Losing a diplomatic ally is never something to be welcomed and, on the face of it at least, Panama was one of Taiwan’s biggest and most geopolitically influential.
But looking beneath the surface of the relationship, two things become clear; firstly, this move has been on the cards for some time, and secondly, in real terms, Taiwan is not losing too much.
China has heavy economic involvement in the Central American country. In the last year alone they have made an estimated $1 billion in infrastructure investments there, while China is also the second biggest user of the canal. Indeed, as far back as 2009, it is reported that Panama approached China about establishing diplomatic ties only to be turned down because of the so-called "truce" between Beijing and the regime of Ma Ying-jeou.
But in practical terms, Taiwan is not losing too much. Panama received much more from Taiwan in investment and other economic benefits than it provided in turn. And whilst the loss is a psychological blow, it will not impact on either Taiwan’s ability to trade with Panama or to move goods through the Panama Canal. Indeed, the Panama President, Juan Carlos Varela, said in his statement announcing the move that he hoped "for a constructive reaction" and described Taiwan as a "great friend."
In her official statement, President Tsai Ing-wen said: "our refusal to engage in a diplomatic bidding war will not change." It is a courageous stance to take in the face of inevitable domestic pressure over the issue, but it is the right one.
As with the loss of São Tomé and Príncipe, the cost of keeping a diplomatic ally far outweighed their value to Taiwan and in a bidding war against China, there is only ever going to be one winner.
In terms of security and status in the international community, Taiwan is much more reliant on its unofficial relations with the USA, the EU, and closer neighbors such as Japan than any of its official diplomatic allies.
Indeed, with commentators speculating on the likelihood of one or two more of Taiwan’s allies being lured by the money of China before the end of the year, the time is right for Taiwan to focus its diplomacy on enhancing existing informal ties and seeking new and stronger links with countries Taiwan has common interests and shared values with.
On many issues, Taiwan is seen as a beacon within Asia and plenty of countries hope that where Taiwan is leading, others will follow. At the same time, the behavior of China’s authoritarian Communist regime on a number of issues is tolerated by the international community purely for economic reasons.
So, Taiwan should be working to focus the international community's eye on issues such as its flourishing democracy, the environment, its proud record of freedom of speech and press freedom, and of course the recent court ruling which permits marriage equality. These are all areas where Taiwan has much in common with the western world and where China is a long way behind.
Religious freedom is another issue which Taiwan has a fine record in. The fact that in the debate over equal marriage the voice of Taiwan’s Christian minority was heard so strongly is a testament to this, regardless what you think about their stance on the issue.
Taiwan also has a free and open Muslim community which is also actively looking to attracting more Muslim visitors to the country. At the same, China is persecuting its Uighur Muslim communities in the northwest of the country and whilst some Christian worship is tolerated, there are plenty of stories of intimidation and of crosses being torn down.
In many parts of the world, religion is a fundamental part of national identity and Taiwan’s record on freedom and tolerance is one that will play well there. Indeed, the ongoing diplomatic relations with the Vatican should be a strong influence on other Catholic nations.
Taiwan is also in the process of modernizing its economy and moving the focus away from manufacturing and towards sectors such as green energy, biotech, new high-tech development, and the service sector.
In that regard, there is a lot of shared interests with developed countries around the world who are trying to move in the same direction. This presents opportunities for closer economic and trading relationships to be formed. The recent news of an offshore wind energy industry delegation to the UK and Holland is just one example of this already in action.
But Taiwan has more in common with other nations around the world than just shared economic interests and values. They could perhaps also seek to identify countries that are not so much under the economic thrall of China or those with a track record of dealing with an oppressive neighboring superpower.
All of these offer opportunities for Taiwan to build closer, albeit more than likely informal ties, with different countries around the world. But it is these relationships which offer real diplomatic value to Taiwan. And while it is possible, just possible, that one of two countries who tick boxes on a few of the issues I have outlined might be tempted to break with China and seek formal ties, Taiwan would have to be sure it was in the national interest for them to take such a step, as there would be inevitable consequences from Beijing.
Such moves would also be a case of Taiwan lining up its ducks too. Because China’s economic bubble has to burst at some point, not matter how much the regime tries to rig the economy. And the question then will be how tolerant the global community will be when China has reached the bottom of its money-pit. When that happens, Taiwan needs to be ready.