China, Taiwan wage economic, political battle in Panama

Fellows Spring 2002

By Vanessa Hua

June 05, 2009

Panama City, Panama -- A country known for its hats, bananas and dictators has become an unlikely battleground for Taiwan and China, longtime adversaries waging their civil conflict a hemisphere away.

With the aim of strengthening ties, leaders on both sides of the Taiwan Strait have encouraged businesses to invest in Panama. It's a fight that touches the Bay Area, where local investors and international companies that do business here also have interests on the isthmus.

Panama is one of the few countries that has diplomatic relations with Taiwan, much to the disgust of China. The mainland regards Taiwan as a renegade province, split off since 1949, when China's Nationalist government fled to Taiwan after its defeat by the communists.

For more than two decades after that, most countries backed Taiwan as the true Chinese government. Then, following former President Richard Nixon's 1972 trip to the mainland, many countries switched recognition -- but not all. China is trying to squeeze Taiwan out of the world stage.

"For the mainland, this is a matter of life and death," said Elizabeth Economy, director of Asia Studies at the Council on Foreign Relations, a New York research center. "Any gain by Taiwan is magnified 10 times as a loss for Beijing."

China wants Panama to dump Taiwan, which in turn is fighting back. Although both countries seek diplomatic favor here with big projects, what's good for diplomacy is not always good for business.

In the United States, trade relations are also subject to political agendas.

For example, whether business or human rights should lead diplomacy has been a continuing foreign policy question.

Rep. Nancy Pelosi, D-San Francisco, fought against granting China normal trade status because of the country's human rights abuses, but Congress voted that trade and engagement with the mainland would benefit U.S. interests.

In Panama, Taiwan's investments have totaled $450 million during the past five years and have provided millions for highways, helicopters and more. Panama is the most significant of Taiwan's 28 allies, all of which are richly rewarded to recognize the island. The shrinking list includes Gambia, Chad and all seven Central American countries.

Critics call Taiwan's tactic dollar diplomacy, but Taiwan refers to it as pragmatic.

In return, Panama co-sponsored Taiwan's hopeless bid last fall to join the United Nations -- a symbolic move to keep the island from total isolation.

"This is a cruel world, and you can't be romantic," said Mario Rognoni, a financial consultant and former adviser to deposed Panamanian strongman Manuel Noriega. "The fact that Taiwan is helping us strengthens relations with that country."

A Dixie flag and Georgia Tech football calender hang in his cramped Panama City offices, reminders of Rognoni's industrial engineering studies in Atlanta.

Under former President Lee Tung-hui, the Taiwanese government sponsored a $7 million project to transform old Fort Davis into a manufacturing zone in Colon, Panama's second-largest city. Lee encouraged Taiwanese companies to do business with their country's precious few diplomatic partners rather than with China.

These underdeveloped nations needed Taiwan's help, he said. Alfonso Tu, former Taiwanese military attache to Chile and Argentina, agreed to manage the zone.


Taiwan flew in 1,000 prospective businesspeople at the government's expense and offered to teach them Spanish. Only five companies decided to invest, but they failed because of the language barrier and tough labor laws.

That's why Tu, a loyal supporter of Taiwan, decided he would lead by example. He started a plastics factory for $2 million. Set against the lush jungle, the factory manufactures plastic goods and bubble wrap.

The area "was like a dead zone. Someone had to do something about it. Someone had to show investors, don't be so worried," said Tu, whose offices display a large flag of Taiwan, along with a photo of him with Chile's despot, Gen. Augusto Pinochet, and medals from the governments of Venezuela and Guatemala.

His uncle Wu Fu Chen -- a Silicon Valley optical networking mogul -- is bankrolling his plans. Plastics is a low-tech turn for Chen, who typically invests in cutting-edge startups such as Cascade Communications and Shasta Networks.

After posting $1 million in revenue his first year, Tu aims to generate $2 million this year and $5 million next year.

Even though patriotism inspired him, the desire to make money drives him now, Tu said.

