Panama, Dominican Republic… Who's Next?

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And then there were 10...

Ok, it sounds a little dramatic when you put it like that, but the news Tuesday night that the Dominican Republic (DR) is switching bilateral diplomatic recognition from Taiwan to China (中华人民共和国和多米尼加共和国关于建立外交关系的联合公报) certainly caught many (but not all, including readers of this digest) China-LAC watchers by surprise. That is not to say that the Dominican Republic wasn't on the shortlist. Prior to Tuesday, of the 11 (now 10) countries in the Americas with diplomatic ties to Taiwan, the DR represented the nation with the largest GDP, second largest population, and China's second most important trade partner in the Caribbean.

Details on what caused the change of heart are still unclear. Taiwan is crying foul, saying that Santo Domingo was offered a $3.1 billion package of investments and loans to secure the switch. Beijing vehemently denies the claim, saying the move was “natural, perfectly justified, and fair." (理所当然,天经地义,光明正大). The move has received wide support from the Dominican business community, as well as from experts in Latin America, and a tepid response from the US government.

With 10 countries in Latin America and the Caribbean with ties to Taiwan remaining, the question is not if others may switch, but who will be next? As China dangles the carrot of the Belt & Road Initiative in Latin America with increased frequency, expect the diplomatic tit-for-tat between China and Taiwan to continue, driven by two priorities: securing economic and commercial relations, and diplomatic strength on the global stage (such as at the United Nations).

Looked at from a commercial and economic standpoint, Paraguay remains one of the frontrunners. Surrounded on all sides (literally) by countries with strong formal ties with China, Paraguay is somewhat of an anomaly. China ranks as its largest source of imports, ahead of both Brazil and Argentina. And while exports have lagged behind, Paraguay is the world's fourth-largest exporter of soybeans, a longtime priority for a China that is looking for other sources now that it has cut back purchases from the US. Incoming Minister of Foreign Affairs Luis Alberto Castiglioni says that the new government will try to have its cake and eat it, too, by establishing relations with China through the World Trade Organization, while maintaining diplomatic relations with Taiwan. 

An often overlooked contender is Guatemala. By far the largest population and GDP in Central America — and larger in population and GDP than Paraguay — Guatemala shifting diplomatic recognition would be a bell weather that the other countries of Central America (Belize, El Salvador, Honduras, and Nicaragua) might soon follow, and that China was more concerned about compromising Taiwan’s influence at the UN. As China dangles the carrot of the Belt & Road Initiative in Latin America with increased frequency, the ability to resist the call of the world's second-largest economy presumably will be harder and harder.

From our standpoint, one of the biggest questions in the short to medium term is: How will this impact on Panama-China relations? For the last twelve months, Panama has been the darling of China, receiving a level of attention that far outweighs countries of similar size. Granted, Panama is home to one of the most important pieces of trade infrastructure on the planet, which gives it a strategic economic importance that outweighs its direct economic value. Is Panama the new norm? Or the exception to the rule?

But maybe the real question is, will the Pope beat Paraguay, Guatemala, and the rest to the punch?

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