This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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¶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
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¶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
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¶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
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¶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
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¶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"
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¶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
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¶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"
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¶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
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¶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
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¶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
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¶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...
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¶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
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¶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
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¶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"?
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¶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
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¶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
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¶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?
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¶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
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¶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