US embassy cable - 05PANAMA909

C O N F I D E N T I A L SECTION 01 OF 05 PANAMA 000909 
 
SIPDIS 
 
DEPARTMENT ALSO FOR WHA/CEN, EAP/CM, EAP/TC, AND INR/B 
SOUTHCOM ALSO FOR POLAD 
VANCOUVER FOR CG ARREAGA 
 
E.O. 12958: DECL: 04/20/2015 
TAGS: PREL, PINR, PGOV, ETRD, EWWT, PM, CH, TW, VE, POL CHIEF 
SUBJECT: PANAMA: CHINA AND TAIWAN TEND THEIR GARDENS AS 
TORRIJOS GOVERNMENT HUNTS BIGGER GAME: AN ANALYSIS 
 
REF: A. 04 PANAMA 2274 
     B. 04 PANAMA 1953 
     C. PANAMA 0225 
 
Classified By: AMBASSADOR LINDA WATT FOR REASONS 1.4 (B) AND (D). 
 
SUMMARY 
------- 
1.  (C) China had high hopes of replacing Taiwan as Panama's 
diplomatic partner, given the supposed pro-China tilt of 
President Torrijos's PRD government, in power since 9/1/2004. 
 Also, Taiwanese diplomats worried that China could use the 
Mar del Sur public relations disaster (that grew out of the 
Taiwan embassy's ill-considered financial dealings with the 
Moscoso administration) to its advantage.  While the Taiwan 
embassy is keeping a low profile and mending its financial 
practices, China's Trade Development Office has found the 
Torrijos government less friendly than it expected.  Recent 
discussions between POL Counselor, China Commercial 
Development Director Yang Fajin, and newly arrived Taiwan 
ambassador Tomas Hu revealed neither side enjoys close 
relations with a Panamanian government (GOP) preoccupied with 
its internal reform agenda and increasingly shy of 
controversy.  There also is evidence that China's new 
anti-secession law, which sanctions the use of force against 
Taiwan under certain circumstances, has made a bad impression 
in GOP circles here.  Panama, like most Central American and 
Caribbean nations, still recognizes Taiwan, and shows no 
signs of considering a switch to China anytime soon.  On the 
other hand, the growing weight of the China trade and its 
significance for Panama and for Panama's maritime and 
logistical infrastructure lend an air of inevitability to 
China's prospects for eventual recognition, though not 
necessarily by the Torrijos government.  End Summary. 
 
GOP Focuses on Domestic Agenda 
------------------------------ 
2.  (C) More than six months after the Democratic 
Revolutionary Party (PRD) -- with its leftist, pro-China past 
-- took office on 9/1/2004, predictions of a rapid victory by 
China in its perennial tug-of-war with Taiwan over Panama's 
diplomatic recognition have failed to materialize.  For the 
moment both China and Taiwan are tending their gardens and 
girding for future battles, as the pragmatist, technocratic 
Torrijos government deals with the two biggest items on its 
political "to-do" list: social security reform, followed by a 
referendum on Canal modernization.  No one expects the GOP to 
give much attention to China-vs.-Taiwan issues until action 
on those items is completed, certainly not before 2006. 
 
Taiwan Lays Low 
--------------- 
3.  (C) In a recent meeting, Taiwan Ambassador Tomas Hu told 
POL Counselor that he and his diplomats are keeping their 
heads down in the wake of the Mar del Sur and Children's 
Museum financial assistance scandals that occurred during the 
Moscoso government.  Hu is eager to repair the damage caused 
by those public relations disasters and re-establish close 
relations with the Panamanian government (GOP) but is at a 
loss on how to proceed.  So far, the Torrijos government has 
been cool to his overtures. 
 
4.  (C) (Comment: Foreign Minister Samuel Lewis has 
complained to EmbOffs that Taiwan diplomats offered large 
sums of money to the incoming Torrijos government, which 
Torrijos angrily turned down.  Apparently the GOP also has 
rejected smaller amounts of Taiwanese humanitarian aid.  The 
Mar del Sur scandal, which broke shortly after September 1, 
2004 when Torrijos came into office involved $45 million of 
Taiwan's money, supposedly earmarked to aid Panama's health 
system, but actually funneled into a private foundation run 
by Moscoso officials, who never have adequately explained how 
the money was spent.  The Children's Museum scandal involved 
discrepancies in the accounting for $6 million that was 
donated to a private foundation, run by Mosoco's sister, 
former First Lady Ruby Moscoso.  News sources claim that 
Taiwan spent $70 million on Panama projects in all during 
1999-2004, including a costly renovation of Panama's Foreign 
Ministry.  See Reftel A.  End note.) 
 
