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Guatemala’s Decision: Exploring What China and Taiwan Actually Offer

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Guatemala’s Decision: Exploring What China and Taiwan Actually Offer

Among many important issues, the incoming Arévalo administration is weighing Guatemala’s historical diplomatic recognition of Taiwan with a desire to expand commercial relations with China.

Guatemala’s Decision: Exploring What China and Taiwan Actually Offer

Taiwanese President Tsai Ing-wen arrives in the Republic of Guatemala on March 31, 2023.

Credit: Official Photo by Wang Yu Ching / Office of the President

Bernardo Arévalo’s emphatic victory in the Guatemalan presidential elections in August 2023 disrupted decades of conservative political control. The direction that the former diplomat and anti-corruption crusader leads Central America’s largest country will have significant geopolitical consequences for the United States beyond the region.

Among many important issues, the incoming Arévalo administration is weighing Guatemala’s historical diplomatic recognition of Taiwan with a desire to expand commercial relations with China. As multiple Central American governments across the ideological spectrum have flipped recognition to China in recent years, understanding the complete economic and political landscape Arévalo faces is important if Washington wants to understand how it can best lend support to Taiwan in its fight to maintain international legitimacy.

Historically founded on a shared Cold War-era anti-communist orientation, contemporary Taiwanese economic assistance to Guatemala has facilitated decades of close diplomatic relations even after the Soviet Union’s collapse. In recent years, Taiwan’s financing of a major highway network, donation of a public hospital, and robust agricultural and public health aid exemplify the positive engagement that has engendered a rich sympathy for Taiwan within Guatemala.

However, the temptation to switch diplomatic recognition to China, whose wealth and global influence far outstrips that of Taiwan, is greater than ever before. China’s recent growing economic importance on the world stage has engendered a greater ability to leverage investment, financing, and aid as a vehicle to marginalize Taiwan internationally and erode its remaining diplomatic ties. Over the last eight years, China has successfully convinced Panama, El Salvador, Nicaragua, and Honduras – in addition to several African and Pacific Island states – to switch recognition to China by offering sizable economic packages that trumped what Taiwan could provide. With Arévalo’s investiture, there is reason to believe that Guatemala could be offered a similar package.

For Guatemala, however, there are legitimate reasons why Arévalo could independently choose to continue recognizing Taiwan. 

Most notably, Guatemala could leverage continued recognition of Taiwan to bolster its relationship with the United States. Under the Alejandro Giammattei administration, Guatemala-U.S. relations became strained, with corruption and rule of law issues disillusioning Washington and limiting aid flows to Guatemala. As President Joe Biden and Republican leaders identify global diplomatic support for Taiwan as a key U.S. interest, maintaining relations with Taiwan sends an unambiguous signal to Washington that Guatemala is a strong and dependable partner that prioritizes its shared values with the United States.

Even with clearly demonstrated potential, Arévalo may also appreciate that diplomatic recognition of China does not guarantee increased economic engagement. There are instances where Chinese projects, investments, and lending have not materialized as desired or promised. For example, China started constructing an addition to Costa Rica’s highway network in 2018 and was expected to finish in 2021, but the Chinese state-owned enterprise failed to account for various challenges. As of November 2023, construction was just 83 percent complete. Some other regional infrastructure projects have similarly failed to come to fruition despite high-level promises.

Although President Xi Jinping set ambitious goals for investment in the region, Chinese foreign direct investment (FDI) flows have tempered to Latin America. Relatedly, lending to Latin America has generally decreased since the pandemic, despite similar promises. While growing trade with Costa Rica and investment promotion in the Dominican Republic exemplify the undeniable potential of Chinese economic engagement, these clear examples underscore that nothing is guaranteed.

In fact, to fully realize the benefits from engaging with China, Guatemala would need a political commitment to a long-term whole-of-government strategy. Experiences in Costa Rica, El Salvador, and Panama show that governments need to develop institutions and organizations, employ the right human capital, fully understand how China operates and more to truly reap the economic benefits of a switch in recognition. As a result, the Arévalo administration may calculate that realizing increased economic engagement with China demands more of an effort than Guatemala can presently expend, especially in light of the political costs of doing so.

