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Monday, August 13, 2007
Perspectives

China, Taiwan and the Battle for Latin America

China appears to be using its economic might as a means to strip Taiwan of its Latin American allies.
Taiwan Vice President Annette Lu with Dominican President Leonel Fernandez in July. Lu's Latin America trip also included Paraguay and Guatemala. (Photo: Dominican President's Office).  

BY DANIEL P. ERIKSON
AND JANICE CHEN

China’s economic engagement with Latin America responds to the requirements of a booming Chinese economy that has been growing at nearly 10 percent per 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 $60 billion in 2006. 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. 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. 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.

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 Western Hemisphere, China is in many ways more politically attractive than either the United States or the European Union, especially for politicians confronted with constituencies that are increasingly anti-American and skeptical of Western intentions. Nevertheless, most analysts recognize that Latin America’s embrace of China—to the extent that this has actually occurred—is intimately linked to its perception of neglect and disinterest from the United States.

Nervousness about China’s rise runs deeper among the smaller economies such as those of Central America, which do not enjoy Brazil’s 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 has begun enlisting regional powers like Mexico to aid its effort to woo Central American diplomats.

Pressure is also being placed on Paraguay by Argentina, Brazil, and Chile, its partners in the South American Common Market (Mercosur), which places certain constraints on member states’ bilateral foreign policy prerogatives. 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 Western Hemisphere.

TAWAIN'S COUNTER-STRATEGY

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 is the frequent and highly publicized exchanges of official visits, with either the president or vice president traveling to the region approximately twice per 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 it was ultimately ratified by the Nicaraguan legislature in December. Trade negotiations with El Salvador and Honduras were completed in May 2007, while preliminary talks with the Dominican Republic began in October. (..). Since the free-trade agreement with Panama went into effect in January 2004, trade between the two countries has grown from around $130 million to $250 million annually. 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. (..)

MORE ROBUST

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 of these being the paucity of private-sector investment in spite of 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, consisting of a $250 million fund set aside to encourage investment by Taiwanese companies in allied countries.16 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. But the ambitious programs have yet to translate into tangible results. In Paraguay, for example, the shortage of skilled labor keeps an ailing industrial park largely vacant.

An analysis by the Taiwanese embassy in the Dominican Republic reportedly cited a 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.

CASH IS KING

It seems, in short, that good old-fashioned cash, in the form of development aid, is still indispensable to the maintenance of these ties. (..)

In late June 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. (..)  Over the past few years, Paraguay has received from Taipei over $30 million in grants for housing projects, $20 million for a new congress building, and more money for scholarships. Taiwan also became Paraguay’s biggest bilateral creditor after two Taiwanese banks offered that country a $400 million loan. (..)

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.

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. 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 of a check made out personally to Portillo four days before he assumed office in 2000.28 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,” declared Carmen Aida Ibarra, director of the Mirna Mack Foundation in Guatemala, as the results of the investigation were unfolding in the press. Under 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. (..)

UNDER PRESSURE

Given the increasing weight of the Chinese economy in the global system overall, all of Taiwan’s allies in the Western Hemisphere are under continually building pressures to formalize their budding ties with Beijing. (..)

Nicaragua is a clear case in point. In July 2006, representatives of the left-wing Sandinista  Front of National Liberation (FSLN) declared in the midst of a heated presidential election campaign that Sandinista frontrunner Daniel Ortega planned to establish formal ties with Beijing and downgrade the Taiwanese embassy to “trade representative” status if he triumphed at the polls. The Taiwanese envoy in Managua at the time categorically rejected the proposal as unacceptable. Since Ortega’s victory in November, Nicaraguan officials 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, it appears that Taipei may have to be prepared to make major concessions to maintain its increasingly tenuous links to Managua.

Ortega’s presumably anti-American streak, coupled with the reality of the PRC’s economic weight in the post-Cold War world,  point to some rocky times ahead for the bilateral relationship.

PANAMA NEXT?

Speculation surrounding potential “swing states” also tends 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 trip to Latin America in 2005. Much has also been made of the fact that Hutchinson-Whampoa, a Hong Kong-based Chinese shipping company with historically close affiliations with the 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.

In the Caribbean, the divided island of Hispaniola is fast becoming the locus of the competition for influence. Under the leadership of President Leonel Fernandez, the Dominican Republic appears to be intensifying its contacts with the PRC, despite continuing diplomatic exchanges with Taiwan. Loss of recognition by the Dominican Republic, one of the most populous countries in the region with a booming economy, would seriously weaken Taiwan’s foothold in the Caribbean. But the diplomatic wrangling extends to the western side of Hispaniola where neighboring Haiti is likewise under enormous pressure from China. The PRC contributed 125 riot police to MINUSTAH, the Brazilian-led UN stabilization force deployed in Haiti, and then subsequently leveraged its permanent member status on the Security Council to prevent Taiwanese Premier Su Tseng-chang from attending the inauguration of Rene Préval in May 2006. Since MINUSTAH is currently the principal force preventing a complete disintegration of the security situation in Port-au-Prince, the Haitian government had no choice but to bend to Beijing’s will. Haiti, the poorest and most vulnerable nation in the Western Hemisphere, is thus caught in a war of attrition between China and Taiwan that threatens to undermine international efforts to bring the country back from the brink of state failure.

PARAGUAY: NEW POLICY?

As the sole Taiwanese ally in South America, Paraguay is another possible candidate for withdrawal of support. Paraguay’s membership in Mercosur prevents it from signing a free-trade agreement with Taiwan without approval from all other Mercosur members, which presents a serious obstacle to the deepening of bilateral trade. Even without formal diplomatic ties, China already buys a good proportion of Paraguay’s soy crop while supplying about one-fourth of its imports,38 so normalized relations would undoubtedly bring significant trade benefits. Paraguayan recognition of Taiwan is in many respects a “holdover from the rabidly anti-communist Stroessner regime.” Given that Stroessner’s dictatorship has been out of office since 1989, officials in Asunción may just decide at some point that the time has come to eliminate this relic of a policy. (..)

Some analysts advocate taking measured but proactive steps in reaction to widening Chinese influence in Latin America, for example by lowering tariffs on U.S. cotton exports to the region through the passage of CAFTA. Making Central American textiles more competitive in the American market reduces U.S. dependence on Chinese imports while strengthening the export sectors of Central American economies. (..)

BENEFIT FROM ATTENTION

This intensifying attention from China and Taiwan is not necessarily unwelcome for Central America and the Caribbean. Indeed, most of these countries are struggling to achieve successful integration into the global economy, and they are only too eager to both seek out new partners and maximize the economic gains from existing relationships. Both China and Taiwan have shown interest in funding infrastructure projects that have fallen out of favor among Western donors, and the Latin American landscape is becoming host to an archipelago of bridges, roads, tunnels, and stadiums built as by-products of the cross-strait competition. Moreover, diplomatic relations with one partner does not preclude sustained economic trade with the other; many nations that recognize China still do business with Taiwan, and the reverse is also true. (..)

In the final analysis, the choice between China and Taiwan will remain a highly charged foreign policy decision for a narrow swathe of vulnerable Latin American countries for many years to come. (..)

Daniel Erikson is a senior associate for U.S. policy and director of Caribbean programs at the Inter-American Dialogue. Janice Chen is a joint degree candidate at the Georgetown University Law Center and the Fletcher School for Law and Diplomacy at Tufts University. This column is based on an excerpt of a longer article that appeared in The Fletcher Forum of World Affairs.  Re-printed, courtesy of The Fletcher Forum of World Affairs

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