Taiwan faces political, not economic, hit after Panama switches ties to Beijing

Trade with the central American nation makes up a very small part of the island’s economy, but the impact on the mandate of President Tsai Ing-wen could be considerable

PUBLISHED : Wednesday, 14 June, 2017, 4:00pm
UPDATED : Wednesday, 14 June, 2017, 4:00pm

Beijing’s move to establish ties with Panama, part of its push to woo Taiwan’s remaining friends, matters more to the political prospects of the island’s president, Tsai Ing-wen, than to its economy.

The long-anticipated defection, which Chinese and Panamanian officials celebrated with champagne on Tuesday, left Taiwan with just 20 diplomatic partners and underscored how far relations between Beijing and Taipei have deteriorated since Tsai’s election last year.

The financial impact was expected to be limited, however, as Panama represented just 0.03 per cent of the island’s total trade in 2016.

“While highly symbolic and a genuine hit, the Panama break is unlikely to make a huge difference,” said Jonathan Sullivan, director of the University of Nottingham’s China Policy Institute, who is currently conducting research in Taiwan. “It may bring pressure to bear on Tsai’s China policy. Certainly, that is Beijing’s short-term motivation for going after Taiwan’s allies.”

China has been ramping up pressure on Taiwan in recent months over Tsai’s refusal to accept that both sides belong to one country – the framework that underpinned talks with her predecessor. In addition to taking away three diplomatic allies, China has curbed tourist trips to Taiwan, pushed foreign countries to deport Taiwanese criminal suspects to the mainland and blocked the island from participating in international bodies.

Such actions highlight the Communist Party’s balancing act with Taiwan, which it considers a province that must be reunited with the mainland. While Beijing might want to force a change in Taipei, it does not want to further alienate Taiwan’s 23.5 million residents, who swept Tsai’s pro-independence Democratic Progressive Party into power by a hefty margin.

“Oppression and threats are not going to help in cross-strait relations,” Tsai said on Tuesday. “I can represent all 23 million people when I say, we will not compromise or yield under threat.”

Panama establishes diplomatic ties with Beijing in blow to Taiwan

China has so far refrained from more disruptive moves, such as putting curbs on the US$112 billion in exports Taiwan sends across the strait. Taiwan still runs more than 100 economic and cultural missions overseas, its citizens travel on Republic of China passports, it has trade agreements with other nations and its companies have operations on both the island and the mainland.

Investors paid little heed to the Panama news, with the TAIEX share index rising 0.2 per cent on Tuesday. Meanwhile the economy is expected to expand 2 per cent this year, according to a Bloomberg survey – the fastest pace since 2014. 

“The Panama incident is unlikely to produce an immediate impact on Taiwan’s stock market or economy,” said Liu Tsung-sheng, president of Yuanta Securities Investment Trust, the island’s biggest fund with about US$12 billion assets under management. “In the longer term, however, Tsai’s administration needs to assess any chain reaction on its foreign allies.”

The loss of Panama, one of Taiwan’s oldest diplomatic partners, carries symbolic weight and could encourage others such as the Vatican or Paraguay to switch. China’s economic might has grown considerably since 2008, when Taiwan’s election of the more Beijing-friendly former president, Ma Ying-jeou, prompted an eight-year diplomatic truce.

US urges China-Taiwan ‘dialogue’ despite Panama’s jilting of Taipei

“This will not have a major impact on Taiwan’s capacity to engage with the rest of the world,” said Steve Tsang, director of the SOAS China Institute at the University of London. “The real price is not how Panama’s switch of recognition would affect Taiwan economically, but how it would impact on the Tsai administration politically.”

Beijing hopes that diplomatic isolation will eat away at Tsai’s political support and push voters back to the opposition Kuomintang, which favours better relations with China. Tsai’s approval rating fell to 39.4 per cent in May, down from almost 70 per cent a year ago, according to the Taiwan Public Opinion Foundation.

While losing more allies would concern the Taiwanese people, it was unclear how long China could sustain the approach, said Paul Haenle, a former China director at the US National Security Council, who now heads the Carnegie-Tsinghua Centre in Beijing.

“Use of coercion has proved ineffective in the past in enticing Taiwan to stop moving away from it,” Haenle said. “In fact, it has done just the opposite: the identity foundation for unification has evaporated in Taiwan in recent decades.”

Panama’s ditching of Taiwan is ‘latest sign that Beijing means business’

Tsai’s history with the pro-independence camp makes her unlikely to move further toward Beijing even if the mainland moves to shut down the informal channels Taiwan uses to conduct commerce with the world, said Chang Ling-chen, a professor of political science at National Taiwan University.

In January, Nigeria ordered Taiwan to move its trade mission from the capital, Abuja, to Lagos, after China pledged to invest US$40 billion in infrastructure in the African nation. In May, the Pacific island state of Fiji closed its representative office in Taipei.

“Even if Taiwan’s remaining allies are down to zero, and they all switch to Beijing one after another, it’s very unlikely for Tsai to change cross-strait policy,” Chang said. “That would be unacceptable for her because it would run counter to her beliefs.”