China has become a major power in its own right and the U.S.' increased global isolationism under the Trump administration makes Taiwan much more vulnerable than before.
After decades of siding with Taiwan in the disagreement over its status, Panama now "recognises that there is only one China in the world" and that Taiwan is part of Chinese territory.
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The self-ruled island had diplomatic relations with as many as 30 countries in the mid-1990s.
Panama is the latest country to cut ties with Taiwan and it is unlikely to be the last, said Carl Thayer, an emeritus professor of politics at the UNSW Canberra college in Australia. The island is also excluded from the United Nations and many other multinational bodies at China's insistence.
China's Foreign Minister Wang Yi and Panama's Vice-President and Foreign Minister Isabel de Saint Malo signed a joint communiqué establishing diplomatic ties in Beijing on Tuesday.
Wang said he was sure relations between the two countries would have a "bright future".
After Chinese Nationalist forces were defeated by Mao Zedong's Communists, the Nationalist government moved to Taiwan in 1949.
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Taiwan was not invited to the annual assembly of the World Health Organization last month for the first time in eight years, and was also excluded a global forum of the International Civil Aviation Organization last year.
China set up an office of commercial development in Panama in 1996. But in the last one year itself, as many as three countries have severed diplomatic ties with the country, which is claimed by China as its own - a part of the mainland.
Although China refused to form such ties during the previous administration of China-friendly president Ma Ying-jeou, it no longer has any such qualms, Tang said.
Diplomacy is closely related to trade, and, in continuing to invest in Panama, China had gained the upper hand on Taiwan, said Chen Chih-chieh (陳至潔), an associate professor of National Sun Yat-sen University.
Scholars voiced concern Tuesday that Panama's switch of diplomatic recognition from Taipei to Beijing may not be an isolated case.
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Trains around the station have reportedly been stopped and the entire area has been cordoned off. Another police spokesman added: "The sole male perpetrator was motivated by personal reasons".
In the past China and Taiwan had competed with each other to win diplomatic allies, wooing poorer countries with promises of aid and investment.