China’s campaign to weaken Taiwan’s legitimacy is based on economic engagement, mainly through its Belt and Road Initiative (BRI). In return, the region has provided China with substantial access to natural resources and a foothold in the United States’ shared neighborhood.
While Chinese investment in the region can be beneficial in the short term, too often, LAC countries have been left with incomplete projects, environmental catastrophes, and corruption.
In the area of development, Taiwan presents a stark contrast to the Chinese model of engagement. Through its diplomatic partnerships, the small island seeks to invest in human capital and digitalization, ameliorate poverty through microfinance and agricultural sufficiency, and accelerate social and economic development of host countries.
and the Caribbean
At a Crossroads
LAC countries have pressing economic and political factors to consider when deciding to pursue development opportunities with either China or Taiwan.
The region has suffered from chronic infrastructure problems for decades.
A recent study placed LAC’s roads, railroads, and ports in the region at the same level as sub-Saharan Africa. The latter, for instance, exceeds LAC by 8,000 kilometers of rail line, and nearly half of LAC’s rail line is concentrated in countries like Brazil.
Airports in the region have also lacked the necessary investment in expansion projects to keep pace with increased air traffic, and the digital divide in Latin America’s urban and rural areas has only widened.
Key Initial PRC Pledges to LAC Countries
Due to the magnitude of Chinese investment in the region, LAC countries like Honduras face a difficult dilemma.
They must choose between two options:
1. Sign opaque infrastructure deals with China that can exacerbate corruption and result in unreliable and sometimes shoddy projects.
2. Forgo billions in foreign aid, trade, and investments by continuing their diplomatic relations with Taiwan, which offers more stable projects but has a fraction of the budget.
This difficult choice has been made by every country that switched.
China’s Development Model
A Belt and Road to the Americas
Initially, China’s engagement with countries in Latin America and the Caribbean involved foreign aid.
However, its economic engagement has gradually shifted toward foreign direct investment, which increases China’s return.
China’s investments in LAC have focused on energy, infrastructure, and extractive industries like mining.
As the region with the most remaining allies of Taiwan, LAC’s adoption of the One China principle has become an inseparable part of the PRC’s engagement with the region and is one of the bases for its strategy there.
China’s engagement with LAC serves three key interests.
Between 2005 and 2021, China loaned around $140 billion to LAC.
However, these loans are directly tied to procurement of equipment and technical services imported from China. Chinese concessional loans consistently stipulate that at least 50 percent of the loan be tied to the purchase of Chinese goods.
Furthermore, China purposefully disburses loans to developing countries at adjustable interest rates, which are more volatile.
Weak currencies and an ever-shifting global interest rate make developing countries vulnerable to default on their loans.
This creates an avenue for China to extract concessions.
Chinese development and investment projects present their own challenges. On average, China’s projects lack feasibility assessments and environmental and social impact evaluations, exacerbate levels of corruption, and disregard human and Indigenous rights.
After years of international criticism and backlash to Chinese projects in the region, China developed the China International Development Cooperation Agency (CIDCA). The new agency sought to address the lack of feasibility assessments, project evaluation, and project impact of Chinese development projects around the world.
However, five years after its creation, CIDCA has yet to publish any reports and claims its scope excludes BRI projects, casting doubt on whether accountability and transparency will become part of China’s model.
and Human Capital
Taiwan’s development model is primarily powered by its goal of maintaining diplomatic recognition of countries across the world, but particularly in LAC, where more than half of its current diplomatic allies are located.
In contrast to China’s model, Taiwan develops assistance projects by following the Paris Declaration on Aid Effectiveness, adopted by the OECD, which focuses on the needs of recipient countries and on building their human capacity.
According to the International Cooperation and Development Fund (ICDF), Taiwan’s development agency, projects are “designed to match the norms and mechanisms of recipient countries rather than impose Taiwan’s own regulations or systems upon them.”
Taiwan’s scale of investment in LAC is significantly less than China’s, but Taiwan has historically dedicated between 30 and 50 percent of its development budget to LAC, and its total development assistance contribution per capita reaches $21.3, outweighing China’s $2.05.
Taiwan's engagement with LAC serves two key interests.
A recipient of foreign aid in the fifties and sixties, Taiwan’s own success story is the basis for its engagement in many parts of the developing world, including in LAC.
By the 1960s, Taiwan had already experienced impressive levels of economic growth and was well positioned to counter China’s attempts at diplomatic isolation through development.
The ICDF has a longer history than the CIDCA, evolving from its overseas missions first started in 1959.
Over the years, the ICDF has expanded to bring development projects to Taiwan’s diplomatic allies around the world.
