Inter-American Dialogue

China, Taiwan, and the Battle for Latin America*

By Daniel P. Erikson and Janice Chen
August 7, 2007

When longtime Sandinista leader Daniel Ortega triumphed in Nicaragua’s presidential election in November 2006, the shockwaves from his historic victory extended to China and Taiwan. Top diplomats in the two rival East Asian capitals knew that, in 1985, a much younger Ortega had swept into the presidency and unceremoniously broke relations with Taipei in favor of a stronger relationship with Beijing. Though Nicaragua’s formal diplomatic ties to China ended abruptly when Ortega was voted out of office in 1990, his return to power now represents a fresh opportunity for Beijing to usurp one of Taiwan’s precious remaining allies. If Nicaragua were to return to China’s fold, this could potentially serve as a valuable beachhead in Central America to facilitate diplomatic inroads into neighboring countries that are friendly to Taiwan, thereby making Beijing’s dream of enforcing global recognition of the “One China” policy one step closer to reality.

While increasing economic and political ties between China and Latin America have attracted significant attention from U.S. policymakers in the past few years, the extent to which Beijing’s foreign policy is shaped by its desire to isolate Taiwan internationally is often overlooked. Yet, this crucial dimension of Chinese foreign policy is indispensable to understanding China’s rising influence in the global system and its possible repercussions for U.S. national interests. Today, in some of the most remote corners of the world, a fierce contest for diplomatic recognition and political influence is being fought between Taiwan and the People’s Republic of China (PRC). In particular, Latin America has emerged as the crucial battleground where a dozen struggling nations, mainly in Central America and the Caribbean, have become ensnared in the cross-strait dispute. The strategically significant “swing states” among them are facing intense pressure to cement diplomatic ties with China at the expense of Taiwan. Meanwhile, officials in Washington have yet to fully consider the possible implications for U.S. policy of this intensifying competition in our own backyard.

Adios Taipei, Hola Beijing

At first blush, the diplomatic whims of Latin America appear to be a world away from such exotic concerns as the decades-long conflict simmering in the Taiwan Strait. The dispute over Taiwan’s sovereignty stems from China’s claim that the island, where the Nationalist government of the Republic of China (ROC) fled in 1949 after losing a lengthy civil war against the Communist Party, is rightly a province of the PRC that must be “reunited” with the mainland, by force if necessary. During the Cold War the Republic of China on Taiwan was viewed as a satellite of the U.S. and a key link in the chain of islands stretching from South Korea to Singapore that was central to American containment strategy against the spread of communist influence in the Pacific. The U.S. consequently contributed substantial infusions of capital and technology transfers instrumental in Taiwan’s successful economic development. Though President Jimmy Carter normalized relations with Beijing in 1979 and closed the American embassy in Taipei, the U.S. Congress simultaneously approved the Taiwan Relations Act requiring the United States to provide the island with the ability to defend itself against mainland China. In the post-Cold War context, American officials and military analysts consider the Taiwan Strait a major flashpoint for regional and global security, a view reinforced by China’s rapid military expansion over the past decade and the 800-plus missiles that it has deployed in the 100-mile strait separating the island from the mainland.

In addition to its campaign of military intimidation, Beijing has pursued a sustained policy of isolating Taiwan diplomatically, most often by promising large sums of aid to the rapidly dwindling ranks of the latter’s allies. Beijing rigorously promotes its One-China policy, which means that non-recognition of the Taiwanese government is a prerequisite for conducting formal diplomatic relations with the PRC. This essentially places other governments in the position of having to choose between Beijing and Taipei. Currently there are only 24 countries in the world which officially recognize Taiwan; fully half of these are located in the Western Hemisphere.[1] Although the 12 Latin American countries involved in this grand geopolitical chess match have little individual clout, together they make up the most significant group of nations caught in the cross-strait tug-of-war. All seven nations of the Central American isthmus recognize Taiwan, a prized contiguous bloc that includes Guatemala, Belize, Nicaragua, El Salvador, Honduras, Costa Rica, and Panama. Not coincidentally, this group also represents the strongest bulwark of support for the United States in this hemisphere. Several of these countries sent troops to Iraq as part of the U.S.-led coalition, and they have dutifully partnered with Washington in efforts to contain regional adversaries such as Cuba’s Fidel Castro and Venezuela’s Hugo Chávez. In November 2006, Panama won a two-year term as a Latin American representative on the United Nations Security Council, breaking a lengthy impasse between Chavez, who campaigned aggressively for Venezuela to assume the post, and the United States, which backed Guatemala—an ally of Taiwan—for the vacant seat.

