Introduction

Taiwan has struggled for diplomatic recognition and international participation ever since the adoption of United Nations General Assembly Resolution 2758 in 1971, which stated that the People’s Republic of China (the PRC) was the only legitimate government representing China. Since then, Taiwan, with the official title of Republic of China (ROC), has lost diplomatic recognition from 40 countries, including the United States on January 1, 1979. The losses have continued for Taiwan, while the PRC has consistently sought to sabotage Taipei’s efforts to maintain ties with third countries and participate in international organizations and forums. Due to China’s political and economic allure and its use of coercion, the number of countries that recognize Taiwan has kept on shrinking, falling from 29 to 14 between 2000 and 2022, with Nicaragua being the most recent loss. Fierce cross-strait diplomatic rivalry rages on, especially in traditional Taiwanese strongholds such as Latin America and the Caribbean and Oceania. Taipei is attempting to hold on to its existing diplomatic partners and establish new ties while Beijing is encroaching on its relationships with promises of aid, trade, and investment.

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This competition is fueled by Beijing’s attempts at power projection in strategically important regions and its drive for spheres of influence. With a view to deepening and strengthening its influence in Africa, a continent which provided decisive support for China’s admission to the UN in 1971, the Forum on China-Africa Cooperation (the FOCAC) was established in 2000. Ministerial meetings were held in 2000 and 2003 and declarations adopted under the framework of the FOCAC. In 2006, China issued a white paper on African policy, the first time it had produced such a policy document for a specific country or region (FMPRC, 2006). The forum was upgraded to summit level that year with the gathering of 41 heads of state from 48 African countries. The event provoked concern in Europe and the EU responded by calling for trilateral dialogue with African countries and China, a proposal that was met with a lukewarm response from the Chinese side (European Commission 2008).

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In the wake of the global financial crisis in 2008, China attempted to combine economic relations with strategic objectives in central and eastern Europe. It established a cooperation framework - the “16+1” format - in 2012. This originally included eleven EU member states and five western Balkan countries. Greece joined in 2019 following heavy Chinese investment, including its acquisition of a 51 percent stake in the Piraeus Port Authority, while Lithuania withdrew. The framework has become a key element of China’s geostrategic approach to European countries and constitutes an arm of its Belt and Road Initiative (BRI), which was launched in 2013. Despite its framing as a multilateral approach, the 16+1 format has remained largely bilateral in practice according to the European Parliament Research Service. (EPRS 2018).

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In November 2012, Xi Jinping became general-secretary of the Chinese Communist Party as well as president of the PRC and chairman of the Central Military Commission. Chinese diplomacy has since undergone a fundamental shift as Xi pursues his vision of the “Chinese Dream” and the PRC’s rise as a great power. He has abandoned the principle laid down by Deng Xiaoping that China should “hide our capabilities and bide our time” and has pursued what he calls “the great rejuvenation of the Chinese nation”.

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A more confident China should not necessarily be incompatible with other countries, even those in the western world. However, Beijing’s tendency to trumpet China’s special characteristics and development needs — sometimes under the cover of “Asian values” — as a justification for China’s deviation from international norms or universal values does pose a challenge to the liberal international order. This is highlighted by China’s increasingly confident participation in international affairs and its eagerness to act as a “rule-maker” not merely a “rule-taker” (Wang 2017). The Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB) are illustrative examples of its ambitions.

 

145 countries have signed up for the BRI since its launch in 2013. Its aim is to generate vast Chinese investment in infrastructure projects around the world. The objective is to give form to the “China dream” by creating a “Sino-centric network of economic, political, cultural and security relations” that can “re-constitute the regional order – and eventually global order” (Callahan 2016, 226). Specifically, China offers loans to countries that participate in the BRI to build their infrastructure and generate economic growth. The BRI has been described as “China’s Marshall Plan” for developing countries in the 21st century (Shen and Chan 2018). However, the initiative has also led to warnings that some of the participants could be walking into a “debt trap” by signing up for excessive loans. Such debts could not only increase China’s leverage over a given country, but also threaten its sovereignty if it’s unable to repay the loan. The best-known case was Sri Lanka’s deal to lease Hambantota port to a Chinese company for 99 years after it failed to repay loans. (Abi-Habib 2018). It is also argued that China’s BRI agreements can encourage corruption in borrower countries (Doig 2019). Accordingly, many democracies chose to steer clear of the BRI despite the financing opportunities on offer. (Balding 2018).

