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The Big China and Taiwan Tussle: Dollar Diplomacy Returns to Latin America

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On August 19th, 2008, Taiwan’s new president Ma Ying-Jeou concluded his first trip to Latin America, one of the most important geopolitical regions in the world for his island nation. The purpose of the trip was to attend the inaugurations of Dominican Republic president, Leonel Fernandéz, and his Paraguayan counterpart, Fernando Lugo. During his trip, President Ma made a brief refueling stop in Panama, where he received a warm welcome from the Panamanian President Martín Torrijos. On his way from Paraguay to the Dominican Republic, President Ma also met with Honduran President Manuel Zelaya and the Vice President of Guatemala, Rafael Espada.

Ma’s trip carried two flags: one was that he was not to be seen as an exponent for “Transit Diplomacy,” a tactic in which his predecessor, Chen Shui-bien has specialized. “Transit Diplomacy” stands for conducting rapid diplomacy while briefly stopping over in a third country, usually the United States. The second one was Ma’s announcement that he did not intend to hand out any grant money during his trip and that all charitable donations and investments should be processed through government procedures. This announcement suggested that Taipei was terminating its own version of “Dollar Diplomacy.”

Dollar Diplomacy vs. Diplomatic Truce
Taiwanese “Dollar Diplomacy” was a strategy that Taipei had used for more than a decade in order to coax more nations to enter into official diplomatic relations with their island nation rather than with China. At that time, Beijing would not tolerate any nation having diplomatic relations with their country and Taipei simultaneously. Since Taiwan lost its UN seat in 1971 and the U.S. ceased its diplomatic relations with Taiwan in 1979, the Taiwanese government in effect has lost any diplomatic leverage to claim that Taipei rather than Beijing was the only legitimate government to represent “China.” Today, only 23 countries officially recognize Taiwan, 12 of them located in Latin America. Currently, Taiwanese strategy to reinforce ties with its remaining allies is based on spreading cash, providing aid, or directing investments into infrastructure projects. Although the name of this diplomatic strategy changes with different Taiwanese administrations, the essence remains the same. In order to persuade developing countries which do not have official relations with Taipei to switch their political allegiance from China to Taiwan, the Taiwanese government offers sizeable grants. This “Dollar Diplomacy” was widely utilized and criticized during the Chen presidency.

The main foreign policy thrust of current Taiwanese President Ma is the “Diplomatic Truce.” More specifically, this tactic seeks to tone down Taiwan’s and China’s torrid competition for allies, with both countries saving money and energy by doing so. The idea of the “Diplomatic Truce” is focused on roughly maintaining the status quo regarding the number of Taiwanese allies. That is to say, the Taiwanese government will not attempt to persuade other small countries to exclusively establish official relations with Taiwan by offering sizeable gifts. Therefore, it is likely that the number of countries recognizing Taiwan will neither increase nor decrease during Ma’s presidency. However, when some Taiwanese allies questioned if Taiwan’s foreign aid would decrease or if there would be any other changes brought on by his “Diplomatic Truce.” President Ma confidently answered that the policy would not harm but rather enhance bilateral relations because Taiwan could now focus on maintaining relations with its current allies. Furthermore, Ma claimed that he does not oppose allies of Taiwan conducting economic and cultural relations with China. He holds out an optimistic attitude towards this because Taiwan itself benefits from such relations with some of China’s allies that do not recognize Taipei.

Does Dollar Diplomacy work?
During the Nicaraguan presidential campaign in 2006, Daniel Ortega stated that, if elected, he would recognize China and develop official relations with the mainland instead of Taiwan. It was assumed that due to Ortega’s leftist background, he would be quick to drop Taiwan and affiliate with China if elected to office. In fact, he had broken off ties with Taiwan during his earlier tenure as president in the 1980’s. However, up until today Nicaragua and Taiwan have had close relations ever since Ortega’s inauguration in 2007.

After Ortega rose to power, Nicaragua became a priority for Taiwan’s diplomatic officers in Central America. The Taiwanese government has put many resources and much energy into maintaining Nicaragua as a strong ally. During 2007 and 2008, the Taiwanese president at that time, Chen Sui-bien, visited Nicaragua twice. The leaders of these two countries first met at Ortega’s inauguration ceremony. Chen visited Nicaragua again later that year. After Ortega’s latest political victory, Taiwan donated $30 million to Managua for the construction of a thermal fire power plant to help relieve the energy shortage in Nicaragua. Taiwan also provided $1.1 million to a project proposed by the Nicaraguan first lady in order to abate the problem of hunger in the country.

However, Taiwanese monetary contributions might not be the only motive causing Nicaragua to stand at Taipei’s side. Taiwanese investment is another possible factor that keeps Ortega from complying with his previous commitment to recognize China. Taiwanese companies are the largest investors in the country’s “Free Zone” industrial park. During the incumbency of a previous Nicaraguan president, Taiwanese corporations had invested around $ 127 million in the country. Nearly fifty thousand Nicaraguan workers are employed by these Taiwanese enterprises. If Ortega turns his back on Taiwan, this would undoubtedly influence the continuous presence of the island’s investments in the country. Nicaragua’s economy might be affected by such an action. Since the withdrawal of Taiwanese factories could lead to major unemployment in a country that has found it difficult to create new jobs.

On the other hand, President Ortega has not closed the door on also having economic relations with China. He has stated that it is not necessary to have diplomatic relations with China in order to do business with it. Instead, China can set up a business office in Nicaragua, as it has in Panama currently, regardless of the fact that Panama recognizes Taiwan at present.

