Panama is paying a price for its involvement in the great superpower competition between China's government and the Trump administration.
In January, under heavy pressure from Washington, Panama's supreme court handed President Trump a victory for his security ambitions in Latin America and dented China's influence in the region when it ousted Hong Kong's CK Hutchison from two ports the company operated at either end of the country's canal.
Now China's government is pressuring Panama with measures that have disrupted its vital shipping industry, thwarting its ambitions to become a global logistics hub at a time of increasing geostrategic importance for the canal after Iran blockaded the Strait of Hormuz.
The diplomatic fallout is proving expensive.
Soon after Panama's justices ruled that contracts for Hutchison to operate the ports of Balboa on the Pacific coast and Cristóbal on the Atlantic side were unconstitutional, Chinese authorities began to inspect and detain Panamanian ships. Asia-Pacific port inspection data show that nearly 500 Panamanian-flagged ships have been detained for safety reasons in Chinese ports since January, including 146 vessels in May alone, compared with 23 in January.
Trump administration officials say the disruptions have commercial and strategic consequences for U.S. exporters and consumers.
"China's response was swift and punishing," said Warren Stephens, U.S. representative to the International Maritime Organization, an agency of the U.N.
Panama-flagged ships carry a meaningful share of U.S. trade, moving consumer goods, apparel, electronics or furniture from Chinese ports to the U.S. East Coast through the Panama Canal. The U.S. is the top user of the waterway, which handles around 6% of global seaborne trade. The canal is busier than ever, with traffic rising more than 5% in annual terms in recent months.
"Beijing took direct action against Panama-flagged vessels -- actions the U.S. has characterized as a deliberate attempt to undermine Panama's sovereignty, disrupt global supply chains, and erode confidence in international trade," Stephens said in an address to the U.N. agency in early July.
Once a vessel is docked at a Chinese port, inspectors assessing safety conditions of foreign vessels board the ship. They find various reasons to detain it, no matter how new the vessel is or its actual condition, say seafarers and one ship manager who work on vessels regularly going to Chinese ports. The vessel is then forced to drop anchor at a designated spot to rectify its problems, sometimes for more than a month, they said.
China says the accusations that it is singling out Panamanian ships for special attention are wrong. "Panamanian-flagged vessels made up less than 20% of all foreign vessels calling at Chinese ports since January, but have caused around 50% of the accidents and consequent deaths and missing persons," Chinese Foreign Ministry spokesman Lin Jian said, adding that China's port state control inspections are "fully consistent with international conventions."
Still, China's measures have exposed the vulnerability of the fees that Panama receives from its vast vessel-flagging business, one of the world's largest ship registries. The situation has become so severe this year that some Panama-flagged ships have changed their registry to avoid these strict inspections. Some 8,500 ships sail the seas with Panama's flag, and China's targeted inspections could prompt more shipowners to look for a different nationality to sail under.
Meanwhile, Hutchison is seeking $2 billion in damages from Panama in international arbitration panels. The company argues that its ousting undermined Panama's reputation as a reliable place to do business.
Chinese officials have accused the Central American nation of bowing to U.S. pressure, demanding that Panama corrects its mistakes and protect the lawful rights of Chinese businesses.
"Anyone clear-eyed can see this is politically driven," Xie Feng, Chinese ambassador and observer to the Organization of American States, said in unusually harsh remarks at a recent regional meeting held in Panama.
"If contracts could be disregarded, market principles ignored, assets taken over and operators forced out at any time, who would have the confidence to invest and seek cooperation?" he said.
Panamanian Foreign Minister Javier Martínez-Acha said his country had the sovereign right to regulate national ports and defended its independent judiciary. He and senior Panama officials have met with Chinese counterparts in an effort to lower tension ahead of a big test: China's renewal of a maritime deal granting Panama-flagged vessels preferential access to its ports.
This is a tense moment for Panama. Chinese state-run shipping giant Cosco has already suspended cargo shipments to Balboa, one of the ports that Hutchison operated and a key piece in Panama's logistics machine. At the port, thousands of cargo containers are transferred between global shipping routes monthly. Cosco didn't respond to requests for comment.
China's Transport Ministry also said it summoned representatives of shipping giants A.P. Moller-Maersk and Mediterranean Shipping Company. Units of the two companies were hired by Panama to take over management of Balboa and Cristóbal for 18 months as authorities look for new long-term operators for the ports. China's message: don't harm the interests of Chinese firms, said one person familiar with the discussions. Both companies declined to comment.
Panama now risks facing tepid demand from global port operators to run the two ports, in part because canal authorities are also preparing a parallel tender process for the construction and operation of two more container terminals on the canal.
"We have to decide with the government on which ports are tendered first, " said canal administrator Ricaurte Vásquez.
"All four should not go on the market at the same time because there will be too much on offer," Vásquez told the Journal.
Any deal giving a stake in any of the Panama ports to a Chinese-owned company would risk infuriating Trump, who objected to Hutchison's operations of Panama's container terminals.
Panamanian and Chinese officials held talks in Beijing earlier this month to renew the maritime agreement that grants favorable conditions to Panamanian-flagged ships. Panama officials said that talks have yielded initial results, including a significant decrease in the number of Panamanian vessels detained for inspection in Chinese ports during July.
But China has yet to disclose whether it will renew the maritime agreement and how Panama could address concerns about the rights and interests of Chinese firms.
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