 

The BRI extends to Latin American and the Caribbean through its maritime arm, known officially as the 21st Century Maritime Silk Road. On February 15th, 2022, the Argentine President, Alberto Fernandez, met with Xi Jinping and agreed to join the Belt and Road Initiative, making Argentina the 21st of 33 LAC countries to sign up. The remaining 12 LAC countries that have not joined the BRI include Taiwan’s eight diplomatic partners in the region and the three most populous countries: Brazil, Mexico, and Colombia. Panama was the first country in the region to sign up in 2017, but the BRI’s expansion has slowed since the outbreak of the COVID-19 pandemic in 2020. The US government took no effective measures to hinder the BRI’s growth until August 2020, when the then secretary of state, Mike Pompeo, launched the Clean Network, which aimed to purge Chinese tech companies from involvement in 5G networks. In September 2021, President Biden and G7 leaders launched the “Build Back Better World (B3W) Partnership,” which plans to counter the BRI by addressing the multi-trillion-dollar shortfall in infrastructure investment in developing countries.

 

China moved to expand its sphere of influence in Oceania in 2000 when it set up the China-Pacific Island Forum Cooperation Fund and opened a Pacific Islands Forum trade office in Beijing. A significant landmark was reached in 2006 when the then Chinese premier, Wen Jiabao, attended the first meeting of the China-Pacific Island Countries Economic Development and Cooperation Forum in Suva, Fiji. It was the first time such a senior Chinese leader had visited the region. Attended by eight Oceanian countries (Cook Islands, Federated States of Micronesia, Fiji, Niue, Papua New Guinea, Samoa, Tonga, and Vanuatu), the forum aimed to strengthen cooperation between the business communities of China and the island countries and to increase Chinese aid. There is a wide consensus in the field of Pacific studies that China has significantly increased its economic presence and aid engagement in the Pacific since the launch of this cooperation forum. The second forum was held in Guangdong in 2013, attended by the same partner countries. The goals became more vigorous: to support major infrastructure projects, increase exports to China, and tap the Chinese tourism market. The third one took place in Apia, Samoa, in 2019, with the Solomon Islands and Kiribati also attending after they both switched diplomatic recognition to Beijing a month before. China at this stage moved to incorporate Pacific island states into the BRI and extend cooperation in multiple sectors.

 

The BRI aims to strengthen links from China to Europe via Central Asia through its terrestrial arm, known officially as the Silk Road Economic Belt. This ambitious Eurasia connectivity plan has aroused concern among EU countries, some of which are wary of what they see as China’s “divide and rule” strategy. China’s investment in key infrastructure projects and its acquisition of critical assets has increased concern about the continent’s economic security. With some hesitation, the EU responded to the BRI with its own connectivity strategy unveiled in 2018 (European Commission 2018). It was expanded and strengthened by the Global Gateway initiative announced by the President of the European Commission, Ursula von der Leyen, on December 1, 2021 (European Commission 2021). The EU also adopted an investment screening regulation in 2019, mirroring the Committee on Foreign Investment already established in the United States. With the outbreak of COVID-19, supply chain security, technological sovereignty and strategic autonomy had become major issues for the EU.

 

While China was promoting the BRI, Taiwan’s new government unveiled its New Southbound Policy (NSP) in 2016 with the aim of improving cooperation and exchanges with 18 countries in South Asia, Southeast Asia and Australasia. SNP was billed as “new” to differentiate it from its predecessor, the Southbound Policy, which was adopted in the 1990s. Both policies had the aim of reducing Taiwan’s economic dependence on China by increasing economic, social and cultural exchanges with other Asian countries. The NSP, however, goes beyond its predecessor’s focus on Taiwanese exports and emphasizes policy areas based on values, with initiatives described as “people-centered” and designed to enhance “bilateral reciprocity.”

