Taiwan's Foreign Economic Relations with Developing Nations: A Case Study of Its Ties with Palau

Since the world began shifting its diplomatic recognition and economic ties away from the Republic of China (Taiwan), and toward the People's Republic of China ¹ in the 1970s, the Taiwan government has solicited political and economic support from smaller nations. As of early 2000, Taiwan had formal relations with some twenty-nine countries, and most of these ties were cemented with economic or other significant aid.

In seeking to broaden its international influence, Taiwan's foreign policy has focused on both the large, developed nations that have probably irrevocably switched recognition to China, and to less developed, often smaller states. These smaller countries can offer full diplomatic ties, as well as occasional voting support on important issues in international forums such as the United Nations. With Taiwan's legitimacy as an independent entity constantly challenged by China, every foreign diplomatic relation is counted as a significant achievement. In addition to these political motivations, these countries are potentially lucrative foreign investment targets. Taiwan's foreign aid is often the key to winning a new embassy.

In earlier research, Gerald Chan examined Taiwan's politically motivated "southward policy" of courting mainly larger countries in Southeast Asia, and Chen Hurng-yu looked at Taiwan's economic and investment ties to several of Asia's developing nations (Chan 1996; Chen 1994). Most of the target nations, such as Malaysia, the Philippines, and Vietnam, generally benefitted from the inflow of foreign capital, though it constituted a relatively small part of their overall economies. Even with no diplomatic relations in this part of the world, Taiwan gains some implicit political clout and moral support from its economic ties with the countries of Southeast Asia.

Taiwan's more successful diplomatic efforts have come in the least developed parts of the world. Ian Taylor has focused on its competition for recognition in African nations, where "dollar diplomacy" has won it recognition by eight states (1998). Karl Fields has taken a wider view of this economic statesmanship and explored the investment policies of Taiwan's ruling Nationalist Kuomintang party in several parts of the world (1998). However, few of these or other works focus on the use of Taiwan's aid or investment in the small, developing states.

The results of Taiwan's investment expansion in developing nations have several implications for ties with other regions of the world, including Pacific Island states. First, the movement allows it to diversify its economic relations away from a growing number of investment projects in neighboring China, which could be tempted to use the resulting leverage for economic or political manipulation. As noted, Taiwan also stands to improve ties with the target nations, even if diplomatic relations remain informal. However, many developing countries have poor infrastructure, and find absorbing funds difficult. On balance, the political pay-off to Taiwan may outweigh any real economic gain for its investors, or even for some of the recipient countries.

This essay extends the examination of Taiwan's efforts to develop economic and political ties with developing states, and focuses on the recently independent nation of Palau. Palau has strengthened its economic and political relations with Taiwan significantly since 1994, when it shed its status as a United Nations trust territory administered by the United States. Finally, in late December 1999, Palau extended official diplomatic recognition to Taiwan. Here I examine strategies the Taiwanese government and quasi-private industry have used to solidify ties with Palau, and the effects these actions have had on Palau's economic, as well as social and political, development.

I begin with a brief look at Taiwan's relations with other Pacific Island states, and touch on the ways it has fostered bonds with the small nations. I then turn to the recent history of Taiwan's move into Palau, and the effects its strategy has had there. In examining Taiwan's...