Taiwan’s alliances in the Caribbean have been whittled down to just four countries—the Dominican Republic, Haiti, St. Kitts & Nevis and St. Vincent & the Grenadines—after St. Lucia and the Bahamas both defected in 1997, and the island nation of Dominica severed ties with Taipei in 2004. Not long after that Grenada, still grappling with the legacy of the communist takeover that prompted U.S. military intervention in 1983, turned its back the staunch anti-communism of the Reagan era to open its arms to China in 2005. Meanwhile, beginning when Chile’s socialist president Salvador Allende formally recognized the PRC in 1970, the other South American powers switched over one by one throughout the 70s and 80s, and today Paraguay is the lone holdout on that continent against China’s diplomatic overtures.

Figure 1. Taiwan’s Shrinking Pool of Friends[2]

Of course, even Latin American countries without official relationships with Taipei often try to maintain good “non-official” relations, which may include opening reciprocal missions disguised as nonprofit foundations or businesses in their respective capitals. The lack of diplomatic links has not prevented Taiwan from undertaking significant trade with Brazil, Chile, or Mexico. However, the Taiwanese government believes that the ability to conduct relations with sovereign states on an equal basis is vital to the legitimacy of its own claim to sovereignty. Official allies also support Taiwan’s repeated petitions to join international forums such as the WHO and the UN, which are perennially squelched by China. And though Central America may share the famous Mexican lament about being “so far from God, close to the United States,” from Taiwan’s point of view this geographical happenstance makes it a particularly valuable region in which to retain a bloc of allies. Central America’s proximity to the United States justifies Taiwanese officials’ use of refueling stops in America to meet “unofficially” with U.S. policymakers while en route to official state visits in the south, a practice that has been dubbed “transit diplomacy.”[3]

Taiwan’s alliances with Latin American and Caribbean nations are sustained to some extent by values-based affinities, stemming from the anticommunist orientation of most Central American governments during the 1970s and 1980s but in more recent years have been bolstered by the shared experience of political and economic liberalization.[4] After several decades under the authoritarian rule of the Nationalist Party (Kuomintang, or KMT), the island embarked on a path of political opening to become one of the most vibrant, if sometimes unruly, democracies in East Asia, paralleling Latin America’s contemporaneous wave of democratic transitions. As one of the so-called “Asian Tigers,” Taiwan is also perceived by many Latin American policymakers as an enviable model for fomenting rapid economic, industrial, and technological development. Speaking in the Taiwanese presidential palace during a recent visit, President Leonel Fernández of the Dominican Republic drew attention to the country’s transformation from a society fighting for mere survival to “an economic miracle drawing respect, recognition, and admiration on a global scale.”[5] Latin American officials openly advocate emulating Taiwan’s path to prosperity, and Taiwan readily makes itself available as a tutor to other developing economies, annually deploying dozens of technical assistance teams to provide expertise in fields ranging from agriculture, fishery management, and pest control, to nanotechnology. Perhaps most important, Taiwan has long been one of the most consistent aid donors to those countries of the region that feel neglected by the international community. It is reportedly the single largest aid donor to St. Kitts and Nevis and St. Vincent, and the Grenadines.[6] In Haiti, Taiwan stood virtually alone among the international community in continuing to support the government of President Jean-Bertrand Aristide when most Western donors imposed a devastating bilateral aid cut-off from 2000 to 2004. When Aristide was forced from power in 2004, Taiwan maintained smooth relations with the interim government and is especially close to Haiti’s current president, René Préval, who was elected in 2006. In the wider Caribbean, Taiwan also offers significant resources for disaster relief, which follows naturally from the island’s own frequent experiences with earthquakes and typhoons.[7]