 

As Taiwan’s target countries overlap with the BRI, the NSP has been seen as an attempt to counter the Chinese initiative. According to Yang (2018), the NSP also facilitates Taiwan’s engagement with the world, a process that has been dubbed “international socialization”. By helping to shape Taiwan’s international identity and increase its visibility, the NSP also helps Taiwan resist China’s attempts to marginalize it. Chen (2020) further argues that the NSP signals to the US that Taiwan is pursuing a moderate foreign policy that aligns with its “Free and Open Indo-Pacific Strategy” (FOIPS), a drive to strengthen Washington’s economic and security relations with the region in response to the BRI (Tan 2020). In other words, China’s BRI has faced a response from both Taiwan and the US in East and Southeast Asian Countries.

 

Since its accession to the WTO in 2001, China has reaped substantial benefits from the world trading system. It has also actively sought free trade agreements and bilateral investment treaties wherever it can, ranging from Southeast Asia, Oceania and Latin America to Africa and Europe. In 2015, Australia became one of the first western countries to conclude a free trade agreement with China, while the EU concluded a comprehensive agreement on investment with China in 2020. In addition to bilateral free trade agreements, China also actively participates in mega-regional trade agreements, including the Regional Comprehensive Economic Partnership, which was concluded in 2020 and came into force on January 1, 2022. Over the past two decades, the volume of China’s international trade has soared and so has its trade surplus with the rest of the world. This has resulted in uneven trade and sometimes undue economic dependence on China, giving Beijing scope for the use of economic coercion, an approach sometimes linked to its increasingly strident diplomacy.

 

China’s attempts at economic coercion are most frequently employed over Taiwan, visits by the Dalai Lama or criticisms of China’s human rights violations. The recent decision by Lithuania to allow the opening of a Taiwanese Representative Office in Vilnius, which led to strong protests and sanctions from Beijing, is a case in point. In response to China’s actions, the European Parliament adopted its first-ever report on EU-Taiwan political relations. It expressed support for Vilnius’s decision and encouraged closer EU-Taiwan political ties, including changing the name of its office in Taipei, from the European Economic and Trade Office (EETO) in Taipei to the European Union Office in Taiwan, to reflect the broad range of relations. The European Commission also moved to counter future threats to member states by proposing the establishment of a retaliatory mechanism, known as the Anti-Coercion Instrument.

 

The competition between Taipei and Beijing for diplomatic partners, and Beijing’s efforts to undermine Taiwan’s diplomatic relations, should also be viewed against the background of Taiwan’s internal politics. Both the succession of Xi Jinping in 2012 and the election of President Tsai Ying-wen in 2016 marked crucial junctures in the contest for diplomatic recognition. Under the previous Taiwanese administration of Ma Ying-jeou from 2008 to 2016, political relations with Beijing were much better than under either its predecessor or successor. They were marked by the signing of the Cross-Strait Economic Cooperation Framework Agreement (ECFA) in 2010 and Ma’s meeting with Xi in Singapore in 2016. The Ma administration’s favorable approach to China led to a truce in the diplomatic competition. When Gambia cut off diplomatic relations with Taiwan in 2013, China held off establishing ties, until after the Tsai administration came to office in 2016.         

 

With the signing of the ECFA, the Taiwanese and Chinese economies became increasingly integrated; however, the signing of a new agreement in June 2013, the Cross-Strait Services Trade Agreement, led to a backlash, with popular protests culminating in the Sunflower Movement in March 2014. The protesters feared that overdependence on China economically would erode Taiwan’s independence and eventually undermine its sovereignty. The Sunflower Movement prepared the ground for the governing Kuomintang’s defeat in the local elections at the end of 2014 and finally in the presidential election of 2016. China imposed economic sanctions after the Tsai administration took office, citing its refusal to recognize the “1992 consensus” [i] on cross-strait relations, a vague and ambiguous understanding that had nonetheless helped preserve the status quo. They included restrictions on Chinese tourist visits and a ban on the import of Taiwanese fruit. China also persuaded several countries to switch diplomatic relations from Taipei to Beijing to signal its anger.

