China’s Front Door to America’s Backyard

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China’s Front Door to America’s Backyard

China’s rising influence in Panama is a case study of its ambitions in Latin America.

China’s Front Door to America’s Backyard

In this Dec. 3, 2018, photo, a Panama Canal worker docks the Chinese container ship Cosco at the Panama Canal’s Cocoli Locks, in Panama City.

Credit: AP Photo/Arnulfo Franco

Recently, China has expanded its presence in the Latin America and the Caribbean (LAC) region. This increasing influence was crystallized during a state visit to Panama by Chinese President Xi Jinping in December 2018. Xi’s 24-hour state visit to Panama, the first by any Chinese head of state, culminated in 19 cooperation agreements in trade, infrastructure, and other areas.

On the economic front, China secured agreements on significant infrastructure projects such as the building of a high-speed train as well as financial service deals between banking institutions to presumably fund such projects. These agreements were not just economic and geopolitical victories for China; Xi’s visit also embodied China’s ambition to pull Taiwan’s remaining diplomatic allies into their orbit. In 2017, Panama shunned Taiwan in favor of relations with China, a shift that caused a ripple effect around the region. The Dominican Republic and El Salvador both cut ties with the island nation in 2018.

Xi’s state visit also had significant geopolitical importance, specifically regarding the Panama Canal. The canal acts as a strategic gateway between the Atlantic and Pacific Oceans and is an essential passage for the world’s commodities. The country of Panama itself links Central and South America.

The geopolitical significance also lies in the shadows of historical elements. Panama was an unincorporated territory of the United States for the greater part of the 20th century. The U.S. also had military installations in Panama and controlled the Panama Canal until 1999 (per the Torrijos-Carter Treaties).

No stranger to the power of imagery, Chinese leadership was keenly aware of America’s historical influence in Panama. Prior to Xi’s inaugural state visit, Chinese leaders were in talks with their Panamanian counterparts to build the Chinese embassy near the Panama Canal in a zone formerly controlled by the United States; thus, the Chinese national flag would have been seen by arriving ships. However, domestic opposition pressured the Panamanian government to shelve those plans.

China’s Latin America and the Caribbean Strategy

China’s upgraded relations with Panama reflect its strategic emphasis and increasing influence in the LAC region. China’s strategy focuses on economic integration via trade, investment, and loans, which are driven by both China’s appetite for raw materials in energy and the region’s thirst for infrastructure investment.

Regarding trade, China has expanded partnerships with LAC countries like Brazil, which overtook the United States in 2013 as China’s biggest import market for soybeans. Also, excluding Mexico, China is ahead of the United States in total trade volume in nearly all of Latin America, according to data from the International Monetary Fund (IMF). “Resource abundant LAC countries can help China to secure its imports for oil, raw material, and agricultural products,” says Yue Su, a Chinese economist at the Economist Intelligence Unit (EIU) in Beijing. However, the LAC region’s trade deficit with China remains an issue as China exports more than it imports. Plus, extraction exports – such as iron and crude petroleum – accounted for one-fourth of all LAC exports to China in 2017, highlighting the importance of energy in China’s trade with the region.

Another attribute of China’s primarily economic-centered LAC strategy is investment. Xi made an ambitious pledge of $250 billion in investment at the inaugural ministerial meeting of the Forum of China and the Community of Latin American and Caribbean States (China-CELAC Forum) in 2015. For LAC countries lacking adequate interior infrastructure, Chinese direct investment helps to meet their infrastructure needs. Similar to trade, Chinese investments also heavily focus on energy and natural resource extraction.

Chinese loan commitments to the region have also expanded. In 2017, Chinese loans in infrastructure increased significantly, contrasted to previous years where oil-related loans constituted the majority. Venezuela, Brazil, Argentina, and other regional countries have all been recipients of notable Chinese capital. Former U.S. Secretary of State Rex W. Tillerson, and current Secretary of State Mike Pompeo have both referred to opaque Chinese investments as debt trap diplomacy.

Across the political spectrum, from center-right governments in Chile to Argentina, Latin American officials are welcoming warming ties with China, says Rebecca Ray, an expert on LAC affairs at the Global Development Policy Center in Boston, Massachusetts.
“China has the advanced technology and experience for large-scale, modern infrastructure projects,” said Ray. Additionally, Chinese contractors are in an advantageous position as they can rely on public financial backing, she added.