Auditor Needed 
-------------- 
5.  (C) Hu implied that the damage done to Taiwan's public 
image in Panama was the fault of his predecessor, Ambassador 
David Hu, who left Panama several months after the Torrijos 
government took office.  While (David) Hu had insisted to 
Moscoso after the scandal broke that Taiwan considered the 
funds a state-to-state gift, (Tomas) Hu acknowledged that the 
Taiwan embassy had never demanded a full accounting and later 
discovered that probably millions of dollars had gone 
missing.  He agreed that hiring an independent auditor is an 
essential first step to re-establishing Taiwan's credibility 
as an aid donor. 
 
Taiwan in the Doghouse 
---------------------- 
6.  (C) In an April 18 meeting, Deputy Foreign Minister 
Ricardo Duran confirmed that, following the scandals, GOP 
officials want to keep Taiwanese diplomats and aid offers at 
arm's length.  The Taiwanese would like President Torrijos to 
visit Taiwan, he said, but Torrijos has shown no interest. 
"Everybody" is nervous about having anything to do with 
Taiwan right now, Duran told POL Counselor, especially 
because the Torrijos government's platform emphasizes 
anti-corruption and transparency. 
 
"The Worst Imperialists" 
------------------------ 
7.  (C) Reflecting on the last 50-plus years of relations 
with Taiwan, Duran said it was almost "an unwritten rule" 
that Panama has relations with Taiwan.  No U.S. diplomat, he 
continued, has ever said that Panama should not have 
relations with China.  Although establishing relations with 
China seems like "a matter of time," Duran noted that to date 
the GOP has not seriously discussed the matter.  Duran 
observed that the Chinese (Taiwanese included) are "the worst 
imperialists," because they expect their money to buy them 
the right to tell small countries (like Panama) what to do. 
(Note: Duran helped to negotiate the 1995-96 agreement that 
established China's Trade Development office in Panama.  End 
note.) 
 
China's Anti-Secession Law Makes A Bad Impression 
--------------------------------------------- ---- 
8.  (C) In an April 7 meeting with PolOff, MFA Asia Director 
Floreal Garrido said the GOP will make "no immediate change" 
in the Taiwan vs. China status quo and has no specific plans 
to shift recognition.  The GOP approach to relations with 
Taiwan and China will be "thoughtful and measured."  Garrido 
showed high interest in U.S. views of China's new 
anti-secession law, which he called "severe."  He added that 
the GOP is "worried" about China's willingness to use force 
to deal with Taiwan. 
 
Dissing "Checkbook Diplomacy" 
----------------------------- 
9.  (C) During a March 28 meeting with POL Counselor, China's 
Trade Development Director Yang Fajin crowed that the 
Taiwanese had got themselves in trouble in Panama (and 
elsewhere in Central America) through imprudent use of 
"checkbook diplomacy."  (Comment: Sic!  China apparently 
convinced the Caribbean islands of Dominica in 2004 and 
Grenada in 2005 to dump Taiwan for China after promising much 
larger amounts of aid, investment, and cold cash than Taiwan 
could promise.  End comment.)  Yang was not forlorn on the 
prospect of closer relations with Panama but he was downbeat. 
 The Panamanians "haven't decided anything" on the subject, 
he deadpanned.  He refused to guess when the GOP would decide 
something.  Betraying his frustration, Yang asked POL 
Counselor whether he thought Panama would move to establish 
relations with China.  POL Counselor was non-committal.  (Bio 
Note: A career diplomat, Yang has served in Cuba, Argentina, 
Peru, Ecuador, Venezuela, and Spain.  He speaks good Spanish 
but little English.  End Bio note.) 
 