 

China’s assertive diplomacy and its global ambitions have caused alarm in Washington and threaten to undermine US interests in Asia and beyond. Various policy initiatives have been tried, including the US “pivot to Asia” under the Obama administration and the current Indo-Pacific Strategy. France, Germany and the EU as a whole have also drawn up their own Indo-Pacific strategies since 2018. Taiwan’s security is now a key consideration for all players as tensions continue to rise in the region. Taiwan was high on the agenda at the G7 summit, the Quad leaders’ summit, as well as the US-Japan summit and bilateral security consultations between Tokyo and Washington. 

 

The competition between Taipei and Beijing for diplomatic partners should be seen within the context of the wider contest between Washington and Beijing. The Taiwan Allies International Protection and Enhancement Act (TAIPEI Act), which was passed by the US Congress in 2019, illustrates Washington’s growing acknowledgement of Taiwan’s importance in the struggle. The Biden administration has shown increasing support for Taipei’s presence in the UN system, all the while reaffirming the US commitment to defend Taiwan. On October 26, 2021, the Secretary of State, Antony Blinken, urged “all UN Member States to join in supporting Taiwan’s robust, meaningful participation throughout the UN system and in the international community, consistent with ‘One China’ policy”.

 

With such geopolitical considerations in the background, this study aims to isolate the economic dimension of the diplomatic competition between China and Taiwan and assess the benefits and risks that third countries can expect from engaging with either. We will assess whether China delivers on the often lavish promises it makes when encouraging countries to break off ties with Taiwan and investigate the economic and social impact on states that switch ties. This project is an attempt to vet and verify China’s claim that significant economic benefits arise from switching diplomatic recognition to Beijing. By offering evidence with empirical, quantitative and qualitative analyses, this study sheds light on the policy making of third countries that are considering such a switch. By exploring the social ramifications for countries that make the change we help to weigh any economic gains against the political and social costs. Moreover, as China relies heavily on economic coercion in its diplomacy, this study helps to ascertain its effectiveness, and explores possible policy responses.

 

We use statistical analysis to assess the impact of China’s threats of economic coercion against countries that challenge it over Taiwan and other issues. We also investigate the social perils that can accompany close economic ties with China, such as restrictions on freedom of speech and the undermining of gender equality. We provide case studies from Latin America, Oceania and Africa, where the competition between Taipei and Beijing has been intense. We also investigate three central European countries - Poland, Hungary and the Czech Republic - where Poland and the Czech Republic are strengthening their relations with Taiwan, and Hungary is a firm supporter of China within the EU. Additional attention is paid to Taiwan’s high-tech sector, including electronic manufacturing services and semiconductor production in the light of the ongoing restructuring of global supply chains.

 

This study starts with identifying China’s use of economic coercion and evaluating its effectiveness. It assesses the impact on the export volume to China of the targeted sectors and to the rest of the world, and the total trade volume of the targeted country with China. Finally, it analyses the responses of targeted countries and their policy options. The effectiveness of China’s attempts at coercion is highly erratic, depending on a country’s relative strength, its trade dependence, and the vagaries of Chinese demand for the products or sector being targeted. The capacity of countries to diversify their markets, and the level of solidarity shown by other countries, are also important factors. We argue that China’s readiness to use economic coercion stems partly from the leverage it wields over countries that rely heavily on the Chinese market, and partly from the weakness of the WTO dispute settlement system. The WTO’s inability to award compensation undermines attempts to deter transgressions. The problem can be addressed by collective action from countries that rally to the support of those caught in Beijing’s sights.

 

Chapter 2 then assesses the perils associated with Chinese foreign aid, as aid is Beijing’s key policy instrument for extending its influence in the developing world. Recent studies suggest that Chinese aid can generate short-term economic growth in recipient countries (Bluhm et al., 2020; Dreher et al., 2021), but its aid diplomacy is accused of being inconsistent with international norms, such as those laid down by the OECD Development Assistance Committee. We map Chinese foreign aid to third countries and examine evidence through statistical analysis of its potential adverse effects. The findings show that Chinese aid tends to erode institutional quality in recipient countries, with a negative effect on democratic development, rule of law, freedom of expression, and gender equality in politics. This process fosters regime corruption. Such aid can also have negative social consequences, such as lower enrollment rates in primary schools and lower gender equality in employment. The findings are robust to alternative statistical models that address the issue of cause and effect. One key implication of this chapter is that China’s foreign aid may continue to be detrimental unless Beijing adopts the international norms and standards associated with official development assistance (ODA) from OECD countries.

