What Biden should do to stop China from controlling Panama Canal

The Panama-U.S. relationship is a strong one, but we often take the relationship for granted. Given the challenges in Panama right now and given China’s increasing interest in Panama, there are some steps we ought to take.

Since 1989, with the fall of the Noriega government, Panama has moved from $2,300 GDP per capita to $14,500 GDP per capita. The country has diversified its economy with tourism, financial services, and is a major logistics hub not only because of the Panama Canal, but also because of its excellent aviation hub. Panama attracts significant Foreign Direct Investment (FDI) for a small country. In 2019, Panama attracted $4.8 billion in FDI. Panama has been known for its stability.

Recently, Panama joined forces with Costa Rica, the Dominican Republic, and Ecuador to form the Alliance for Development in Democracy. In essence, this partnership signals to others, including the United States, that these alliance partners are countries open to foreign investment.

Panama, along with the rest of the alliance members, is a great nearshoring candidate. The Panamanian Ministry of Trade and Industry published a report on the advantages that Panama has for nearshoring. Many of the opportunities include Panama’s increasing logistic and manufacturing abilities, its function as a hub, legal stability, and environmentally friendly practices. 

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Despite being labeled as an upper income country, Panama has been wracked by a myriad of protests over the increasing inflation, accusations of corruption, and recent government trends that continue to cause economic disparities among the Panamanian people. The unemployment in the country continues to rise despite President Laurentino Cortizo’s measures to alleviate food and fuel costs. For example, recently, President Cortizo approved the reduction in the price of gas from $3.95 to $3.25 per gallon. Protestors continue to set up roadblocks.

The protests in Panama are part of a pattern of broader regional and global disruptions in other successful countries like Chile and Colombia that have made notable progress, but where stakeholders "want more" and where the rise in the price of food and fuel have increased tensions. 

The challenges in Panama are happening when Panama is receiving increasing attention from China. Panama shifted recognition of Taiwan to mainland China in 2017. Although, Panama maintains absolute control of the Panama Canal - and has done so since 1999 - Chinese companies have been increasingly involved in infrastructure, electricity, and logistics around the canal. There are many Chinese diaspora in Panama including a "China town" in Panama City related to the building of the canal in the 19th Century. So Panama’s ties, as a Pacific nation, to Asia are long-standing. 

Not only is China the second-largest user of the canal, preceded by the United States, but it also operates ports on both sides of the canal via Hutchison, provided for the construction of the Amador Convention Center, proposed the development of a cruise terminal, and funded the production of bridges over the Panama Canal. China remains the primary source of products transporting through the Colón Free Trade Zone. Huawei, the Chinese technology company, provides digital and telecommunications products and services throughout the country.

In April, Chinese and Panamanian Foreign Ministers Wang Yi and Erika Mouynes met to discuss the prospects for fortifying the relations between the two countries.

There are 20,000 to 30,000 U.S. retirees in Panama, and Panama is ranked one of the best foreign countries for Americans in retirement, and most Panamanians have pro-American views. Yet, our relations with Panama have been complicated in the last several years. A major sticking point in our relationship is the classification of Panama as a "country subject to increased surveillance" by the Financial Action Task Force (FATF) in 2014, partly as a result of the so-called "Panama Papers." 

In 2016, Panama was removed from the list after some regulatory changes were made but after a three-year hiatus, Panama was reinstated on the list in 2019. Clearly, Panama has some problems with money laundering which led to the renewed FATF designation. Clearly, the U.S. government and others believe that Panama still needs to do more to fix the lack of effectiveness of their anti-money laundering regime. Panama is seeking to make fixes to address these issues.

The Inter-American Development Bank (IDB) is a major partner in Panama. The IDB is a major instrument of support to respond to the current crisis along with enabling digital transformation, and financing nearshoring hard and soft infrastructure.

In the context of COVID-19, Panama’s economy was sustained by activity around the Canal and the Cobre Panamá mine. Unfortunately, the financial sector, the tourism sector, and the logistic sectors were greatly impacted.

President Cortizo and his administration have taken a "slower" approach to China in comparison to Cortizo’s predecessor Juan Carlos Varela. Recently, President Cortizo has stated that he wants to restart the negotiations with China for a free trade agreement. Despite increased in engagement with China, President Cortizo has said that he sees the U.S. as Panama’s primary partner.

The Biden administration should reinforce its confidence in and support for the Cortizo government, including diplomatic attention. The vibrant private sector in Panama should be seen as a long-term U.S. partner. Governments come and go but often private investments and industries last decades.

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Many of the traditional "soft power" tools that the U.S. might look to: the World Bank, the Development Finance Corporation, the U.S. Trade Development Agency, the U.S. Agency for International Development and even the U.S. Export-Import Bank have limitations on their ability to operate in Panama because Panama is an upper income country. Recently, at the Summit of the Americas, President Biden and his administration briefly mentioned the need to revisit the potential for the DFC and United States International Development Agency (USAID) to operate in Panama. Perhaps given the recent political challenges in Panama, the US ought to consider some limited assistance to help those communities most affected by the Covid-19 pandemic.  

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The most important step that the U.S. could do is to come to a mutually satisfactory conclusion of the FATF process and remove Panama from the gray list, assuming Panama merits removal from this list.

Finally, we need to put in place a U.S. ambassador in Panama. We have not had a U.S. Ambassador to Panama since 2018.

Success stories like Panama should not take for granted. We need to remain actively engaged and show our commitment to Panama, the Panamanian people, and support the Cortizo administration.

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