Over the decades, the use of aid funds as a diplomatic tool has been interwoven with a purposeful cultivation of personal connections between Taiwanese diplomats and local officials. In the words of one observer paraphrasing a Chinese expression, the Taiwanese government, conscious of the need to “warm the coals before starting the fire” carefully identifies junior bureaucrats and military officers early on in their public careers who are likely to become influential players in the future.[8] Ties are consolidated through extensive use of both academic and military training exchanges, as Taiwanese officials remain particularly aware of the still far-reaching influence of military institutions and personnel in Latin America. Over time this approach has created networks of elites spanning the Central American isthmus whose firsthand experiences and contacts in Taiwan presumably reinforce their political sympathies toward the island. Of course, for all the talk of mutual respect and cooperation between their peoples, experience has also shown that nothing is quite as effective at making and keeping friends as straight cash payments funneled surreptitiously into private accounts—another staple tactic of the KMT era that seems to have survived the death of the regime.

Meanwhile, China’s galloping entrance into the Latin American market for energy resources and other commodities has been accompanied by an accelerating pace of high-level visits by Chinese officials to the region over the past few years. Though China’s foreign policy strategy toward the developing world prioritizes South Asia and Africa over Latin America, this last relationship has experienced explosive growth. In 2001, Chinese president Jiang Zemin’s landmark visit to the region sparked a wave of subsequent visits by senior officials and business leaders between China and Latin America to discuss political, economic, and military concerns. Since then, the volume of trade between China and the region has skyrocketed. President Hu Jintao traveled to Argentina, Brazil, Chile, and Cuba in 2004 and visited Mexico in 2005. The presidents of all those countries (and several others) have paid reciprocal visits to China.

China’s economic engagement with Latin America responds to the requirements of a booming Chinese economy that has been growing at nearly ten percent a year for the past quarter century. The economic figures are impressive: In the past six years, Chinese imports from Latin America have grown more than six-fold, at a pace of some 60 percent a year, to an estimated $50 billion in 2005. China has become a major consumer of food, mineral, and other primary products from Latin America, benefiting principally the commodity-producing countries of South America—particularly Argentina, Brazil, Peru, and Chile. Chinese investment in Latin America remains relatively small at some $6.5 billion through 2004, but that amount represents half of China’s foreign investment overseas.[9] China’s Xinhua News agency reported that Chinese trade with the Caribbean exceeded $2 billion in 2004, a 40 percent increase from the previous year.[10] China has promised to increase its investments in Latin America to $100 billion by 2014, although government officials have since backed away from that pledge and several proposed investments are already showing signs of falling short in Brazil, Argentina, and elsewhere.

Figure 2: China v. Taiwan: Trading with Latin America

Source: Taiwan Ministry of Economic Affairs, Bureau of Foreign Trade online trade statistics database.

For their part, Latin Americans are intrigued by the idea of China as a potential partner for trade and investment. As a rising superpower without a colonial or “imperialist” history in the hemisphere, China is many ways more politically attractive than either the United States or the European Union for some politicians confronted with constituencies that are skeptical of Western intentions and increasingly anti-American.[11] Nevertheless, most analysts recognize that the Latin Americans’ embrace of China—to the extent that this has occurred—is intimately linked to their perception of neglect and disinterest from the United States. Nervousness about China’s rise runs deep among the smaller economies such as those of Central America, which do not enjoy Brazil or Argentina’s abundance in export commodities and are inclined to view the competition posed by the endless supply of cheap Chinese labor as a menace to their nascent manufacturing sectors.

