By Jonah Bock and Haley Parilla
Amid recent efforts to pass the Compacts of Free Associations Act of 2023, the strategic importance of the Pacific Island nations has come into public view. Of the three “Freely Associated States” (FAS), two of them – Palau and the Marshall Islands – maintain diplomatic ties with Taiwan. Across the globe, another nine countries -mostly in the Americas – recognize Taiwan. In a world of increasing competition with China, the diplomatic and military value of these relations cannot be understated. However, these relationships face continuing pressure from the People’s Republic of China (PRC): most recently, shortly after the January 2024 Taiwanese election of Democratic Progressive Party (DPP, 民進黨) candidate Lai Ching-te (賴清德) to the presidency, the nation of Nauru announced that it would be cutting ties with Taiwan in favour of China.
After DPP president Tsai Ing-wen (蔡英文) was elected in 2016, the PRC ended an informal diplomatic truce with Taiwan and began an aggressive campaign to poach Taiwan’s diplomatic partners. Since then, ten nations have ended their diplomatic relations with Taiwan. In the Pacific, the Solomon Islands and Kiribati recognized China in 2019, followed by Nauru in 2024.
With an aggressive China seeking to eliminate Taiwan’s presence on the world stage, it is necessary to understand why countries have switched their diplomatic allegiance -and whether such moves can be accurately predicted in advance. Are there similarities between the ten states that have switched recognition since 2016? What events transpired immediately before they cut ties? And, were there any identifiable long-term trends affecting these decisions?
We have identified four primary indicators that may help predict a shift in diplomatic recognition from the Republic of China (ROC, Taiwan) to the PRC. These indicators include (1) dollar diplomacy and promises of development assistance from the PRC; (2) requests from the diplomatic partner country for massive financial aid from Taiwan; (3) PRC investment in regional neighbors; and (4) changes in trade patterns between the PRC and Taiwan’s allies.
Dollar diplomacy and development assistance
Many nations that ally themselves with Taiwan face significant challenges to economic growth and development. The PRC frequently exploits their poor economic conditions to lure these nations away from Taiwan. Since 2016, Taiwan has consistently accused the PRC of promising vast amounts of financial assistance in exchange for recognizing the “One-China Principle” (-個中國原則) (the PRC’s position that maintains that Taiwan is a province of the PRC). In 2002, Taiwan accused Beijing of purchasing Nauru’s allegiance by providing USD $137 million in grants and debt repayments. Again in 2024, China allegedly offered Nauru USD $100 million in aid, easily surpassing Taiwan’s capabilities. In the case of Nauru, government officials have been accused of receiving money from China on multiple occasions.
Taiwan has emphasized that it will not attempt to compete financially with the PRC to secure allies, since the PRC’s capacity to provide financial aid greatly outweighs its own. Accordingly, Kiribati opted for a USD $66 million grant from China in 2019. Soon after receiving the money and officially cutting ties with Taiwan, Kiribati signed 10 trade agreements with the PRC.
Kiribati and Nauru are not the only countries to switch ties due to promises of financial aid. In Nicaragua, China promised to pay for the construction of an airport and liquefied gas terminal totaling USD $430 million in value. The Solomon Islands and El Salvador expressed hopes of economic growth through PRC investment in both nations – which has seemingly materialized, with the PRC promising USD $500 million to the Solomon Islands, and El Salvador receiving USD $150 million from the PRC only a few months after its shift of diplomatic recognition.
Massive financial assistance requests
Prior to a change in diplomatic ties, Taiwan’s former allies had reportedly requested massive financial assistance from Taiwan. These requests were considered outside the scope of Taiwan’s international aid laws. For example, Taiwan was asked to fund the re-election campaign for El Salvador’s president Sánchez Cerén, and a port development initiative that Taiwan deemed unviable. Taiwan believed the port initiative would cause both countries to accumulate excessive levels of debt. Despite Taiwan’s good intentions, El Salvador decided to recognize the PRC soon after.
Taiwan had also refused a request made by Kiribati president Taneti Mamau for money to purchase a commercial aircraft just before the shift in recognition. Not long after Kiribati cut ties, the PRC purchased the aircraft for the island nation. Likewise, Burkina Faso switched ties even after signing a deal with Taiwan to obtain USD $47 million to support education, agriculture, and, defense projects. Before the decision to recognize China, the country requested an additional USD 23 million to fund various development projects, which Taiwan refused. Finally, São Tomé and Príncipe had also demanded USD $200 million in financial support from Taiwan. Combined with the pressures from dollar diplomacy, such high financial expectations of Taiwan’s allies indicate that the economic incentives of siding with China often outweigh those offered by Taiwan.
Chinese investments in regional neighbors
Before a shift in recognition, a state’s neighbours will have likely previously switched recognition, and China will likely have increased the “carrots” given to other countries in the region. Each country that recognizes the PRC is thereafter showered with “gifts” for switching. Both in the headlines and in material terms, these gifts are highly visible to the neighbouring countries. El Salvador sees the aid given to Panama, Nicaragua sees the aid to El Salvador, and Honduras sees the aid to Nicaragua, cascading the PRC’s impact. This is also observable in terms of China’s increasing aid and engagement with surrounding nations that already recognize it.
Trade flows
In all cases considered here, in the year before each country changed recognition, China was one of the top three sources of imports. Similarly, the share of Chinese imports into the country rose rapidly in each case over the past 20 years, while imports from Taiwan generally declined in the same period.
In most cases, the share of exports to China dramatically decreased before the country changed recognition to the PRC. The share of Nicaraguan exports to the PRC dropped by over 50 percent from 2015 to 2020 – the year before Nicaragua switched recognition. In Honduras the share dropped by 60 percent from 2020 to 2022, when Honduras switched recognition. The share for Panama dropped by nearly 70 percent from 2015 to 2017, when it changed recognition. In the Pacific, China’s share of Kiribati’s exports decreased by 85 percent from its high in 2016, to 2019 when it switched recognition.
By buying less, China may be punishing Taiwan’s allies for recognizing the ROC. This also provides a “carrot” that China can offer to states, promising to improve their terms of trade if they switch recognition. China signed a trade deal with Panama in 2018, and with Nicaragua in August 2023; and entered into negotiations with El Salvador in 2022, and Honduras in 2024. In countries that have not penned trade deals, exports and imports have also risen.
Taiwan’s recent loss of allies highlights the importance of the PRC’s strategic investments and “dollar diplomacy” in these nations. Financial incentives are a powerful tool China uses to weaken Taiwan’s influence worldwide, and to motivate numerous countries to alter their strategic alignment. Recognizing indicators including economic pressures and changing trade dynamics is vital for predicting future shifts in diplomatic alignment, and reflects the broader trends in international relations that will shape the global order in coming years.
The main point: Latin America and the Pacific Islands have proven to be regions of intense competition between Taiwan and China for diplomatic relationships. There are four main indicators that can predict a change in diplomatic recognition from Taiwan to the PRC: dollar diplomacy and promises of development assistance from the PRC, requests for significant financial aid from Taiwan, PRC investment in regional neighbours, and changes in trade patterns between the PRC and Taiwan’s allies.
