Taiwan Isn’t Playing Dollar Diplomacy Anymore

After years of trying to outmaneuver China in a game of global diplomatic recognition, Taiwan is finally shifting strategies.

China last month convinced Honduras to break formal ties with Taiwan and recognize Beijing, a significant setback for the independently governed island. The diplomatic blow left Taiwan with just over a dozen countries around the world that recognize its sovereignty and convinced top Taiwanese policymakers that it can no longer financially match Beijing in its bid for global influence.

Taipei’s era of so-called checkbook diplomacy may be over. Decades of economic competition between China and Taiwan have developed a David-and-Goliath dynamic, as Beijing competes fiercely to undermine any recognition of the island as a sovereign country. Amid that competition, Taiwan has competed to maintain formal ties with a number of small countries around the world through generous development programs and investments in recipient nations’ health care, transportation, and technological sectors.

China, meanwhile, has sought to buy out the competition in a long-term strategy that seems to be paying off. In South America, China has focused its efforts on energy, mining, and infrastructure, totaling approximately $122 billion in those sectors alone as of 2021. Big money, and big promises, for big sectors has lured more than a half-dozen countries to Beijing’s side in recent years.

In 2012, 23 countries recognized Taiwan. Today, it is only recognized by 12 countries—the majority of which are in Latin America and the Pacific—and the Holy See. When Honduras became the latest country to ditch Taiwan for China, ending 80 years of ties with Taipei for lucrative investment and infrastructure funds from Beijing, Taiwanese President Tsai Ing-wen said that Taiwan will no longer “engage in a meaningless contest of dollar diplomacy with China.”

“The Taiwanese president’s statement reflects a recognition on the part of Taipei that it simply cannot compete dollar for dollar with the PRC’s [People’s Republic of China] deep pocket,” said Russell Hsiao, executive director of the Global Taiwan Institute, a Washington-based nonprofit advocacy organization. Tsai’s statement is also a recognition of the need for a more pragmatic global strategy, particularly given Taipei’s more limited resources, he added.

China is one of the largest economies in the world, second only to the United States. In 2019, China’s international development aid and investment reached $4.8 billion, according to the Organization for Economic Cooperation and Development (OECD). Taiwan reported that its official development assistance, as defined by the OECD, was about one-tenth of that, just $502 million in 2020.

This shift in strategy has been a long time coming, experts said. Tsai’s statement underscores Taiwan’s growing recognition that it needs to find savvier ways to play a weaker hand against the global economic superpower after years of diplomatic losses.

“They’re just trying to keep the allies that they have. The idea of expanding the list is kind of out of the question at the moment,” said Ryan Berg, director of the Americas Program at the Center for Strategic and International Studies. “It’s prompting a soul-searching in terms of its ability to keep allies through innovative development projects.”

The diplomatic gamesmanship between Taiwan and China has taken on outsized geopolitical importance as Washington ramps up its support for Taiwan and raises new alarm bells about a possible Chinese military invasion of Taiwan in coming years if Taipei doesn’t bend to Beijing’s will. The strategy also comes as China itself is altering its practices on the world stage, taking a more hard-line approach to Washington and its allies and flexing its hard-power muscles in unprecedented ways.

“The Chinese attitude toward Latin America has changed,” said Julio Armando Guzmán, a former presidential candidate in Peru in 2016 and 2021, now at the National Endowment for Democracy. “At the beginning it was based fundamentally in soft power, in trying to convince Latin American countries that China’s rise would be very good for the region.” Now, he said, “China is willing to impose its power and is using hard power to try and get countries to do what it wants.”

A preview of this tactic came in Europe, when China tried to bully Lithuania into submission after it agreed to allow Taiwan to open a “representative office” in Vilnius. China responded by castigating the Lithuanian government, downgrading its diplomatic relations with Vilnius, and blocking most of its trade with the country. In another case, China also threatened to block key exports from South American countries if they didn’t fall in line behind Beijing’s preferred candidate for an influential job at the United Nations, several diplomats told Foreign Policy in 2019.

Chinese developmental aid is still often hailed by its partners in the developing world because there are no strings (at least bothersome ones like environmental standards or human rights) attached, and China seeks to present its loans as more flexible and forgiving than those offered by the United States and international banking organizations. That’s not always the case. Sri Lanka already had to hand over a big port to China to cover its debt; now China is even repossessing monkeys.

Washington and its allies are banging that drum. Prior to Honduras’s dramatic withdrawal of its diplomatic recognition of Taiwan, a Taiwanese Foreign Ministry spokesperson warned Honduras not to “quench [its] thirst with poison” by accepting aid from China and falling into its “debt trap.”

If Taiwan can’t outspend China for its diplomatic recognition, it still has the opportunity to emphasize other values to keep lit the flickering flame of international recognition, said Isabel Bernhard, assistant director of the Adrienne Arsht Latin America Center at the Atlantic Council.

To do so, Berg said Taiwan needs to find its niche: using its own economic and democratic development story to continue to appeal to its remaining diplomatic allies, many of which are developing small island states.

“Maybe it doesn’t do infrastructure the same way that the PRC does, but it develops human capital and talent in a way that the PRC doesn’t,” Berg said. “Or, it has an approach that really takes transparency and environmental, social, and governance standards into greater consideration. Or it has digital transformation in a way that the PRC doesn’t.”

In a trip to Guatemala and Belize earlier this month, Tsai emphasized Taiwan’s record in the medical and health fields. In Guatemala, the Taiwanese president toured a $22 million hospital built with the support of Taiwanese donations. She then made her way to Belize, where the country’s prime minister thanked her for a $16.5 million Taiwanese grant to build a hospital.

While these projects pale in comparison to the $300 million investment provided by China for a hydroelectric dam in Honduras in 2021, which formed the basis of renewed negotiations for another Chinese-financed dam weeks prior to the diplomatic switch, Hsiao said it differentiates meaningful development assistance offered by Taipei from China’s cement-heavy checkbook diplomacy.

“I see these initiatives that Taipei has announced with a couple of its remaining diplomatic partners in the Latin America and Caribbean region as part of that effort to both maintain its international diplomatic space while also trying to distinguish its model of international assistance with that of the PRC,” Hsiao said.

Beyond putting the dollar sign on the muscle, Taiwan may also look to strengthen informal ties, both with former allies and with countries that were never aligned with the island, “whether that’s via subnational exchanges, educational or technical diplomacy, agricultural ties, and things like that,” Bernhard said.

And Taiwan might be able to ride Uncle Sam’s coattails. While the United States does not have formal diplomatic ties with Taiwan and adheres to the “One China” policy, it has strengthened relations with Taiwan in recent years and framed the survival of a sovereign, democratic Taiwan as a linchpin of its strategy to counter China, especially in the Western Pacific.

Michael Mazza, of the American Enterprise Institute, said recent U.S. diplomacy, both bilaterally and in forums like the G-7, has put Taiwan front and center on the international agenda. This has helped encourage U.S. partners to deepen their own informal diplomacy with Taiwan, despite not having formal ties.

“This is a way of the United States using its own diplomacy with its own partners to highlight the challenges Taiwan is facing and also to highlight the reasons to engage more deeply with Taiwan,” Mazza said.