What Do Countries Get for Switching Ties to China?
Honduras’ president was recently feted in Beijing with the usual promises of big trade and investment deals. What gains have other countries seen in that regard?
From June 9 to 14, Honduras’ President Xiomara Castro paid a state visit to China. It was not only Castro’s first visit to Beijing, but the first by any Honduran president – until March 2023, Honduras maintained diplomatic relations with Taiwan. During her trip, Honduras and China also opened their respective embassies in each other’s countries.
Most countries that have made the switch from Taiwan to China have cited economic motivations for doing so – they are hoping for increased access to China’s massive market, as well as courting Chinese investment. In Honduras’ case, Taiwan’s Foreign Minister Joseph Wu claimed that Castro’s government had demanded $2.45 billion from Taiwan to build a hospital and a dam two weeks before it cut ties with Taipei.
Notably, even before Honduras established official ties with China, the Chinese company Sinohydro was already engaged in a hydropower project worth $300 million – the funding for which came from the Chinese government. Castro is clearly gambling that there will be more money in the offering now that Honduras and China have official ties. During her meeting with Xi, she said that Honduras “firmly believes” that cooperation with China will bring her country “more and better development opportunities.”
To that end, during Castro’s time in China Honduras signed on to the Belt and Road Initiative and requested to join the New Development Bank, the BRICS funding arm headquartered in Shanghai. The two sides also “reached consensus” on opening negotiations for a free trade agreement, and Chinese companies expressed interest in boosting imports from Honduras, particularly of coffee, shrimp, melons, and other agricultural products. Honduras’ trade minister told China’s Global Times that Honduras expected a rapid boost in the scale of exports to China, now that its products would no longer need to “go through an extra step” of using Taiwan as a “middleman.”
Honduras is not the first country to cut ties with Taiwan in the hopes of striking it rich through increased relations with China. Eight countries have made the switch over the past six years: Panama (2017), Dominican Republic (2018), El Salvador (2018), Burkina Faso (2018), Kiribati (2019), Solomon Islands (2019), Nicaragua (2021), and Honduras (2023). We can start to get an idea of what countries actually gain from forging ties with China by observing the experience of those that have done so over the last decade.
First, it’s helpful to understand what these governments actually want. Chinese investment – particularly in sectors like energy, infrastructure, telecommunications, and agriculture – is much desired. In addition, governments are hoping to boost trade balances, but simultaneously worried about a flood of Chinese imports swamping domestic markets. What they really want, then, is to increase their exports to China.
Finally, it’s important to remember that these countries had existing trade and investment relationships with China even before they established official diplomatic ties – just as Taiwan has trade and investment relationships with countries around the world that do not officially recognize its government. Economic ties are not starting from zero, but there’s a clear hope that they will rapidly expand after forging a diplomatic relationship.
Panama, which was the first country to switch its diplomatic recognition from Taiwan to China after the “diplomatic truce” broke in 2016, has the most data to go through – and the most time for its economic ties with China to develop. Here, the trendline is extremely encouraging for Honduras, which will be hoping its economic markers follow a similar trajectory.
According to the China Global Investment Tracker (CGIT), a database maintained by the American Enterprise Institute, Panama has received a total of $2.5 billion in Chinese investment since 2005. Of that, $1.86 billion has come since 2017, when Panama established diplomatic relations with China.
On trade, the developments are even more striking. According to the Observatory of Economic Complexity (OEC), China-Panama bilateral trade was worth a total of $6.3 billion in 2016, the last full year before they established official ties (unless otherwise noted, for all the statistics below I take the last full year before diplomatic recognition as the comparison point). Of that, a paltry $43.6 million was Panama’s exports to China.
In 2021, the last year for which the OEC provides data, trade turnover had ballooned to a total value of $9.77 billion. Of that, Panama exported $1.1 billion worth of goods to China, which is now its top export destination. That’s a 55 percent increase in total trade since Panama made the switch, with a jaw-dropping 2,422 percent increase – over 24-fold growth – in Panama’s exports to China.
Of course, that sort of success is not replicable for every country. Panama’s top export product to China is copper ore, which accounted for 96 percent of its exports to China in 2021. Countries not rich in natural resources that China is eager to import might find it difficult to secure such rapid growth in trade figures.
Likewise, the bulk of Chinese investments in Panama are concentrated around the famous Panama Canal, a crucial transit channel connecting the Atlantic and Pacific Oceans – with $900 million going to a single project to develop a container port on the canal. Other countries not blessed with such geoeconomic prominence might struggle to bring in big-ticket investments.
That said, for the most part there’s a clear pattern that establishing ties with China helps boost investment. Three of the countries that most recently made the switch – Dominican Republic, Burkina Faso, and Solomon Islands – had recorded no Chinese investment (at least not according to the CGIT) prior to establishing formal ties. They’ve received hundreds of millions of dollars in deals since. But the CGIT records no investment deals for either El Salvador or Kiribati, whether before or after diplomatic recognition.
Nicaragua is a particularly glaring exception, racking up $530 million in deals before establishing ties with China and nothing since (admittedly, it’s a small sample set of less than two years, much of it stifled by the pandemic). But overall, Honduras should indeed expect to see inflows of Chinese investment increase over time.