 

Chapter 3 is a quantitative chapter that uses the econometric method to trace changes in economic growth when a country switches diplomatic recognition from Taipei to Beijing or vice versa. We also track the impact on growth of other Chinese initiatives. They include the introduction of the Belt and Road Initiative to Latin American and the Caribbean in 2013, the first Forum on China-Africa Cooperation (FOCAC) summit held in 2006, the establishment of the China-Pacific Islands Economic Cooperation Forum in 2006, and the launch of the 16+1 format in Central and Eastern Europe (CEE) in 2012. We examine whether these landmarks had a significant impact on growth and whether the effect was positive or negative. The results of this chapter lay down the foundations for further analysis in subsequent chapters. The methodology we use is the Difference-in-Differences formula to assess whether a policy change has made any difference to growth.    

 

The remaining chapters use the DID methodology, supplemented by qualitative analysis employing methods from the social sciences and anthropology, to assess the broader impact on economies and society. Diplomatic competition between Beijing and Taipei has been particularly fierce in Latin America and the Caribbean, Oceania and Africa. In Central and Eastern Europe, where there have been no switches in diplomatic recognition, there has nonetheless been a significant change in atmosphere. Poland, the Czech Republic, Slovakia, and most recently Lithuania, have all made sympathetic overtures towards Taiwan and backed closer cooperation, while continuing to adhere to the EU’s One China policy. 

 

Chapter 4 turns to Latin America and the Caribbean where the diplomatic competition between Taipei and Beijing remains intense. We supplement a study of the numbers with an analysis based on interviews and secondary literature. The quantitative analysis shows that the switching of diplomatic relations from Taipei to Beijing does not necessarily lead to stronger economic performance. In the case of Costa Rica, the economy did grow steadily after switching ties from Taipei to Beijing in 2007, but growth was slower than for its assigned control country, Panama, which remained with Taiwan until 2017. In addition, after building formal ties with China, a trend of trade imbalances became increasingly clear. By 2016, China had become Costa Rica’s largest trading partner and also the country with which it maintained the largest trade deficit. However, the prospect of faster growth is not the only factor at play. Some small countries opt to reject Beijing for the higher relational status they get from Taiwan, “a feeling of being accepted and respected.” This, however, should not be overstated and economic incentives are often decisive. We thus argue that the Taiwanese government needs to work harder to contribute to the economies of its diplomatic partners.

 

Chapter 5 takes in Africa, once the scene of intense competition between Taiwan and China, but where Eswatini remains the only country to still recognize Taiwan. We find that the economic impact of ties with Beijing is complex, and China is often far from the decisive factor affecting performance. Malawi switched ties to Beijing in 2007 and its exports to China increased but so did its trade deficit (to over US$100 million in 2009 and to a peak of $500 million in 2019). The change has had only a limited impact on its economic performance. Switching relations to Beijing often creates expectations of an economic boost that Chinese and African leaders are unable to deliver on. Chinese diplomats, African leaders, and journalists frequently talk up investment pledges and project proposals that never materialize. While China has chalked up a diplomatic victory on the African continent, Taiwan has come to depend increasingly on people-to-people relations, an area that has not received serious study. But Taiwan has also tended to apply the principle of reciprocity to countries that break diplomatic relations or challenge its interests, a response that is often counterproductive. Taiwanese private actors have occasionally stepped in to preserve contacts after diplomatic breaks. On occasion, African students in Taiwan cut off from Taiwanese government support have been offered support for tuition and living costs. The Pingtung Christian Hospital also stepped in to fund and operate the Taiwanese built Rainbow AIDS clinic in Malawi after Taipei cut support. Such steps are unlikely to generate a lobby for the reestablishment of formal relations, but they can create a constituency of people well-disposed to Taiwan who can help in other ways.

