Taiwan’s Central America Dilemma

What explains why Taiwan has been able to hold on to formal recognition in Central America, and can this continue with the recent loss of Panama?

 

In the wake of Panama’s diplomatic switch in June, Kevin Ponniah of BBC News described China’s activities as a return to the “poaching” of Taiwan’s diplomatic allies. Many Taiwan observers expected that the informal diplomatic truce started under the Ma Ying-jeou administration in 2008 would collapse with the Kuomintang’s (KMT) loss of the presidency to the Democratic Progressive Party’s (DPP) Tsai Ing-wen in 2016. However, Panama is not alone, but simply the most important in a trio of countries, along with The Gambia and Sao Tome and Principe, that have switched to China since 2016 (The Gambia cut ties in 2013 and was able to establish relations with Beijing in March 2016). Now the bulk of Taiwan’s 20 diplomatic partners are in three regions: Oceania (6), the Caribbean (5), and Central America (5 after Panama’s departure).

Whether Panama was the linchpin maintaining Taiwan’s diplomatic relations in Central America remains to be seen, and previous claims that the region would shift to China following Costa Rica’s switch in 2007 failed to materialize. But the loss of Panama should direct attention to why the region historically has been particularly friendly to Taiwanese interests and whether these relationships can endure.

Similarities within Central America have often led the region to adopt similar foreign policies, including diplomatic recognition. For example, in 1907, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua declared their refusal to extend recognition to governments that came to power without democratic support. Throughout most of the Cold War, other than Nicaragua for a brief period, six of the seven countries recognized the Republic of China (Taiwan). Belize, which became independent in 1981, recognized the People’s Republic of China (PRC) briefly (1987-89) until switching to and staying with Taiwan. In general, Taiwan benefited from anti-communist regimes in the region as well as implicit American backing. Even when the U.S. cut military assistance for anti-communist activities in Guatemala, Taiwan provided military training and assistance.

However, even with the end of the Cold War and declining saliency of Cold War ideologies, Central America largely remained with Taiwan. Part of this continuation of diplomatic relations could be attributed to the shared experiences of political and economic liberalization in the 1980s and 1990s. For example, Nicaragua switched to China with the election of Daniel Ortega in 1985 and switched back with his defeat in 1990. Yet when Ortega returned in 2006, despite concerns that he would recognize China, Nicaragua maintained diplomatic ties with Taiwan. Even after Costa Rica’s switch in 2007 and Panama’s recent switch, Central America is the only region in which a majority of countries have chosen Taipei over Beijing. In addition, Taiwan maintains free trade agreements (FTA) with all but Belize and Costa Rica in the region, although the continuance of the Panama-Taiwan FTA is unclear with Panama’s recognition of the PRC.

Taiwan-Central American relations often are viewed within the context of “dollar diplomacy.” Perhaps ironically, the term’s origin — in relations to American efforts to further political leverage through the use of economic incentives in the early 20^th century — also focused considerably on Central American countries. Taiwanese officials historically denied “dollar diplomacy” claims, couching aid packages as tied to infrastructure assistance or otherwise meeting the needs of poor countries, and the Tsai administration reiterated that the end of the diplomatic would not lead to the return of actions consistent with an aid-for-recognition policy. But such a denial ignores the historical incentives behind “dollar diplomacy,” especially in Central America.

Whether altruistic aid or purely a strategic act, Taiwanese economic assistance in Central American cannot be ignored. Through loans, bribes, or other forms of enticements, financial assistance remains the clearest means to gain diplomatic partners, but also to simply stave off further losses swayed by Chinese political or economic influence. Identifying all aid and investment directed towards Central America is difficult, but data from Taiwan’s International Cooperation and Development Fund (ICDF) gives some indication of the extent of aid projects in the region. As of August 2017, Taiwan funds 63 active bilateral projects in Central America (Belize 9, Ecuador 4, El Salvador 13, Guatemala 10, Honduras 13, Nicaragua 14), with an additional 7 regional projects. Using the United Nations Conference on Trade and Development (UNCTAD) from 2001-2012, shows that China has been slow to match foreign direct investment (FDI) among Taiwan’s diplomatic allies. In that time frame, Chinese FDI outflows totaled US$387 million in three countries (Ecuador, Honduras, and Panama), compared to US$737 million by Taiwan (El Salvador, Nicaragua, and Panama). However, Taiwanese FDI stock in Central America clearly dwarfed that of China (US$15.91 billion versus US$2.01 billion).

Regarding Panama specifically, Taiwanese outflows and FDI stock in Central America outmatches Chinese counterparts nearly ten to one. However, Chinese investment increased in the months leading to the country’s switch in recognition. According to the China Global Investment Tracker, published by the American Enterprise Institute and the Heritage Foundation, Chinese companies invested US$510 million in construction alone over a twenty-two month period from August 2015 to May of 2016. Chinese Communications Construction invested an additional US$900 million in Panamanian shipping during May of 2016 in a single transaction. However, even after the switch, Panama’s President Juan Carlos Varela denied asking for asking for anything in return for switching recognition.

