expose the role played by Panamanian business and political elites in awarding the highly favorable contracts initially negotiated with CK Hutchison and their subsequent profits from the deal. China’s potential leverage over Panama is much higher than in Honduras.
Given its role in world trade, it is also of more strategic importance. So far, Chinese diplomats have avoided heavy criticism of the Mulino government and focused their attacks on the U.S. bullying. However, if Panama were seen to be acting against China absent of duress, or if China’s own position on the isthmus looked hopeless, that could change. Beijing would have every incentive to pursue all available legal options, maximizing the costs of disengaging with China to set an example to other nations.
Panama has a diplomatic right to establish closer political and economic ties with Taiwan, and an economic incentive to do so. However, the visit demonstrates that the deep political and economic ties that China forged in the years surrounding diplomatic recognition is a hidden cost that limits Panama’s foreign policy options.
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