A CSIS analysis of ICDF “after action” reports shows that Taiwan’s project design prioritizes the target country’s industry potential, local development needs, and UN Sustainable Development Goals.
Through its economic engagement in the region, Taiwan has sought to invest in human capital, ameliorate poverty rates, and increase climate resiliency among its diplomatic allies.
China’s BRI in the Americas has brought unprecedented financial investments to a region that for years has been underserved by other development banks.
Though the BRI was only officially extended to LAC in 2018, China’s earliest infrastructure projects in the region date back to 2005.
For the PRC, BRI is an important vehicle to expand its diplomatic presence across the world.
China has also used the BRI to offload excess capacity materials into international infrastructure and energy projects.
China’s projects in LAC countries have met varying levels of success.
China’s difficulties completing projects in the region
can be attributed to three key factors.
The varied results of China’s infrastructure projects in the region should serve as a warning sign to regional governments about the short- and long-term impacts of these projects on the environment and the region’s democratic values and traditions.
Overall, LAC countries must consider the record of China’s infrastructure performance in the region, as well as the high levels of debt that may come as a result.
Furthermore, China’s investment in the LAC region has dwindled after the Covid-19 pandemic, shifting away from the massive infrastructure projects it was once focused on toward smaller scale projects.
Because Taiwan’s economy is a fraction of China’s, and thus its foreign aid budget more limited, it must be more judicious about how it allocates its resources in the region. Therefore, Taiwan’s projects in LAC differ from China’s in both type and scale.
In addition to agricultural projects, Taiwan’s strong presence in the ICT sector enables it to assist partner countries in building smart city capabilities with digital technology.
Taiwan’s record in the region features strong anti-corruption safeguards, yet it is not spotless.
In 2014, the former Guatemalan president Alfonso Portillo pleaded guilty to laundering $2.5 million through U.S. banks.
The former president was ultimately sentenced in a New York court to over five years in prison for money laundering conspiracy, based on his efforts to conceal the source and origin of the funds.
Taiwan’s corruption incident stands in stark contrast to China’s record. A William & Mary data set analysis of over 13,427 Chinese development projects shows that 35 percent of BRI projects have involved corruption, labor violations, and environmental threats to local ecosystems.
Despite successful projects throughout LAC, Taiwan cannot compete financially with the PRC on development investment. Level of investment is an important motivator for LAC countries to remain allied to Taiwan.
While countries like the United States demonstrate a willingness to arm Taiwan militarily, they do not effectively lend diplomatic support, which has significant consequences for Taiwan’s future.
Recent agreements between the Taiwan ICDF and the United States Agency for International Development to cooperate on development projects in LAC have the potential to expand Taipei’s development reach and cement its relevance in the Western Hemisphere.
The Case of Saint Lucia
While Taiwan cannot outspend China in the Western Hemisphere, its meaningful economic engagement has proven to be transformative for countries that have experienced both China’s and Taiwan’s development and investment.
Saint Lucia switched recognition back to Taiwan after a decade of Chinese development projects. Wooed by China’s promise of monumental investment in the island, Saint Lucia switched its diplomatic recognition from Taiwan to China in 1997. During the 10 years that followed, China built a stadium.
The stadium has been used as a hospital for the past 13 years.
China also opened small businesses but left many of its investment promises unfulfilled.
“St. Lucia did not win its sovereignty from one power to be now dictated to by another as to who its friends should be. . . . [Beijing's One China principle cannot] be legally or diplomatically thrust on St. Lucia, as though we, too, were a colony of China.”
After the reversal, the ICDF worked with Saint Lucia to design projects with the goal of increasing local farmers’ annual revenue by at least 20 percent and increasing the total agricultural produce sold by Saint Lucian farmers to hotels and supermarkets by 30 percent. Despite Saint Lucia’s success, no other country in LAC has taken a similar step for fear of provoking China.
Still, for LAC countries with pressing infrastructure needs, Chinese aid and foreign direct investment offer immediate relief through the injection of capital into their economies. Many are willing to overlook the lack of transparency and anti-corruption safeguards as a necessary price.
The examples of China’s and Taiwan’s development efforts in LAC represent their divergent approaches.
China’s massive infrastructure projects, lacking feasibility assessments and oversight, contrast with Taiwan’s small-scale, sustainable initiatives.
The projects’ different outcomes, however, are the result of China’s and Taiwan’s distinct objectives in the region: economic value versus diplomatic survival.
As LAC countries on both sides of the divide continue to face the choice between China and Taiwan, achieving a deep understanding of not only the immediate rewards but also the long-term consequences of these relationships is critical.
Made possible by the generous support of the Taipei Economic and Cultural Representative Office in the United States (TECRO).