Tu's success in Fort Davis comes too late for Taiwan, which said in January it would scrap its share of the joint venture with Panama.

Urged to equate patriotism with foreign investment, Evergreen Group, the Taiwanese transportation giant, sank millions into Panama. Chang Jung-fa, chairman of Evergreen, has close ties with Taiwan's government. When President Chen Shui-bian visited Panama last year, he cited Evergreen as a model of how Taiwanese businesses should take part Panama's development.

Evergreen's influence extends to the Bay Area. In 1999, Chang donated $2 million to San Francisco State University. The company's Evergreen Marine ships are important customers at the Port of Oakland, and its EVA Airways provides service from San Francisco.

In Panama, Evergreen's $100 million Atlantic port terminal boasts a health clinic, one-room museum and a Taiwanese chef -- in contrast to the nearby slums of Colon. Opened in 1999, the port is only 70 percent full, providing service mostly to its own ships.

In the capital, Evergreen's office towers and posh restaurant also hurt for customers.


Without diplomatic status on the isthmus, China tries to use its economic might to persuade Panama to switch ties.

With the return of Hong Kong to mainland in 1997, Beijing made overtures to Panama to preserve economic ties between the Chinese port city and the isthmus.

Now, the mainland is the third-largest user of the Panama Canal and accounts for 20 percent of cargo going into the Colon Free Zone, the world's second- largest trading post.

In recent years, Chinese companies have invested $200 million in Panama. More Chinese companies would invest there, but they are holding back because of the lack of formal relations, said Li Yonglu, China's trade representative to Panama. (The argument is a bit disingenuous, considering the tremendous cross-strait investment between the mainland and Taiwan.)

Hutchison Whampoa, a Hong Kong conglomerate whose core businesses include telecommunications and maritime services, has spent more than $120 million since 1997 to renovate Atlantic and Pacific ports on both ends of the Panama Canal.

Hutchison's port concession angered U.S. lawmakers opposed to Panama's closer ties with China. They claimed that the company's controlling shareholder, Li Ka-shing, had friendly relations with Chinese leaders. Already rankled by the U.S. military departure in 1999, American conservatives loathed seeing China in the former fiefdom of the United States.

They claimed Hutchison's control of the ports meant command over the canal.

So far, traffic on the canal is speeding along with few problems.

But, "You can't judge the security of the canal on whether it's operating efficiently right now," argued Rep. Dana Rohrabacher, R-Huntington Beach, one of the loudest challengers of the Chinese presence in Panama. "We have people who are hostile to national security interests who have leverage."


Hutchison has again sailed into controversy. Last month, Panama agreed to waive $22 million in rent, plus 10 percent of Hutchison's revenue, annually, that the company is supposed to pay the government. The loss to Panama amounts to more than $1 billion over the remainder of the company's 50-year concession.

Hutchison, which said it could not afford the payments, promised $240 million in investment. Otherwise, the company threatened that it would not expand its port terminals.

Opponents of the renegotiated deal say Hutchison should be held to its original concession, which allowed the company to outbid rivals such as Bechtel Corp., the giant San Francisco firm.

Despite Panama's troubles with this major Chinese company, businesses on the isthmus want access to the mainland's enticing markets. Taiwan has provided considerable capital in the past, they say, but China has even greater potential.

"We cannot ignore the presence of China in the Panamanian economy and the world," said Jose Chen Barria, a member of the Chinese-Panamanian Friendship Association, whose objective is to persuade the government to switch recognition after the presidential election in 2004. Now an insurance broker, Chen Barria formerly was Panama's controller and immigration director.

For now, Panama has no plans to switch sides, officials said. The country takes pride in the attentions from China and Taiwan. After celebrating the U.S. exit from the Canal Zone in 1999 as a chance to assert its national sovereignty, Panama does not want to begin taking orders from any global power.

Thus liberated, Panama revels in playing its suitors.

"Panama has a strategic importance even though it is a small country," said Harmodio Arias, No. 2 in Panama's foreign ministry. "We are unique because of our canal."