Deep Pockets Shop Real Estate 
----------------------------- 
10.  (C) Yang considers the GOP's slowness in deciding 
anything about China relations and its pursuit of other 
priorities as a setback, but only a temporary one.  Not 
averse of giving the impression that Panama's recognition of 
China is just a matter of time, Yang mentioned that he is 
looking at two-hectares of real estate in Clayton (in the 
former Canal Zone, down the hill and across the street from 
the U.S. Embassy construction site) to buy for a PRC embassy, 
if one is needed.  The Clayton lot includes a former U.S. 
military hostel, Yang said, which must be inspected and 
approved by engineers from China.  No decision has been made 
on purchasing the land, he added.  (Comment: RSO is 
interested in Yang's assertion, and is actively evaluating 
his claims, in light of the recent New Embassy Compound 
startup.  End Comment.) 
 
A Pricy Kitchen and Patio 
------------------------- 
11.  (C) With money apparently no object, Yang explained that 
he has almost finished a half-million-dollar upgrade of his 
Altos de Golf residence, including a much bigger patio (with 
room for 100 guests), a new kitchen, and a new dining area 
with seating for 40.  (The previous dining area was a 
smallish room with a large circular table seating 10.) 
Also, Yang confirmed that the China Trade Development Office 
(the official name is Oficina de Desarrollo Comercial 
Chino-Panameno) is planning to rent new high-rise offices and 
to triple its floor space to around 25,000 square feet (from 
8,000 currently). 
 
Venezuela-Panama Pipeline 
------------------------- 
12.  (C) Yang claimed the Venezuela-Panama pipeline proposal 
(Reftel B) does not involve China directly.  The idea is 
Venezuela's and Venezuela presumably will pay all the costs, 
he said, but he acknowledged that in general China is looking 
for new sources of oil.  Venezuela produces a heavy crude 
that needs special refinery facilities, POL Counselor said. 
In addition, China can expect to buy the oil at world prices 
only if Venezuela agrees, in effect, to subsidize the cost of 
shipping the crude across the Isthmus to the Pacific.  Yang 
seemed untroubled. 
 
More on the Pipeline... 
----------------------- 
13.  (C) In an April 13 meeting, MFA Foreign Relations chief 
Dario Chiru told POL Counselor that, as envisaged, the 
Panama-Venezuela pipeline deal would permit oil flow both 
directions, cost $20-25 million, but would be a 100% 
Panamanian (or non-Venezuelan) investment.  (Comment: 
Estimates range up to $100 million.  See Septel forthcoming 
which will discuss details.  End Note.)  Chiru, who was 
ambassador to Haiti during 1995-1999, said the 1994-1999 
Perez Balladares government tried hard to convince Taiwanese 
companies to invest in Panama.  The project failed, Chiru 
claimed, because the Taiwanese wanted to invest in China 
instead.  (See Reftel C.) 
 
...And Bananas 
-------------- 
14.  (C) Having committed itself to create jobs, the Torrijos 
government is worried by the downward spiral (due to faulty 
administration and higher EU tariffs) of the Puerto Armuelles 
banana company in western Panama, which now employs 2,000 
workers, Chiru said.  (Note: The company once employed as 
many as 8,000, but that figures included many contract 
workers.  End Note.)  Ecuador is selling bananas to China, 
Chiru mentioned, hinting that Panama would like to do the 
same.  (Note: Chiru himself favors establishing relations 
with China.  End note.) 
 
Corruption Hurts China 
---------------------- 
15.  (C) Yang applauded the State Department recent decision 
(under 212-f) to revoke the U.S. visa of former Panamanian 
Maritime Authority (AMP) Administrator Bertilda Garcia for 
corrupt practices, adding that Panamanians claimed that 
Garcia had stolen $20 million.  Japan had complained about 
the treatment of its vessels and the delays they faced under 
Garcia's regime, Yang said, in which ship licensing 
applications all were funneled into one small company, the 
better to control them and siphon off the proceeds.  With 
that regime now dismantled, China also benefits, he implied. 
Chinese companies own 200 Panamanian-flagged ships. 
 
