In June this year, Panama seized upon an important regional precedent as it switched its diplomatic relations from Taiwan to Beijing. Chinese President Xi Jinping hailed his Panamanian counterpart, Juan Carlos Varela, a “hero”; asserting that he had shown “great vision, political courage and responsibility” in making the transition.

During Varela’s week-long visit to China, 19 deals were signed, including agreements for a railway line in Panama; the beginning of talks on a bilateral free-trade agreement; cooperation on China’s “Belt and Road Initiative”; and even a memorandum of understanding designating Panama an “approved touristic destination” for Chinese tourists.

Tsai Ing-wen looking miffed
Taiwanese President Tsai-Ing-wen expressed her disappointment at Panama’s decision to recognise Beijing. Photo credit: Wikipedia Commons.

Who to recognise?

The move means that Panama has finally bought into Beijing’s vision of the ‘One China’ policy, having sustained diplomatic relations with Taiwan since 1912. The One China agreement has several interpretations, but essentially posits that there is only one sovereign state encompassing both mainland China and Taiwan.

However, Beijing and Taipei disagree on which of the two governments is the legitimate government of China. In its perpetual feud with Beijing, the Taiwanese government has often looked to Central America and the Caribbean as the bastion of its dwindling international recognition.

Indeed, of the 20 states that still recognise Taiwan’s Republic of China (ROC) over Beijing’s People’s Republic of China (PRC), five are in Central America (Belize, El Salvador, Guatemala, Honduras, and Nicaragua) and five are in the Caribbean (Dominican Republic, Haiti, St Kitts and Nevis, St Lucia and St Vincent and the Grenadines).

There are clear motivations for recognising Beijing over Taiwan: Dominica switched allegiance to Beijing in 2004 and Costa Rica followed suit in 2007, amid great fanfare and floods of investment.

The PRC shows a clear preference to engage with states that recognise its government in its trade and commercial involvement in the region: none of the 12 Latin American states that recognise Taipei over Beijing were in the top 13 destinations of PRC loan commitments between 2005 and 2015.

Chinese trade with Latin America

China has enjoyed a trade relationship with Latin America since at least the 16th century. Since the first boats began to arrive at the port of Acapulco, Mexico, from Manila in the Philippines bearing raw silk, fabrics and china; the economic boon of Sino-American commerce – initially the jurisdiction of the Viceroyalty of Nueva España – has become the bountiful realm of modern day Latin American nations.

An era of Chinese economic reform and opening, beginning in the 1980s and resulting in China’s admission to the World Trade Organization (WTO) in 2001, has led to a ripple of Chinese investment, migration and political involvement being felt almost everywhere in the world. Latin America was not immune to this influence.

Panama Canal isla Margarita
The Panama Canal is strategically-vital for international shipping, and China is its second most frequent user after the US. Photo credit: Wikipedia Commons.

The gradual opening of the Chinese economy has led to staggering growth. Since 2000, China’s economy has grown at an average rate of 10.3% per year, while its population over the same period has increased by over 1.2 billion people.

Consequently, according to Cecilia Arnson, an unquenchable thirst for raw materials, energy and food catalysed an “unprecedented expansion of China’s commercial and political relations with the developing world, including… resource-rich Latin America.”

The region was ideally placed to plug China’s raw material deficit. Indeed, in 2005, 14 of China’s top 20 imports from Latin America by volume were primary materials. Between 2000 and 2009, the region’s exports to China increased nine-fold, and this voracious upward spiral saw the indicator increase at an even greater rate between 2006 and 2009; from $22.3 billion to $41.3 billion.

Taiwan fights back

In the face of the PRC’s incomparable economic might, Taiwan has taken steps to reinforce the resolve of its remaining partners in Central America since Panama’s diplomatic defection.

On 3 September, Nicaragua signed an agreement with Taiwan to strengthen bilateral military support; while on 15 September, Taiwanese President Tsai Ing-wen said that her country would seek to increase business and infrastructure investment in its four Central American diplomatic allies.

El Salvador also received funds from Taiwan in October for a social programme which aims to eradicate poverty in beneficiary countries through targeted investment.

Taiwanese trade with Central America

Among Taiwan’s remaining Central American diplomatic allies, trade remains significant, yet is dwarfed by intraregional commerce and deals with the US. Guatemala imported US$45.8m worth of goods from Taiwan and exported goods to the value of US$75.4m; while Nicaragua’s trade with the ROC in 2016 showed an increase of 857% on its 2006 value, the year in which the two countries signed a free trade deal.

So far this year, Nicaraguan trade with the ROC has shown yet another remarkable rise, topping US$100m in the first 10 months of 2017 alone.

Tail Air China Jet
Air China has announced a direct flight between Panama and China from March 2018. Photo credit: Pixabay.

Honduras exports textiles, recycled paper, coffee, aluminium, seafood, plastic and wood in Taiwan; in return for car parts, electronics and metals. In 2016, Taiwanese exports to El Salvador totalled US$87.4m – mostly comprising fish products, coffee, gold and even green iguanas.

President Varela’s shift towards Beijing will also have been watched closely by the increasingly inward-looking administration of US President Donald Trump.

Varela was quick to quash any line of thought that might suggest conflict, stating that relations with the US and Beijing were not mutually exclusive: “We do have a strategic alliance with the US, but… developing closer relations with China is in no conflict with our relations with the US.”

Domino effect?

In the short term, despite Beijing’s economic potency, it is unlikely that Taiwan’s diplomatic allies in Central America will switch allegiances. According to Timothy S. Rich, professor of political science at Western Kentucky University, Beijing prefers to space out such diplomatic gains for “maximum media impact”.

While Taiwan was quick to denounce Panama’s move toward Beijing, it also stated that it would not compete with China in what it described as a “diplomatic money game”. Professor Rich concurred with this declaration, writing that Taiwan “should avoid returning to the ‘dollar diplomacy’ cycle where the loss of one diplomatic relation frees up aid to woo away a country recognising China”.

While a short-term domino effect is unlikely, the tantalising incentives for doing business with Beijing – in return for diplomatic recognition – remain. Taiwan will inevitably struggle to convince its allies in the region that recognising its diplomatic arm is a prize worth having; and envious eyes will surely be cast towards Panama once it begins to bear the fruits of its transition to Beijing.

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