Another course of action is to maintain the status quo. Guatemala can maintain its recognition of Taiwan and continue to trade with China as it has done since the 1980s. China has been an important commercial partner for Guatemala for the last four decades despite the lack of official recognition of Beijing. In 2022, China was the second largest source of imports to Guatemala and the eighth biggest recipient of Guatemalan exports. As such, decades of trade make it clear that Guatemala’s recognition of Taiwan has not been a significant impediment to maintaining commercial relations with China.

Yet the allure of more robustly interacting with a key pillar of the global economy by switching recognition is a serious and genuine option that Guatemala – and Washington – cannot discount. 

Principally, switching recognition provides an opportunity for Chinese FDI, financing, and aid in a manner that Taiwan cannot match. 

Over the entirety of the multi-decade diplomatic relationship, Taiwanese businesses have only invested $22.87 million in Guatemala. In comparison, switching recognition to China has paved the way for massive investment in some of Taiwan’s former allies, such as the billions of dollars that China has sent to Panama. Moreover, switching recognition is a clear lever for greater FDI, as multiple studies show that China’s diplomatic strategy guides Chinese firms’ FDI decisions.

In financing, Taiwan has provided tens of millions to Guatemala to finance projects like the major highway network. However, China has provided billions of dollars in lending to the region to finance infrastructure development, dwarfing what Taiwan can offer. In 2018, China provided Costa Rica nearly $400 million in financing to carry out a transportation project. As Guatemala has one of the lowest rates of public infrastructure investment in Latin America, even Taiwan’s President Tsai Ing-wen understands that her country cannot “engage in a meaningless contest of dollar diplomacy with China.”

Furthermore, the millions of dollars of aid that Taiwan has given Guatemala has grown local economies and boosted health outcomes, but the level of aid of which China is capable significantly outstrips Taiwan. China offers generous grant and aid packages (often in combination with lending), with the $500 million that China gave to El Salvador in 2019 for various infrastructure and tourism projects exemplifying these aid programs.

In addition to greater money flows, recognizing China could open the door to greater Guatemalan exports by tying a free-trade deal to diplomatic recognition, as other Central American countries have done. For example, the Guatemalan coffee industry has already identified China as a future key market. With China’s coffee market roughly seven times that of Taiwan, recognition with an FTA could provide Guatemalan producers greater access to the growing Chinese market, significantly bolstering the Guatemalan economy.

By switching recognition and seeking greater economic engagement with China, Arévalo would also be following up on a central campaign promise to fight poverty. Attracting Chinese FDI could support domestic job creation while inflows of Chinese lending could help ameliorate the infrastructure investment deficit that currently limits Guatemala’s economic development. Recognizing China has the clear potential to advance Arévalo’s development agenda, a key pillar of his campaign.

Finally, Arévalo has most certainly calculated that switching recognition to China may mean losing favor in some Washington circles, but that the U.S. will likely not impose any serious economic consequences. Drawing from recent diplomatic switches in Central America, then-President Donald Trump simply recalled for consultations the top U.S. diplomats in Panama, the Dominican Republic, and El Salvador when those countries recognized China;  Biden did nothing of substance in response to Honduras’ 2023 switch. Even with the TAIPEI Act in place, which effectively threatens punitive measures for countries that break relations with Taiwan, there appears to be little will in Washington to destroy important U.S. bilateral relationships over switching recognition to China.

In economic terms, it is clear that despite the effort required to successfully engage with Beijing, the complete economic package that China offers outweighs that of Taiwan. The U.S. must realize that disputing that conclusion is a losing argument; experience points to a net positive experience in other Latin American countries that have made the switch. With this perspective, if the U.S. wants to support Taiwan’s diplomatic relationships, it would benefit from focusing on both the political and economic aspects of Guatemala’s decision. Fully understanding Guatemala’s perspective on the issue, and in particular the details of what China stands to offer, will allow the Biden administration to make an informed decision on how to engage Arévalo and best empower Taiwan.

Guest Author

Hunter Sosby

Hunter Sosby is a graduate student at the Johns Hopkins School of Advanced International Studies, where he is focusing on good governance, corruption, and Latin America’s changing role on the world stage. He has previously worked in international development at the National Democratic Institute (NDI) and has conducted research on organized crime and corruption in Latin America at the Center for Advanced Defense Studies (C4ADS).

Guest Author

Jalen Zeman

Jalen Zeman is graduate student at the Johns Hopkins School of Advanced International Studies studying international political economy in Latin America and China’s role in the region. He has previously worked at the RAND Corporation.