"Yankee Perfidy"? 
----------------- 
16.  (C) Apparently having nerved himself, at meeting's end 
Yang complained that he had heard from Panamanians that "the 
Americans" were trying to discourage them from establishing 
relations with China.  Yang asked whether that was true.  POL 
Counselor denied it and reminded Yang of the U.S. one-China 
policy, the three U.S.-China communiqus, China's seats in 
the United Nations General Assembly and Security Council, and 
long-standing U.S. diplomatic relations with China. 
(Comment: Torrijos officials repeatedly have made clear that 
the GOP will consult with the Embassy when and if they hold 
serious discussions on China vs. Taiwan.  See Reftels A and 
B.  End Comment.) 
 
COSCO Has A Birthday 
-------------------- 
17.  (SBU) On April 13, Yang paraded his best GOP contacts at 
a banquet at a local Chinese restaurant (ironically situated 
in the Taiwan-owned Evergreen Building) to celebrate the 10th 
anniversary of COSCO (China Ocean Shipping Company) in 
Panama.  In attendance were Second Vice President and AMP 
Administrator Ruben Arosemena, the president's cousin and 
maritime advisor Hugo Torrijos, and Merchant Marine Director 
Fernando Solorzano.  COSCO, a state-owned company, has 120 
ships, most or all of them under the Panamanian flag, 
officials told POL Counselor. 
 
COSCO Allies With Taiwan's Evergreen 
------------------------------------ 
18.  (SBU) COSCO recently began joint operations with 
Taiwan's Evergreen-owned Colon Container Terminal, on 
Panama's Caribbean side.  COSCO also is interested in 
acquiring part of a U.S.-owned ship repair yard on Panama's 
Pacific coast, and possibly expanding those operations to a 
Caribbean facility.  East Asian interest in Panama is not 
confined to the Chinese.  A private Singaporean investment 
group arrived in Panama during the week of April 18 to 
discuss potential investments in Atlantic and Pacific-side 
"mega ports," according to banker Max Harari. 
 
COSCO Trains Panamanians, or Vice Versa? 
---------------------------------------- 
19.  (SBU) COSCO also has begun training Panamanian maritime 
personnel during Canal transits, MFA Asia Director Garrido 
confirmed.  Implying that the training is as much for the 
benefit of the Chinese as the Panamanians, Garrido said it 
could help overcome Chinese-Panamanian friction in COSCO's 
operations.  Garrido implied that Chinese are not familiar 
with Panamanian laws and procedures, which sometimes causes 
friction with Panamanian authorities.  The training also is a 
good way for Chinese and Panamanians to overcome cultural 
barriers and get used to working with each other. 
 
Comment 
------- 
20.  (C) Booming growth in East Asia, containerization, 
China's entry into the WTO, the apparently bottomless U.S. 
appetite for Chinese goods, China's growing stake in the 
global shipping industry, all have made the all-water Canal 
route to the Atlantic much more important for China than just 
a few years ago.  China's view of the Canal is similar to the 
U.S. view: It is a vital conduit and vulnerable choke-point. 
Above all, China wants to assure free access and speedy 
transit for its burgeoning and increasingly valuable exports 
of finished goods to the U.S. East Coast and its imports of 
raw materials from South America, especially Brazil.  China 
also is busy building the world's largest fleet of commercial 
sea-going vessels, which already includes 200 Panamanian 
flagged vessels.  Many of the world's "mega" post-Panamax 
ships belong or will belong to Chinese companies.  Without 
the rise of the China trade, Panama probably would not now 
have to consider widening the Canal. 
 
21.  (C) It is ironic that the success of U.S.-China trade 
relations and China's entry into the WTO are directly 
responsible for China's enhanced commercial profile in 
Panama.  The GOP is well aware of the steadily increasing 
value of the China trade passing through the Canal and of 
Chinese investments in Panama.  China already is the Canal's 
second-biggest user.  Chinese firms are active investors in 
developing Panama's maritime logistical infrastructure, which 
the GOP sees as crucial for Panama's  economic growth. 
Meanwhile, Taiwan's shenanigans with the Moscoso government 
have complicated its position in Panama for the present.  But 
the GOP fears that an ill-considered move toward China could 
compromise its relations with the United States, its most 
important bilateral partner.  The Embassy does not anticipate 
a change in the status quo for the foreseeable future. 
 
WATT