Criticism of Chen’s “Dollar Diplomacy” has been heavily focused on the president’s habit of handing out money which many deemed to be an embarrassment to his country. By papering his trips with financial hand-outs, President Chen sometimes had been treated as a national hero in the countries that he visited. During Chen’s eight-year tenure, he distributed around $1.6 billion to his hosts in Central America and the Caribbean in aid and investment projects. The opposition party at that time, the Kuomintang, harshly criticized Chen’s actions as a waste of money and accused him of working not for the country’s well being, but rather to elevate his personal reputation.

Due to a lack of meticulous evaluation of its investment projects, Taiwan’s profligacy did not always bring about satisfactory outcomes. Some Taiwanese corporations barely benefited from these government-encouraged investments. For example, during President Chen’s visit to Honduras in 2007, he agreed to invest $300 million in the country to construct a hydro-electricity powered electronic plant. However, after the Taiwan Power Company performed a cost-benefit analysis of the project, it was established that this project would lose $35 million, and that the deficit could not be made up over the duration of the concession, which would revert to Honduras after thirty years.

There have been a number of scandals involving Taiwanese aid. For instance, both the former president of Costa Rica, Miguel Rodríguez, and the former president of Nicaragua, Enrique Bolaños have been accused in their own countries of corruption and of illegally receiving funds from foreign governments. Some of these transactions were traced to Taiwanese authorities. These incidents not only raised widespread doubts among the Taiwanese public regarding the purpose and efficiency of offering so much aid to their putative friends overseas, but also have hurt the island’s image internationally.

Ironically, President Chen’s spending did not cause Taiwan’s flags to fly in any additional countries, but rather in less: nine countries turned their backs on Taiwan and instead embraced China during Chen’s tenure. Three Latin American countries: Costa Rica, Grenada and Dominica were among these.

Costa Rica Changes its Mind
Costa Rica’s diplomatic shift from Taipei to Beijing has been interpreted as particularly noteworthy because it is the only country in Central America that has established diplomatic relations with China as of now. Also, San José has always been seen as a very important friend of Taiwan because the two countries have had official ties for more than six decades. Taiwan is also worried that Costa Rica’s defection could prove infectious, which might catalyze a domino effect in Central America, encouraging more Central American countries to take similar action.

Actually, even before it became a reality, there already was an indication that Costa Rica might break away from Taiwan. In May 2007, Costa Rica voted against Taiwan´s petition to join the World Health Organization. A month later, Costa Rica announced that it would enter into official relations with China. Not long after the news began to circulate, Taiwan gave notice that it would suspend all its aid and projects involving Costa Rica. However, with China’s pledge that it would provide much greater funding than Taiwan had, Taipei’s declaration did not cause consternation in San José. By crossly stating that Taiwan had not given sufficient aid to Costa Rica, President Oscar Arias let it be known that China would be offering more aid than Taiwan. Furthermore, evidence exists indicating that China convinced San José to develop diplomatic links with Beijing by arranging its State Administration of Foreign Exchange to purchase Costa Rican government bonds.

The trade relationship between China and Costa Rica is expanding, with China’s imports from Costa Rica now exceeding $1 billion annually. Moreover, the two countries are talking about entering into a bilateral Free Trade Agreement. The cooperation between them is not limited to only economic ties. In addition, San José announced that China will help build a stadium and a sport training center there as well as set up a series of sports training exchange programs.

If Nicaragua can be seen as a rousing Taiwanese success story in dollar diplomacy, then the Costa Rica case can be seen as a diplomatic failure. However, China might be cautioned not to push too harshly on Nicaragua to change its current recognition arrangement, since the latter nation (along with Haiti) is one of the least developed countries in Central America and Caribbean region, and they need all the assistance they can obtain. Taiwan’s concerns about Haiti materialized in 2004 when China responded by deciding to send troops to the island to join the peacekeeping mission there known as MINUSTAH, in spite of the fact that Port-au-Prince recognizes Taiwan.

The Dilemma
Regardless of the current competition between Taiwan and China, the countries in Central America and the Caribbean are finding themselves as the ultimate beneficiaries. Since worldwide the countries that have diplomatic relations with Taiwan are mostly small and have many needs due to their poverty, an alliance with Taiwan is attractive if Taipei is prepared to pay the check. Taiwan is the largest aid donor in many Caribbean countries. Taiwan has proven to be quick to offer natural disaster relief supplies as well as provide natural disaster management skills to countries that have suffered from the damaging effects of hurricanes and earthquakes. At the same time, China is also increasing its influence in the region due to its enormous economic power. Take Panama, at the present time Chinese companies are the biggest users of the Panama Canal. Another example is that Guatemala recently set up a Guatemala-Sino Chamber of Commerce, an indication that China is increasing its business ties with the country. Meanwhile, Taiwan cannot neglect the steady erosion of its leverage in the region.

Choosing between Taiwan and China is a dilemma for a number of Central American and Caribbean countries. Taiwan has been practicing the fine art of financing above and below the table in the region for a long time and has won over certain influence in a number of Central American and Caribbean basin development organizations and lending institutions. On the other hand, Chinese economic impact in the region is increasing. Almost every country in the area is witnessing that the tempo of its trade with China in on the increase. This is a phenomenon that no one can ignore. As long as Taiwan and China, cannot solve their political rivalry, the dilemma of choosing between a long term democratic ally who continually provides aid in exchange of diplomatic support and a non-democratic country but a rising global economic power remains. This is a question without a correct answer but only practical benefits.