Beijing diplomatic moves punish Taiwan without gutting economy

China’s push to woo Taiwan’s remaining friends – seen again with Beijing’s move to establish ties with Panama – will probably have a greater impact on President Tsai Ing-wen’s political standing than the island’s economy.

The long-anticipated defection, which Chinese and Panamanian officials celebrated with champagne this week, left Taiwan with just 20 diplomatic partners and underscored how far relations between Beijing and Taipei have deteriorated since Tsai’s election last year. Still, the financial impact was expected to be limited: Panama represented just 0.03 percent of the island’s total trade in 2016.

“The switch was politically and diplomatically rather significant, but economically insignificant,” said Jonathan Sullivan, director of the University of Nottingham’s China Policy Institute, who’s 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.

Still, China could do much more if it really wanted to hurt the island’s economy. Taiwan exported USD112 billion across the strait last year, it has 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.

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

The moves show the Communist Party’s balancing act with Taiwan, which it considers a province to be reunited with the mainland. While China’s leaders might want to force a change in Taipei, they don’t 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 Tuesday. “I can represent all 23 million people when I say, we will not compromise or yield under threat.”

Ma Xiaoguang, a spokesman for China’s Taiwan Affairs Office, rejected questions at a Beijing news briefing Wednesday about whether Panama was lured away with money, saying that “there was no exchange of business interests whatsoever.” Taiwan avoided Panama’s defection in 2009 in what was seen as a favor by China to the island’s then-president, Ma Ying-jeou.

Investors shrugged at the Panama news: The local TAIEX gauge rose 0.2 percent on Tuesday. The economy is expected to expand 2 percent this year, according to a Bloomberg survey – the fastest pace since 2014. 

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

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 on the U.S. National Security Council who now heads the Carnegie-Tsinghua Center in Beijing.

“Use of coercion has proven 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.”

Tsai’s history with the pro-independence camp makes her unlikely to move further toward Beijing even if it 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 $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 its cross-strait policy,” Chang said. “That’d be unacceptable for her because that’d run counter to her beliefs.” Ting Shi, Bloomberg