23 April 2019
The Panama Canal’s share of container cargo has been slipping due to heightened rivalry following the expansion of the Suez Canal. Photo: Wikipedia
The Panama Canal’s share of container cargo has been slipping due to heightened rivalry following the expansion of the Suez Canal. Photo: Wikipedia

Why Panama needs to befriend China

Panama has recently severed its longstanding diplomatic ties with Taiwan in favor of China, reflecting in part its increasing economic reliance on China.

With a small population of 3.7 million, Panama has two main economic pillars. The Panama Canal , a waterway that connects the Atlantic Ocean with the Pacific Ocean, generates enormous toll and services revenue each year. Also, the nation is one of the world’s popular offshore tax havens for its favorable tax regime and confidentiality.

However, both industries have been suffering since 2015.

That year, Egypt completed the expansion of the Suez Canal. The expanded canal can better facilitate the passage of the largest cargo ships and super oil tankers, easing congestion and shortening the average traffic to 11 hours from 18 hours.

Also, Egypt’s government offered a 45 percent discount to very large crude carriers (VLCC) en route from the United States to Arab Gulf countries through the canal last year. That helped reduce the toll charge for big vessels to US$400,000.

The Panama Canal suffered as result. As of July last year, the Panama Canal’s share of container cargo moving between Asia and the US east coast dropped to 62 percent, down from 79 percent in early 2010. By contrast, the Suez Canal lifted its market share from 21 percent to 38 percent in the period.

Also, the nation’s offshore tax heaven business was badly hurt by the Panama Papers leak last year. Both the US and Europe have ramped up efforts to crack down on offshore tax evasion in recent years, further hitting Panama.

As a result, Panama’s GDP growth slowed to 4.9 percent last year, down 0.9 percentage points from the previous year. It was the slowest growth rate since the 2008 financial crisis.

Panama has been concerned about political instability since the US withdrew troops in 1999. Keeping a relatively rapid economic growth is needed to defuse social unrest and maintain political stability.

Panama has received increasing investment from China in recent years.

For instance, China’s Landbridge Group acquired Margaret port, the biggest port in Panama, for US$900 million in May last year. And the company has announced it will spend another US$1 billion to expand the port.

Interestingly, Panama President Juan Carlos Varela streamed the inauguration ceremony of Margaret port expansion live on his Facebook account. The national flags of both Panama and China could be seen in the video. That was a warning sign for Taiwan.

China has been trying to isolate the island from the rest of the world. Now only 20 countries have diplomatic relations with Taiwan.

This article appeared in the Hong Kong Economic Journal on June 14

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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