But even as China seeks to reassure the United States that its interests in South America are purely economic, Beijing is now enlisting the influence and leverage of regional powers like Mexico to aid in its effort to woo Central American diplomats. Pressure is also being placed on Paraguay by Argentina, Brazil, and Chile and via the Mercosur (South American Common Market) which constrains its member states somewhat in their conduct of bilateral foreign policy. Despite its avowals to Washington, China appears to be using its economic might as a means to achieve the patently political objective of stripping Taiwan of its democratic allies in the hemisphere.

Beyond Checkbook Diplomacy?

In order to counter Chinese attempts to lure away its few remaining allies, the government of President Chen Shui-bian has sought to broaden and diversify the avenues for interaction between Taiwan and its Central American and Caribbean partners since taking office in 2000. The most visible instrument utilized by the Chen administration are the frequent and highly publicized exchanges of official visits, with either the president or vice-president traveling to the region approximately twice a year while a core roster of Central American and Caribbean heads of state stream steadily through Taipei. Taiwan is also aggressively pursuing bilateral free-trade agreements with Paraguay and member countries of the Central American Free Trade Agreement (CAFTA). Negotiations were finalized with Panama in 2003 and with Guatemala in 2005; a similar agreement, signed with Nicaragua in June 2006 was thrown into doubt following the recent Sandinista election victory in November but ultimately ratified by the Nicaraguan legislature in December. Trade negotiations with El Salvador and Honduras are nearing completion, while preliminary talks with the Dominican Republic began in October. Negotiations with Costa Rica are in the works. Since the FTA with Panama went into effect in January 2004, trade between the two countries has grown from around $130 million to $250 million annually.[12] Even though most of this growth is made up of exports to Panama and the trade balance still heavily favors Taiwan, imports from Panama jumped from $6 million in 2003 to $22 million in 2004 and $24 million in 2005—an impressive increase by any measure. With CAFTA in place, Taiwanese manufacturers hope to reduce their dependence on the Chinese market by using Central America as a gateway to the United States.

The Chen administration has also increased diplomatic interactions through multilateral channels. Taiwan holds observer status in SICA (Central American Integration System) and FOPREL (Forum of Central American Presidents and Legislators). Its foreign service personnel in Washington are in regular contact with the Inter-American Development Bank and have lobbied hard—though so far unsuccessfully—to gain observer status in the Bank, a status that China now holds.[13] Similar efforts to become an observer at the Organization of American States have not borne fruit, although China won this status three years ago. In 2005 Vice-President Annette Lu launched the Democratic Pacific Union, a group of states “committed to promoting democracy, peace, and prosperity,” constituted by 26 member states from around the Pacific Rim. The role of Taiwanese nongovernmental organizations is also expanding globally. Perhaps most notable is the Tzu Chi Buddhist Foundation, which performs humanitarian aid work throughout the developing world and operates offices in Asunción, San Salvador, Santo Domingo, Guatemala City, Tijuana, Mexicali, Sao Paulo, and Buenos Aires. While not a state agency, Taiwanese officials are well aware that NGOs effectively augment the diplomatic footprint by making Taiwan globally visible to populations beyond foreign capitals.[14]

Figure 3. China v. Taiwan: Bilateral and Regional Free Trade Agreements

	Taiwan	China
Finalized	Panama (2003) Guatemala (2005) Nicaragua (2006)	ASEAN Chile (2006) Thailand (partial)
Under Negotiation	El Salvador Honduras Costa Rica Dominican Republic Paraguay	Australia New Zealand Pakistan Chile Southern Africa Customs Union Gulf Cooperation Council
“Wish List”	United States Japan Singapore New Zealand	Brazil Iceland India Japan South Korea