Besides economic pursuits, there is some apprehension that Beijing may have military ambitions in the LAC region as well. After El Salvador cut ties with Taipei and established diplomatic relations with Beijing, the U.S. ambassador to El Salvador expressed concern that China might use the country’s bustling La Union commercial port as a “military base.” However, the likelihood of such a move is minimal as China’s strategy in the region is mostly economic. Moreover, in light of its aggressive actions in the South China Sea, China would also find a confrontational move counterproductive to its banner of “peaceful coexistence.” Additionally, military equipment sales to LAC countries like Venezuela and military agreements with others such as Argentina, do not have a direct impact on U.S. national security interests in the region.

China’s largely economic-based strategy in the region also helps to serve its foreign policy and geopolitical objectives. Chinese economic statecraft is increasingly used to expand its presence and leverage in the region. China’s most celebrated exports to Latin America are not its manufactured goods, but its developmental model – a top-down economic approach with the state at the center of society and industry. Many LAC leaders view China’s no-strings-attached investment deals as increasingly attractive.

Panama’s Role in China’s LAC Strategy

China views Panama’s role in its LAC strategy through the Panama Canal. In essence, China’s relationship with Panama is a move to gain a symbolic and economic foothold between the North and South American continents. “As a regional financial and transportation hub, Panama can act as a gateway for China’s presence in the region,” said Yue. Because of its strategic location, China hopes Panama will become a logistics center for the rest of the region, as well as a hub for Chinese goods entering into the Americas.

China’s newfound ties with Panama also demonstrate to other regional powers the benefits of establishing formal diplomatic relations with the Middle Kingdom. “This [Panamanian-Chinese ties] could potentially help China gather more supporters as geopolitical tensions rise,” mentioned Yue.

However, as the United States and China are the biggest users of the Panama Canal, the canal itself may end up an unintended casualty of the current U.S.-China trade conflict. The Trump administration’s recent move to increase tariffs on $200 billion worth of Chinese imports and China’s counter tariff-raising measures suggest further escalation and deterioration of bilateral relations. This downward trend amid a deepening strategic rivalry could conceivably stunt the growth of the canal as less American-Chinese goods flow through the maritime artery and a real decoupling of the two major economies slowly starts to manifest.

On the other hand, as a result of the tariff escalations, China shifted its soy purchases from North to South America – further elevating the strategic importance of the canal to China. “It is no secret that China is a significant buyer of Brazilian and Argentine soy,” said Ray. “A close relationship with Panama is vital to ensure that these shipments will be able to continue unimpeded.”

Chinese state-owned enterprises (SOEs) are actively engaged around the canal. For example, Chinese Overseas Shipping (COSCO), is alleged to be a key client of Chinese investment on the Atlantic side of the canal, which if true, would enable it to expand its shipping operations in the region. Chinese interests could also impact the situation on the canal’s Pacific-facing side with reported interest from Chinese investors to purchase nearby land to develop a logistics park.

China also sees Panama as a critical partner in the region for its Belt and Road Initiative (BRI), as it became the first LAC state to sign a memorandum of understanding (MOU) on the geopolitical and infrastructure plan. Panama’s participation in the BRI effectively kills two birds with one stone as Beijing seeks to bolster its power projection and secure its economic interests in the region. The BRI itself is as much about image as it is about economics. Thus, considering the symbolic and strategic location of Panama, it is a fitting partner for China’s new “Maritime Silk Road.” Since Panama’s inclusion, 15 other LAC countries have signed MOUs to promote the BRI.

Notably, however, these countries were largely absent from Beijing’s Second Belt and Road Forum (BRF) this year, as Chile was the only LAC nation to send a top leader. Nonetheless, by including Panama, China can link its ambition of dominating the Panama Canal as a logistics and shipping center under the BRI. Many LAC countries also have diverging foreign policy interests and relations with China. Thus, China could exploit this lack of cohesiveness through Latin America’s “front door” – Panama.

Significant potential nonetheless exists for triangular cooperation between Panama, the United States, and China, says Ray. Ray points out that Chinese technical compatibilities with LAC governments can be complementary with Western multilateral development banks’ (MDBs) institutional management skills. “In Panama in particular, this kind of MDB expertise is crucial in avoiding social conflict and environmental damage from new infrastructure plans,” she added.

Don Giolzetti is a China Policy Analyst based in Beijing and a frequent contributor to CNN in the Greater China Region.