 

Chapter 6 addresses the diplomatic competition in Oceania against the backdrop of a dynamic geopolitical picture. We first consider the divergent regional discourses under such headings as “China as an alternative” or “China as a partner” as opposed to “China as a threat.” We find that arguments advocating China as an alternative to the traditional regional powers, or as a partner, tend to forego scrutiny of the reality behind China’s rhetoric and its repetition of such concepts as “non-interference” and “South-South” engagement. As the world’s second largest economy and a growing military influence in the region, China cannot be called a developing country in the same category as the Pacific island states. China’s claims of ‘non-interference’ in the region also need careful examination. We then analyze the economic performance of selected countries using results from the DID method and dig deeper into key economic sectors. It often makes economic sense for small island economies to side with Taiwan. This can present them with economic opportunities and doesn’t put them at a disadvantage compared to neighbors that align themselves with China.  On the other hand, Chinese aid and loans often boost economic performance for a period but the gains can be short lived, as experienced by Samoa. Both Samoa and Tonga are now heavily in debt to China, while Taiwan’s remaining partners suffer no such burden. Larger countries whose revenue depends on resource extraction tend to rely heavily on China as an export destination, which makes them vulnerable to political pressure from Beijing. Diversification of import and export markets was identified as an important step in increasing resilience against potential Chinese pressure and maintaining sovereign control over foreign policy.

 

Chapter 7 addresses Central and Eastern Europe, where Taiwan and China compete for influence even in the absence of any switches in formal ties. We focus on Poland, the Czech Republic and Hungary (the CEE3) and examine the trade and investment activities of Taiwanese and Chinese enterprises. We find that accession to the EU in 2004 and the launch of the 16+1 initiative in 2012 gave new impetus to CEE3 relations with China. However, trade has remained unbalanced. Whereas Chinese exports into the CEE3 have increased substantially, the growth of the CEE3’s exports to China remained modest after 2012, and even decreased slightly for a few years after 2014, leading to wider trade deficits. Trade relations between Taiwan and the CEE3 are more balanced. Between 2002 and 2020, imports from Taiwan nearly doubled, while exports to Taiwan tripled. Chinese investments, meanwhile, are still dwarfed by, for example, German multinationals’ (MNEs) investments into these countries, with Chinese FDI stock barely accounting for one per cent of total inward FDI stock. Taiwanese investment in the CEE3 is even less significant in percentage terms. One less expected discovery was that most Taiwanese multinational companies with a presence in the CEE3 also have a connection with China: either a subsidy from the Chinese mainland or cooperation at the global level. We also find that for Chinese enterprises, political relations between the home and the host country are of critical importance. Taiwanese enterprises are less concerned about the level of diplomatic cooperation, although political relations do count to some degree. If Taiwan wishes to translate its economic links with the CEE3 countries into diplomatic gains, then investments in more advanced sectors and technologies appears to be the key rather than restricting itself to electronics manufacturing.

 

Chapter 8 stands alone in this study as it does not focus on state activities. Instead, it investigates the behavior and strategies of Taiwanese technology enterprises and examines what possible spill-over effect they may have on the political domain. To this end, we chose two industries where Taiwan holds a strong position: electronics manufacturing services (EMS) and semiconductor foundry services. We focus on two regions and one country, Southeast Asia, Central Europe and India, where Taiwanese enterprises are in the process of relocation, diversification or investment, and where Taiwan appears to be making incremental diplomatic gains. Investments by Taiwanese EMS companies in South and Southeast Asia have been surging lately. They have been fueled by the trade and technology contest between the US and China and the launch of Taiwan’s New South Bound Policy, although China’s entrenched role as the “world’s factory” appears unlikely to be challenged in the near term. In addition, the strategic importance of Taiwan’s semiconductor industries has been further affirmed by the current chip shortage crisis and disruptions to supply chains. We argue that the Taiwanese government should align its strategies and policies with the private sector to support the global expansion of Taiwanese high-tech enterprises. This would yield added diplomatic benefits at a time of rising economic nationalism in a way that is distinct from China’s system of state capitalism. We further propose the joint development of science-based industry parks, the promotion of digital infrastructure projects through foreign aid, and the establishment of a global semiconductor alliance, as practical steps for Taiwan to raise its profile. Such opportunities are on the rise given the growing trade and tech rivalry between the US and China. Any partnership and synergy between the Taiwanese government and Taiwan’s high-tech enterprises can only be mutually beneficial.