Source: www.bilaterals.org

As a result of these diversified avenues of interaction, Taiwan’s political alliances today—at least in Central America—are arguably more robust than they were five years ago. There are nevertheless some disappointments, the most painfully obvious being the paucity of private-sector investment despite repeated declarations of official commitment to the cause. It is certainly not for lack of government initiative that Central America has not been flooded by Taiwanese capital as everybody had hoped. In 2000 Taiwan and Panama cooperated in the establishment of an export-processing zone in Colon City, Panama, and similar “Taiwan Parks” have been set up in El Salvador and Nicaragua. During a trip to El Salvador, Guatemala, and Panama in September 2005, President Chen unveiled the so-called “Jung Pang,” or “co-prosperity” initiative, which consists of a fund of $250 million set aside to encourage investment by Taiwanese companies in allied countries.[15] The government also established a Central and South America Research Center, several new investment consulting missions abroad, and a central coordinating office to facilitate investment projects by the Taiwanese private sector overseas.[16] But the lofty rhetoric has thus far not translated into reality. In Paraguay, for example, the shortage of skilled labor keeps an ailing industrial park largely vacant.[17] An analysis by the Taiwanese embassy in the Dominican Republic reportedly cited weak industrial base, high electricity costs, unstable power supply, high labor costs, and a deteriorating crime rate” as factors contributing to an unsound investment environment.[18]

It seems, in short, that good old-fashioned cash, in the form of development aid, is still indispensable to the maintenance of these ties. The bulk of Taiwan’s official aid budget is disbursed through the International Cooperation and Development Fund, established within the Ministry of Foreign Affairs in 1996, which had a budget of $388 million by 2000. The deputy foreign minister at the time estimated that about 80 percent of aid goes to diplomatic allies, while the rest was used to assist developing countries that “have the potential to become allies.”[19] The frequent reciprocal official visits are tellingly almost always accompanied by promises of aid in the form of grants and loans. In late June of 2006, Dominican President Leonel Fernández returned from a four-day trip to Taiwan bearing the promise of a fresh infusion of $60 million in aid. In July, a visit by the Prime Minister Ralph Gonsalves of St. Vincent and the Grenadines secured a $15 million loan for the construction of an international airport in Kingstown.[20] Less than two weeks later, the Taiwanese ambassador to St. Kitts and Nevis announced another $14 million loan for the expansion of the international airport in St. Kitts ahead of the 2007 World Cricket Tournament.[21] Paraguay has received from Taipei over $30 million in grants over the past few years for housing projects, $20 million for a new Congress building, and more money for scholarships. Taiwan also became Paraguay’s country’s biggest bilateral creditor after two Taiwanese banks offered that country at $400 million loan.[22] In October of 2000, the foreign ministry put forward a bill requesting a gradual annual expansion of the ICDF’s budget up to $940 million.[23] In addition, various other “soft” funds are reported to exist, as in 2003 when the Taiwanese media uncovered a secret $100 million fund in the intelligence agency earmarked for “buying influence abroad.”[24]

Taiwan’s internal political transformation has created new obstacles to its foreign engagements. While a divisively partisan domestic political arena has generally undermined the state’s ability to pursue a coherent foreign policy, heightened expectations for transparency and budgetary accountability now preclude the use of certain tools of diplomacy that were liberally employed in past decades, such as bribes and payoffs. At the same time, the democratic transitions undergone by many of Taipei’s allies since the height of the Cold War created a parallel source of opposition to such practices. Reports of a number of questionable fund transfers have surfaced in the past few years. In October 2004, former Costa Rican president Miguel Angel Rodríguez was forced to resign as Secretary-General of the Organization of American States after less than one month in office when both he and then-president Abel Pacheco came under intense judicial scrutiny for allegedly receiving kickbacks from French telecommunications company Alcatel. The widening investigation subsequently found that both also received funds totaling hundreds of thousands of dollars from the Taiwanese government for unexplained purposes, unleashing a firestorm of domestic criticism for Chen’s government, to say nothing of considerable international embarrassment.[25]

News of the Costa Rican scandal followed closely on the heels of allegations in September 2004 that $1 million was transferred to Panamanian president Mireya Moscoso without a full accounting.[26] In February 2005, Guatemalan media revealed that President Alfonso Portillo received three fund transfers of $500,000 each from the Taiwanese government, one of them in the form a check made out personally to Portillo four days before he assumed office in 2000.[27] Opposition legislators in Taiwan called repeatedly for an end to “checkbook diplomacy” and the “buying” of alliances in light of these revelations, while civil society groups in Guatemala similarly registered their outrage. “It would be embarrassing for Taiwan to be exposed as a government that corrupts other governments,” hinted Carmen Aida Ibarra, director of the Mirna Mack Foundation in Guatemala as the results of the investigation were unfolding in the press.[28] Under the domestic pressures for openness and accountability stemming from both sides of the relationship, the networks of personal connections that held these ties together over decades may begin to strain.

