Latin America Advisor

A Daily Publication of The Dialogue

Would a Trade Deal With China Benefit Panama?

Panamanian Government

Panama and China officially began negotiations for a free trade agreement on July 9, almost one year after the Central American country established diplomatic relations with China and severed ties with long-time ally Taiwan. What are Panama’s objectives going into the negotiations for the free trade deal? How would such a deal with China boost the Panamanian economy? Which sectors stand to gain or lose? What do the new trade talks say about China’s engagement and plans in Latin America and the Caribbean?

Joaquín E. Jácome Diez, former minister of trade and industry in Panama and senior partner of Jácome & Jácome: “Since the Panamanian government established diplomatic relations with China, it has promoted a robust agenda with Beijing. One of the most important elements is the negotiation of a free trade agreement between the two countries. Panama is looking to enhance its already vibrant economic relations with China, offering its strategic location in the hemisphere to serve as a gateway to the rest of the region, through its maritime, airline hub, telecommunications and financial capabilities. Once a free trade agreement is finalized with language, including financial services, investment, public procurement, intellectual property rights and phytosanitary provisions, among other key topics, our country could be positively affected. According to the Panamanian government, establishing diplomatic relations and having in place a free trade agreement with China will bring vast amounts of foreign direct investment in areas like infrastructure, services tourism, logistics, financial sector and maritime, which would reflect an increase in the GDP of the country. Panamanian exports, though limited, could benefit from having access to such a broad market. Realistically, foreign direct investment could be where Panama stands to gain. However, we have to be careful in areas like agriculture, manufacture, services and products to human consumption. The government’s decision to break diplomatic ties with Taiwan in favor of China has been portrayed to the Panamanian people as a potentially lucrative one, creating unrealistic expectations by comparing Panama to countries in the region that took similar steps years earlier. It’s no surprise that China has an aggressive foreign policy in our hemisphere and establishing diplomatic relations with Panama was one key aspect of that policy, which the current Panamanian government made possible.”

Anabel González, senior consultant on trade and investment, former senior director at the World Bank and former trade minister of Costa Rica: “Panama and China already enjoy close economic ties. China is the second most important user of the Panama Canal, after the United States, and the first supplier of the Zona Libre de Colón, the largest free zone in the hemisphere. Building on this solid point, a free trade agreement would provide a rules-based framework to underpin this relationship, which could be useful in fostering Chinese infrastructure investment in Panama and positioning Panama as the anchor point of the Belt and Road Initiative in Latin America. Cooperation between both countries could also cement Panama’s strategic position as the distribution hub for Chinese products in the region, in particular if further investments are made in logistics and distribution services. Additionally, Panama’s financial services infrastructure could support internationalization of the renminbi currency, a key Chinese policy objective, which could also strengthen Panama’s position as a financial sector. The above suggests that it is important to approach the negotiation of this free trade agreement with a broader perspective that would put services and investment at the heart of the accord. It is not so much about exporting Panamanian goods to China, but more about bringing Panama’s strategic role as a gateway to trade and connect with China and East Asia to a new level.”

Arancha González, executive director of the International Trade Center:“As Panama and China engage in negotiations for a free trade agreement, both countries stand to gain. For China, an agreement with Panama would build on the existing deal with Costa Rica, gaining access to a very valuable transportation and logistics hub for trade between east and west as well as opening a faster route to the Atlantic coast of Latin America. For Panama, a deal with China would help improve its ability to move up the value chain, capitalizing on its strategic location and human capital. But more importantly, the move shows that both countries see in trade a tool to generate better quality growth, opportunities for employment and development prospects. As both countries begin negotiations, it is worth recalling that trade agreements make trade possible, but to make trade happen, countries need to invest in policies at home that strengthen productive capacity, invest in education and skills, and ensure that those negatively affected by greater competition are not left behind. At a time when trade unilateralism is on the rise and when trade agreements are seen by some as a zero-sum game, Panama and China can help send a useful message on the value of trade and international cooperation.”

Barbara Kotschwar, senior private sector specialist at the World Bank: “One year after restoring diplomatic relations, Panama is beginning negotiations to become the fourth Latin American country to have a free trade agreement with China (after Chile, Costa Rica and Peru). China is an increasingly important trade partner for Panama. Imports from China have ballooned over the past decade: in 2007, 20 percent of recorded imported goods originated in China; by 2016 this portion has risen to a third, surpassing the United States, which has fallen from being the main source of imports with 22 percent in 2007 to less than 10 percent in each of the past five years. Panama’s motivations for consolidating economic relations are twofold: infrastructure and diversification. Infrastructure is key to the Panamanian economy and China has prominently pushed to support infrastructure projects around the globe. Aside from its prominent focus on infrastructure through the One Belt One Road Initiative and its support for the Asian Infrastructure Investment Bank, China has lent significant funds to Latin American countries to support infrastructure development. As the second largest consumer of Panama Canal services, and the main supplier to goods in the Colón Free Zone, China and Panama share goals of bolstering the efficiency of Panama’s shipping and logistics sectors. A free trade agreement with China may also serve to diversify Panama’s trade dependence on the long-standing largest consumer of Panama Canal services: the United States.”

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