How Pacific Islands Leverage the China-Taiwan Tug of War

Xi Jinping was unusually hawkish toward Taiwan in January 2019 when delivering a speech commemorating the 40th anniversary of lifting the freeze on Beijing-Taipei relations. He pointedly kept open the prospect of the “use of force” against Taiwanese “separatists” and broke with consensus language about “peaceful reunification” that had become the norm across decades.

In response, Taiwanese President Tsai Ing-wen has been cautious, merely emphasizing the difference in regimes between Taiwan and the People’s Republic of China (PRC). In her statement the day before Xi’s speech, she claimed to be “on an equal footing” with Beijing. In 70 years of existence, the Taiwanese state has gained de facto independence and so far, the PRC has accommodated it without ceasing to consider the island as one of its provinces to be returned eventually to the mainland. Beijing’s “red line” remains a unilateral declaration of independence, and since her election in 2016, Tsai has been careful not to cross it.

Beijing is, however, on the alert: 2016 was marked by not only by Tsai’s election but also that of Donald Trump, who is seen as a transactional president, ready to put everything, including the Taiwan relationship, on the bargaining table with China. In response, China has tried to isolate the island diplomatically by removing one by one its rare diplomatic allies in return for partnership agreements and massive investments. In December 2016, 22 states recognized Taiwan as the Republic of China; in 2019, only 17 still do.

The Pacific region remains key to Taiwan’s diplomatic strategy. One-third of its remaining allies are in the Pacific, and no Pacific state has swapped its diplomatic alliances since Nauru in 2005. Hence the region has renewed importance in the eyes of Taipei, but also Beijing, which sees an opportunity to continue to diplomatically isolate the island.

The Pacific is thus becoming an ideological battlefield, one in which the island countries themselves are the main participants. Each state tries to take advantage of the situation by putting on the scale potential gains (mostly assimilated as money) against possible losses (of sovereignty), all against the backdrop of heightened geostrategic anxiety in the region.

To understand the consequences of this ideological fistfight on the Pacific, it is important to discern the causes and highlight the risks of engaging with these two parties.

China’s Interests in the Pacific

The Chinese population has been present for a long time in the Pacific. Significant pockets of ethnic Chinese have resided in the region for more than a century. The second prime minister of Papua New Guinea, Julius Chan, still a member of parliament, is half ethnic Chinese. The Chinese population is growing unabated in the region this century. Chinese nationals, many of whom are brought to the region on fishing vessels or to work on state-owned enterprise (SOE) infrastructure projects, are enticed by these high-cost economies, where selling imported goods can be lucrative, and remain in the region to pursue economic opportunity. Official statistics are impossible to track – many of these new-wave Chinese nationals are not captured in migration data – but their presence is keenly felt. For example, a couple of month ago, while on Makira, a small and remote island of the Solomon Islands, I noticed that the only retail shop in Kira-Kira was owned and managed by Chinese.

The protection of this diaspora, perhaps the most security vulnerable community in the Pacific, is one of Beijing’s first justifications for its presence in the region. Recall that in recent years, the instabilities of the Pacific have generally targeted populations of Asian ethnicity – particularly Chinese. These populations were accused of stealing jobs and forcing locals out of formal sector employment opportunities. Indeed, Chinese competition is hard on local businesses, but they provide good services – their shops are open longer and sell a cheaper and wider range of goods.

In 2006, during the riots in the Solomon Islands and Tonga, tensions arose against the ethnic Chinese population. In Honiara and Nuku’alofa, Chinese businesses were looted and houses were burnt or destroyed. For the first time, the Chinese government organized a mission in the Pacific to evacuate by air 150 of its citizens from the Solomon Islands (April 2006), and more than 200 from Tonga (November 2006). There have been more recent periods of unrest in which new-wave Chinese have been targeted in Fiji, Bougainville, and Papua New Guinea.

These interventions have been renewed in recent years, but with a different twist. In 2017, Chinese police extracted 77 Chinese nationals from Fiji for alleged gambling fraud. This year, six Chinese nationals, four of whom held local passports, were whisked out of Vanuatu on similar charges.

This large population is, however, also the mainstay of China's trade integration in the Pacific. The Pacific Islands region is attractive for a growing China, constantly on the hunt for raw materials. With their natural resources, such as fisheries and logging – as well as, in the case of PNG, a plethora of other minerals – and extensive exclusive economic zones, the Pacific Island countries represent an economic opportunity that is worth investing in. Between 2000 and 2012, China’s trade with its diplomatic partners in the region rose from $248 million to $1.767 billion. In 2009, China became the second-largest trade partner to the region, behind Australia. However, this economic activity is only going in one direction.

As such, the protection of this Chinese native presence is key to the development and preservation of China’s economic influence in the region. While many observers see the spreading of this diaspora as a tool for establishing military bases to help the People’s Liberation Army achieve its ambitions of global force projection, protecting it is also in the direct interest of China’s economy.

