December 30, 2010 / 4:17 PM / 9 years ago

Analysis: Taiwan's Central American allies expand China ties

SAN JOSE, Costa Rica (Reuters) - Friendlier ties between Taiwan and China are allowing Central American nations to deepen economic links with the communist giant, increasing Chinese influence in a region dominated by the United States.

Central American businesses say the isthmus has been held back by its long support of Taiwan, a self-ruled island claimed by Beijing as part of China, denying the banana and textile exporting countries free access to the world’s No. 2 economy.

The region has been torn between Taiwan’s generous aid and the promise of doing business with Beijing, enviously looking on while bigger economies like Brazil, Chile and Peru steadily increase their shipments of raw materials to China.

Costa Rica made the surprise move of breaking off its decades-long relationship with Taiwan in 2007, now only recognized by a handful of small countries.

El Salvador, Honduras, Nicaragua, Panama and Guatemala say they have no immediate plans to abandon Taiwan, but are worried they will be left behind after Costa Rica agreed to a free trade deal with China in April that lawmakers aim to ratify in 2011.

China has traditionally shunned business with Taiwan’s allies, but in August this year the island and the mainland passed a landmark trade deal, binding their economies together and opening the door for similar pacts with other countries.

“It is not in Beijing’s interest anymore to close off completely Taiwan’s diplomatic ties ... it is willing to allow the government of Taipei to maintain some dignity,” by holding onto recognition from countries in Central America, said Eugenio Anguiano, a China expert at Mexican think tank CIDE.

Central America, a generally poor region regularly hit by hurricanes and floods, is taking advantage of the thawing tensions by expanding commerce with China where it can.

Honduran President Porfirio Lobo signed a $1.2 million contract in September with Chinese firm Sinohydro Corporation to help build three hydroelectric dams in western Honduras to generate 524 megawatts of power. “We have an excellent relationship with Taiwan ... But we cannot close our eyes to reality,” said the head of Honduras’ industrial association, Adolfo Facusse. “The world has changed and it’s in our interest to have more direct relations with China,” he added.

El Salvador and Nicaragua hosted trade fairs this year promoting Chinese-made food, cars, machinery, high-technology and medical equipment as cheaper imports from China can cut costs for companies. Nicaragua imported $260 million of Chinese goods last year, mostly shuttled through intermediary countries like Mexico and the United States.

To sugarcoat China’s new alliance with Costa Rica, Beijing bought $300 million of Costa Rican government bonds and is building a gleaming new 35,000-seat stadium in San Jose.

U.S. CONCERN?

China is already the second-biggest user of the Panama Canal, with around 20 percent of its exports passing through the waterway connecting the Atlantic and Pacific oceans.

The United States is carefully watching China’s so-called soft power in the developing world in the form of foreign aid and investment. Central America is by no means a top priority for Washington, but the United States fought proxy wars in the 1980s to prevent the spread of communism. More recently, a Central America-U.S. trade deal has been designed to consolidate the region into a lucrative single market.

China’s trade with Latin America grew ten-fold between 2000 and 2007, reaching $142 billion in 2008, still smaller than the United States but growing at a faster rate, according to the U.S. Congressional Research Service.

China’s growing prowess prompted El Salvador’s president, Mauricio Funes, to say last month that he would consider ditching Taiwan in the future.

Panamanian President Ricardo Martinelli talked about allying with China during his election campaign. “We have chosen to have diplomatic relations with Taiwan but commercial relations with both,” Martinelli said in a recently published interview.

Additional reporting by Sean Mattson in Panama City, Gustavo Palencia in Tegucigalpa, Nelson Renteria in San Salvador, Ivan Castro in Managua and Sarah Grainger in Guatemala City; Editing by Eric Beech

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