Why Does Paraguay Recognize Taiwan and Shun China?

Only 15 countries worldwide maintained diplomatic relations with Taiwan as of May 2021. Among those, Paraguay stands out as Taiwan’s only South American ally. As a consequence of its recognition policy, the country missed out on the Chinese finance received by its neighbours. However, beyond simple ‘checkbook diplomacy’ Paraguay uses its diplomatic recognition policy for a particular form of small-state status-seeking.

Taiwan has faced increasing diplomatic pressure in recent years as China has escalated efforts to wrest away the island’s diplomatic allies. This contest has reached Taiwan’s former diplomatic stronghold of Central America and the Caribbean. Since 2018, Taiwan has lost the diplomatic recognition of three countries in that region, namely Panama, El Salvador, and the Dominican Republic. These countries added to the loss of Costa Rica in 2007.

In a recent paper published in Foreign Policy Analysis, we explore the dynamics of the China-Taiwan diplomatic contest through the decisions of Taiwan’s remaining allies, namely the case of Paraguay, Taiwan’s only remaining partner in South America. The Paraguay case is particularly intriguing because the country’s agricultural economy has strong export links to China. For years, the issue of recognition received little attention, though lately it has been the subject of intense debate in the country’s legislature.

Taiwan’s dilemma, and its position increasingly as a de facto state, emerges from a stringent either/or approach to diplomatic recognition, One China Policy, and from an increasingly assertive campaign by China to isolate Taiwan. Broader diplomatic recognition has clear benefits for Taiwan: greater security, predictability, and international participation. On security, widely recognized states rarely suffer major territorial losses or extinction. On international participation, broad recognition brings diverse benefits from an amplified voice and vote on the international stage to technical cooperation. As its recognition has declined, Taiwan has sought to compensate through less-than-complete forms of participation, such as observer status.

However, the benefits for states that recognize Taiwan are less clear. Paraguay pays large opportunity costs for its Taiwan policy in the form of foregone Chinese investment, loans, and credits. We label this the “Taiwan cost”. According to our calculations, from 2005 to 2014, the annual average value of aid, investment and financial flows from China for Latin American countries with diplomatic relations with China represented 1 per cent of their GDP. Paraguay received nil from China. This was not offset by flows from Taiwan. While Taiwan has provided some high-profile assistance and loans in the past, investments and new loans during the same period were minimal.

In the face of Chinese entreaties under the One China Policy, why do countries like Paraguay continue to recognize Taiwan? Conventional explanations have focused on “checkbook diplomacy,” a sort of bidding war between China and Taiwan. In the past, anti-Communism and US pressure also played significant roles. But none of these factors adequately explain recognition today (although US pressure did return to the headlines under the Trump administration). In Paraguay and elsewhere, it is clear that Taiwan cannot simply outspend China.

For Paraguay, most external factors favor the opposite recognition policy, including occasional pro-China pressure from its neighbors. During South America’s “China boom,” from roughly 2003 to 2013, anti-Communist sentiments had faded and US pressure was absent, and Paraguay’s Taiwan cost had grown as it missed out on the growing financial flows its neighbours attracted. Today, the Covid-19 pandemic, and the difficulty in purchasing vaccines from Chinese sources, has put the costs of shunning China in the headlines again.

We suggest that the perceived benefits may be rooted in the pursuit of a different form of recognition that Taiwan grants to small states—attention, esteem, and relational status—that goes beyond narrow material benefits.

We find that Paraguay uses its diplomatic recognition policy for a particular form of small-state status-seeking. Relations with Taiwan create a parochial, relational status, in which Paraguay receives meaningful attention and respect from its partner—one worthy of emulation due to shared historical ties and Taiwan’s economic success in difficult geopolitical circumstances—complemented by smaller (though highly symbolic and discretional) material benefits. Sustained attention from a near-peer may trump the more fickle attention of a great power.

While Paraguay pay a substantial “Taiwan cost”, relations with Taiwan provide the country—one that is smaller, poorer, and often overshadowed by its neighbors—with respect, valued high enough for Paraguay to “choose the right pond,” to use a phrase from Carvalho et al.’s work on status, where it looms large and makes a tremendous difference. Paraguayan diplomats and elites are celebrated by Taiwan in a way they would not be for long by China. Paraguayan elites feel sympathy for a small state “bullied” by a large neighbor, in part because they read their own international history and condition in a similar light.

For Taiwan, retaining diplomatic partners in the face of rising Chinese economic clout requires both the provision of status benefits and the maintenance of elite consensus in its partner countries. This is no simple task, particularly when the pandemic has made China’s favor—and its vaccines—frontpage news.