Many observers and academics, however, see the presence of China in the Pacific as driven not by an entrepreneurial diaspora or the protection of economic interests but rather by strategic motivations. The region represents for China an area where it can practice its own diplomatic power and try to expand its influence while shaking the traditional status quo of the region.

Over the past few years, China has established itself as a direct competitor in strategic spaces for the West. For instance, Beijing developed strong relationships with countries in the Melanesian Arc, Australia’s first line of defense to counter security risks from the north, and has invested heavily in Micronesia, a part of what is known as “the Second Island Chain,” housing key strategic positions for the United States, such as Guam. This island chain should protect the United States from any rising power in Asia. By establishing itself as a direct competitor to traditional powers in this space, China has found an effective way to impose itself as a regional power at the expense of the West. A certain paranoia is palpable in Canberra in response.

China is also in the Pacific region to promote and fight for its “One China” policy. Since the 1970s, the battle for recognition between the People’s Republic of China and the Republic of China (Taiwan) has migrated to the Pacific. Today, one-third of Taiwan’s allies are in the region. These include Kiribati, the Marshall Islands, Nauru, Palau, the Solomon Islands, and Tuvalu. While Taiwan has “economic missions” all over the world, no formal bilateral diplomatic relations can be established unless partners are willing to sever ties with Beijing.

For many years, Taiwan’s argument for friendship was mostly financial. By using “checkbook diplomacy,” Taiwan secured support from Pacific Island countries in regional organizations in exchange for development assistance.

In order to put an end to the diplomatic relationships Taiwan built over the years, the Chinese diplomatic corps has heavily intervened in the region, mostly through financing aid. Indeed, as can be seen in the Lowy Institute Pacific Aid Map, Chinese financial assistance to the region has dramatically increased over the past few years. It went from $26 million in 2007 to $165 million in 2017, mostly to support big infrastructure projects, such as the road upgrading in Fiji and Papua New Guinea.

What’s in it for the Pacific?

For the Pacific countries, the ideological conflict between Beijing and Taipei is both a boon and a threat. Knowing how to identify and interpret these “gifts” is a crucial issue for them.

First of all, the economic spinoff effects on the Pacific are important. Over the years, the region’s states have learned how to leverage their particular position in the middle of the diplomatic war. Since 2011, more than $1.5 billion in financial support (mostly ODA) has been disbursed in the Pacific by China and Taiwan together, either to acquire or strengthen diplomatic ties. Among all donors, China and Taiwan are respectively ranked third and 11th, accounting for a total of almost 10 percent of total aid to the region.

By volume, China’s contribution to the region far outstrips that of Taiwan. Since 2011, China has spent $1.48 billion in aid to its diplomatic backers in the Pacific, with its projects on average nine times larger than those of Taiwan. In comparison, Taiwan has spent $225 million.

Looking at these figures, it is tempting to assume that China will soon convince Taiwan’s Pacific friends to swap. However, on a per capita basis, Taiwan’s aid spending is more than twice the amount of China’s. This is mostly due to the fact that China provides support to the two most populous countries of the region, namely Papua New Guinea and Fiji. 

It is also interesting to note that, instead of competing on monetary value, Taiwan has identified key areas of development in the Pacific where its smaller contribution can still carry clout. Its projects target key sectors such as agriculture, health, and industry, in comparison to China’s multibillion-dollar infrastructure projects, mostly all under the Belt and Road Initiative (BRI).

Infrastructure remains a crucial requirement for ensuring resilience in the Pacific. But developing connection with locals, focusing on people-to-people relations – which Taiwan does – brings better bang for your buck, in terms of recognition.

A good example of knowledge sharing between Taiwan and the Pacific are the horticulture technical missions implemented in most of Taiwan’s allies in the region. Poor soil, lack of arable land, and severe droughts have led to low vegetable production and dependence on imported food across the Pacific. As a consequence, the Pacific community is subject to a high level of noncommunicable diseases, often linked to malnutrition, and experiences difficulties in developing sustainable livelihoods for locals. Taiwan’s horticulture project has sought to increase the sustainable productive capacity of these local populations through training workshops, internships, and extended foreign missions by envoys.

Furthermore, having both China and Taiwan as new key players in the Pacific aid landscape has challenged the status quo and pushed traditional donors, such as Australia and New Zealand, to offer cheaper projects, with more advantageous terms and fewer conditions.

Some would argue that Australia’s “step-up,” New Zealand’s “reset,” and the United States’ re-engagement are mostly designed to counter the rise of China in the region. As a result, the Pacific Islands are benefiting greatly from this changing situation, as evidenced by the Coral Sea submarine cable project currently being implemented between Australia, the Solomon Islands, and Papua New Guinea.

In 2016, the Solomon Islands’ government inked a deal with Huawei (a Chinese telecom firm, which Australia later banned because of national security concerns) to consider constructing an undersea cable linking the country with Australia, in a bid to improve the Pacific Island nation’s often unreliable internet and phone services. Concerned about Huawei being permitted to plug into Australia's telecommunications infrastructure, the Australian Secret Intelligence Service advised the government against the project. Later that year, a “very generous” deal was signed between Honiara and Canberra, almost halving the cost of the project for the Solomon Islands.