Meanwhile, China’s ever-expanding economic prowess has enabled it to become competitive in the dollar diplomacy game. The Chinese Communist Party has an advantage over Taipei in this endeavor, to the extent that its foreign ministry operates unconstrained by the scrutiny of either a legislature or an independent media, and the Party’s willingness to dig into its deep pockets have already paid some dividends. Dominica’s Prime Minister Roosevelt Skerrit switched recognition to China in 2004 after receiving a pledge of $112 million over a six-year period from Beijing. And though in 2003 Grenadian Prime Minister Keith Mitchell said that maintaining ties with Taiwan is “practical,”[29] by 2005 he had changed his tune, signing a joint communiqué declaring support for the “one China” policy. In exchange for ending this 15-year relationship with Taiwan, Grenada received support from China for rebuilding and expanding its national stadium for the 2007 Cricket World Cup; the construction of 2,000 housing units; new hospital facilities; agricultural support; a $6 million grant to complete projects previously financed by Taiwan, and an additional $1 million scholarship fund.[30]

The “Swing States”

All of Taiwan’s allies in the Western hemisphere are under continually building pressures to formalize their budding ties with Beijing given the increasing weight of the Chinese economy in the global system overall. However several among them stand out as being either especially susceptible to Beijing’s overtures, or for their heightened strategic importance. At this juncture the loss of even one of these key allies would represent a damaging reversal for Taiwan. The frequent use of the phrase “domino effect” vividly conveys the dread of a chain reaction which could severely cripple Taiwan’s claim to sovereignty.[31] Nicaragua is a clear case in point. In July 2006 representatives of the left-wing FSLN declared in the midst of the presidential election campaign that Sandinista frontrunner Daniel Ortega would establish formal ties with Beijing if he triumphed at the polls and downgrade the Taiwanese embassy to “trade representative” status—a proposal which the Taiwanese envoy in Managua categorically rejected as unacceptable. Since Ortega’s victory in November Nicaraguan representatives have been careful to assure Taipei that cooperation between the two countries will continue, and President Chen attended Ortega’s inauguration in January 2007. Still, one has to wonder what concessions Taipei will have to be prepared to make to maintain its increasingly tenuous links to Managua. There seems to be a strong sentiment that “the FSLN cannot ignore the reality of the economic impact that the PRC has in the world.”[32] Ortega’s presumably anti-American streak, coupled with the economic realities of the post-Cold War, point to some rocky times ahead for the bilateral relationship.

Speculation surrounding potential “swing states” also tend to center on Panama, one of the most strategically significant countries in Central America, where President Martín Torrijos invited Beijing to aid in the expansion of the Panama Canal. Panama’s voters approved a referendum on this massive infrastructure project last October, which will surely create new economic openings for Chinese construction companies. Relations between Taipei and Panama had cooled visibly when Torrijos assumed office; Torrijos turned down Chen’s request to visit Panama during a Latin America trip in 2005.[33] Much has also been made of the fact that Hutchinson-Whampoa, a Hong-Kong based Chinese shipping company with historically close affiliations with China’s People’s Liberation Army, already holds a 50-year lease on management of key port facilities at both ends of the canal. Panama is a significant leader in the region, so if the Torrijos government arrives at the conclusion that the benefits of a relationship with Beijing are just too overwhelming to ignore, the rest of the isthmus may well follow suit.[34]

In the Caribbean, the divided island of Hispaniola is emerging as the site of a