However aid and investment do not necessarily keep countries from switching, as evident with Costa Rica. After receiving US$50 million in infrastructure assistance in 2003-2004, Costa Rica switched in 2007, lured in part by Chinese promises of more aid, and as later revealed in court documents, a Chinese promise to purchase US$300 million in Costa Rican bonds. Additional aid and scholarships to study in China followed as well, along with an investment of more than US$1.3 billion in energy, technology, and transportation over the following decade. Nor do diplomatic relations fueled on financial assistance or other factors, mean that the countries consistently act in Taiwan’s favor. For example, in 2007, several allies were absent on a World Health Organization vote on Taiwan’s membership, while others (including Costa Rica) voted no.

The big question remains: Can this maintenance of Central American diplomatic partnerships endure? If based primarily on aid and historical goodwill alone, then this maintenance will be complicated by a PRC potentially willing to isolate Taiwan further in future by simply promising larger aid packages to Taiwan’s diplomatic partners, and perhaps using its veto in the United Nations Security Council to prevent these countries from receiving humanitarian assistance. Of course, Chinese promises of aid often have failed to materialize, as in the case of the Pacific microstate of Nauru, resulting in the country returning to Taiwan after recognizing China in 2002. Trade patterns also may bolster Chinese efforts. Chinese trade in Central America clearly dwarfs that of Taiwan. For example, a snapshot of 2013 of six Central American countries (excluding Belize) finds that Taiwanese trade volume is less than a third of that of China’s with the region. From 2004-2013, Guatemala’s trade with China grew nine times faster than trade with Taiwan despite the presence of a free trade agreement.

Furthermore, China’s cultivation of strategic economic alliances with countries in Central America and the Caribbean that have already switched formal recognition from Taiwan to China may also be utilized as a recruitment method to incentivize such a switch from Taiwan’s remaining allies. Marking the 10-year anniversary of Costa Rica’s decision to steadfastly maintain formal diplomatic ties with China instead of Taiwan, China proclaimed its intent to forge a deeper, more strategic partnership with Costa Rica in order to bring more peace and stability to the Central American region. This “partnership” has publicized intent to invest more money and resources in Costa Rica’s economy, along with Costa Rica’s invitation to China’s International Import Expo, among other incentives. In return, China asked for Costa Rica’s help in developing its relations with other countries in the region. This attempt to woo other Latin American countries, which may still be deciding whom to recognize, is especially pertinent after the shift in Panama’s diplomatic recognition earlier this summer. Costa Rica’s response to this request has yet to be seen; however, it is possible that China may implement a similar strategy in future.

Taiwan’s ability to embed itself in the political and economic institutions in Central America may explain in part its success in the region compared to individual attempts to procure and maintain partnerships elsewhere.

Still, Taiwan’s ability to embed itself and in some cases create regional institutions potentially allows Taiwan additional means of leverage. Taiwan has helped broader political integration projects centered on the Sistema de Integración Centroamericano (SICA) by becoming the primary donor for its economic wing, the Secretaria de Integración Económica Centroamericana (SIECA), including helping construct the building where the secretariat is housed. Taiwan’s aid to the region — from loans and technical assistance to humanitarian help and higher education scholarships — has been directed through Taiwan’s ICDF in cooperation with SICA. Similarly, Taiwan entered the Central American Bank for Economic Integration (Banco Centroamericano de Integración Económica or BCIE) in 1992, upon the amendment of the original agreement to allow extra-regional partner countries. Upon entry, Taiwan contributed US$150 million to the bank, signed multiple co-financing agreements with the BCIE and allied regional developmental banks, such as the Banco Interamericano de Desarrollo (BID). Taiwan also created a special committee and provided incentives for direct investments to Central America (as well as Caribbean partners) through the 1990s, which culminated in the 2006 Subsidy to Entrepreneurs Regulation that provided US$240 million in subsidies to encourage business investments in the region. Taiwan’s ability to embed itself in the political and economic institutions in Central America may explain in part its success in the region compared to individual attempts to procure and maintain partnerships elsewhere.

Taiwan’s Central American partners are unlikely to desert en mass to China as Chinese officials likely realize further isolation in a short period of time may push the Tsai administration towards more controversial actions, according to the Chinese perspective, to maintain its sovereignty claims. Similarly, even if the number of countries amenable to extending diplomatic recognition to Taiwan seems to be shrinking, with each partner loss, funds already allocated for international investment or “dollar diplomacy” can simply be moved toward another target. However, Taiwan’s broader interests in Central America benefit from the multifaceted approach of findings political commonalities, the use of economic ties and Taiwan’s access to regional intergovernmental organizations.

 

Top photo courtesy of the official Tsai Ing-wen Facebook page.

You might also like

---

More from Cross-Strait

---

Editor Picks

---