In sum, the Pacific Islands know how to harness these projects and seize the opportunity that this particular conflict of interest offers.

In addition to more aid, concerns expressed by the West related to the rise of China in the Pacific have given the region a platform on which it can now express itself and be heard. For instance, the invitation to the White House of heads of states of the Compacts Free of Association, a historical first, illustrates the benefits a rising China offers to the Pacific Island countries.

What’s more, the region is currently attempting to incorporate itself with the rest of the world. The process started in the 1990s with the creation of the PALM Summits, gathering Japan and the Pacific Islands states together. There are now various South Pacific+1 summits, which have enabled the region to raise its voice globally. Both China and Taiwan have their own as well.

In addition, China and Taiwan’s increasing diplomatic and economic presence in the region, coupled with their growing economic and political strength globally, brings access to markets, technology, financing, and infrastructure, which, if managed well, could offer a clear path to a viable future for the Pacific Island countries.

To a large extent, these countries have been excluded from the mechanisms that can enable them to fully engage in a globalized world. Many Pacific Island countries see the ideological conflict as an opportunity to rectify this. The region has seen large increases in both financing for development and trade with Taiwan and (mostly) China over the past decade.

China has become an important export market for Pacific Island countries. Full of natural resources and raw materials needed for China’s economic growth, the Pacific represents an ideal partner for Beijing. Since 2000, the value of Pacific exports to China has increased more than 12-fold. Beginning at $500 million, Pacific Island countries’ exports to China now represent more than $6 billion. In Papua New Guinea, China is now the leading export market, ahead of Australia, its traditional partner. A stand-out resource project is the Ramu Nickel Project, the most important Chinese mining project in the region, with an investment of $2.1 billion.

In addition, Chinese companies are now well established in the region and know how to win large government projects, mostly supported by multilateral organizations. Up to 2018, Chinese enterprises reportedly had a total of $5 billion in contracts for various projects.

Threats for the Pacific

But to mention just the benefits of the Chinese and Taiwanese presence in the Pacific would only give one part of the picture.

Far more than Taiwan, China is criticized for the disproportionately weak economic impact of its aid. In the case of construction projects in the islands, Taiwan usually provides funds for the local government to purchase materials and labor. China, on the other hand, usually provides the materials and labor, and therefore fewer benefits are directly felt in the local economy.

The danger of excessive indebtedness, as well, is a growing fear associated with aid from China. As an upcoming report by the Lowy Institute will show, China owns an important portion of the external debt of countries that are on the verge of a situation of “debt distress.”

Whereas Taiwan gives money primarily in the form of grants, China tends to provide loans to the region, which is already suffering economically. Even at low interest rates, some of these loans became a crushing burden for small Pacific Island states.

This is the case for Tonga, for which China owns a sizable part of the national debt. Debt to China was equal to one-third of Tonga’s GDP in 2018 and, as such, a long-term burden on the economy. After the country tried unsuccessfully to get Beijing to forgive this debt, Prime Minister Samiuela Akilisi Pohiva openly warned against the danger of indebtedness to China.

Another recurring concern is the way in which China operates – particularly Chinese SOEs – in the region. By engaging directly with the political elite of the Pacific, often through high-level corruption, Chinese SOEs are actively undermining already fragile institutions that donors like Australia invest a lot in trying to improve.

Similarly, China uses its economic power as leverage against the small economies of the Pacific. In 2017, China decided to pressure Palau, which has diplomatic relations with Taiwan and gets a $10 million grant from Taipei each year. To do so, Beijing stopped Chinese tourism agencies from organizing tours to Palau. Tourism generates about 40 percent of Palau’s GDP, and half of it was coming from Chinese visitors. The impact on the economy was dreadful. Despite this, the ambassador to Taiwan, Dilmei Olkeriil, said that Palau would maintain diplomatic ties with Taiwan. To compensate, Taiwan’s President Tsai promised Palau that Taiwan would increase its direct flights to the island starting in 2018.

Overall, both Taiwan and China draw criticism for impeding the development of good governance in the Pacific Islands by leveraging their cash and other benefits directly with the political elites. In this regard, Taiwan is not exempt from criticism. In the Solomon Islands, for example, Taipei contributes substantially to “constituency development funds,” discretionary funds for individual members of parliament. Pundits and observers of the region argue that these funds increase corruption in local politics while failing to deliver tangible public benefits.

In conclusion, the ideological conflict between Beijing and Taipei goes well beyond the borders of Asia, and strongly impacts the Pacific. All island countries participate, and everyone plays their cards as well as possible. For instance, Nauru broke its relationship with Taiwan in 2002 only to return in 2005, claiming that promised Chinese aid never materialized. Meanwhile, Palau’s concerns about Chinese tourism have strengthened its relations with Taiwan. In contrast, China’s efforts in the Solomon Islands have led many to assume a change in recognition is imminent. What will happen next is only for the Pacific Islands countries to decide.