Latin America Advisor

A Daily Publication of The Dialogue

What Will Relations With China Mean for El Salvador?

Salvadoran Foreign Minister Carlos Castaneda and his Chinese counterpart, Wang Yi.

El Salvador on Aug. 21 became the latest country to break diplomatic relations with Taiwan in favor of establishing them with China. The move left Taiwan with just 17 nations that recognize its government, nine of which are in Latin America and the Caribbean. Why did El Salvador’s government make the move now, and what will it mean for the country’s economy? What has severing relations with Taiwan and establishing them with China meant for other countries, such as Panama and the Dominican Republic, which have recently made that move? Will more Latin American and Caribbean countries break relations with Taiwan, and what will result from Taiwan’s growing diplomatic isolation?

Margaret Myers, director of the Asia & Latin America Program at the Inter-American Dialogue: “El Salvador’s decision to sever ties with Taiwan came as a surprise to most, including plenty of Salvadorans. The current administration reportedly made the decision behind closed doors, so many high-ranking legislators and officials were caught unawares. China no doubt made a series of promises to the ruling Farabundo Martí National Liberation Front (FMLN) in exchange for its support, but the details of those have yet to surface in their entirety. If Costa Rica, the Dominican Republic and Panama are any indication, El Salvador was likely promised more in the way of Chinese investment and trade, in addition to other cooperative agreements. China has expressed particular interest in upgrading the La Unión port. An infusion of Chinese capital and technical assistance could certainly benefit Salvadorans, but only if conditions are in place to ensure that Chinese engagement is both environmentally and socially sustainable and will result in concrete gains such as new jobs, tech transfer and/ or growth in Salvadoran exports. The FMLN no doubt struck this deal with the February presidential election in mind, and it might benefit from big investment-related announcements in the coming months. But the best outcomes for Salvadorans will require open and transparent debate about the benefits and drawbacks of Chinese projects, and critical study of Latin American experiences with Chinese ports and other investments. The consequences of bad deal-making could otherwise be felt for generations to come.”

Ricardo Cevallos, partner at BLP Abogados in El Salvador:  “Five months before the presidential elections in El Salvador, the FMLN after two consecutive presidential terms is under pressure from voters. It does not have the enormous economic support that it had in the past from Venezuela. While President Sánchez Cerén was announcing the breaking of relations with Taiwan, the foreign ministry of Taiwan was making public that it had received a request from the FMLN for an extraordinary amount of money to finance its campaign ahead of next February’s election. Additionally, China is interested in investing in the Port of Cutuco in the eastern part of the country, a Saca administration project that never took off. El Salvador’s Congress is considering the creation of a special economic area surrounding the port. If all this happens, China will have the opportunity to develop the port and a large trading zone for the manufacturing and distribution of Chinese products. This will certainly help an economy that shows no signs of recovery, but at what cost? Taiwan is losing its battle to China’s deep pockets. Other countries in the region began this trend of breaking relations in recent years, but the impact on their economies is still being evaluated. China has benefited with a stronger presence in the region that could soon signify faster routes and the benefits of low tariffs for its commerce with North America and Europe. In addition to the economic aspect, there is growing geopolitical presence of China in the area, which the United States is beginning to show concern about.”

Carlos Imendia, economic consultant based in San Francisco:  “The tip of the iceberg shows a shadowy move from a government months before it leaves office. Underwater, there are more dangerous driving forces related to geopolitics where a country’s strategic position matters, opening the old Pandora’s box of the 1980s with new actors, in line with Managua’s recent moves on a chessboard filled with China’s expansionist experiments. Negative economic implications will affect the whole area in the long run. The integration process in general and the fate of the Central American Bank for Economic Integration in particular may be imperiled. Taiwan finances regional initiatives and is one of the bank’s three largest stakeholders. With this decision, it loses an ally on the bank’s board of directors, which includes several representatives from nations that have dashed its hopes of becoming a state. Scenarios on future dynamics abound, probably with no desertions. However, El Salvador’s move is posing critical uncertainties and tensions with the United States with high costs for Central America’s well-being. Let’s be clear, even though it has supported development projects, Taiwan also has had a corrupting role in the entire isthmus with its checkbook diplomacy. A declining Taiwan doesn’t just reflect China’s increasing weight in world affairs; it raises the possibility of other shady deals.”

The Latin America Advisor features commentary from leaders in politics, economics, and finance every business day. The publication is available to members of the Dialogue’s Corporate Program and others by subscription.

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