Dollar Diplomacy, Democracy, and Paraguay’s China Crossroads
The Taiwanese President Tsai Ing-Wen inaugurates the Taiwan-Paraguay Polytechnic University in Asunción. Photo courtesy of the Taiwan Presidential Office.
While most South American nations have eagerly embraced China’s lucrative investments and massive consumer market in recent decades, Paraguay has been forced to forego economic opportunities with China in order to maintain diplomatic allegiance to Taiwan. Yet, despite the growing number of countries recognizing China instead of Taiwan and the financial costs to Paraguay, the South American nation should continue to recognize Taiwan and reject a lucrative switch to recognizing China.
Paraguay’s “eternal brother[hood]” with Taiwan, formally known as the Republic of China, began in 1957 when diplomatic ties were formed between two stringently anti-communist, right-wing dictatorships, led by the Colorado Party in Paraguay and the Kuomintang (in English, Chinese Nationalist Party) in Taiwan. This antipodal recognition came in the wake of the Communist victory in the Chinese Civil War (1945-49) over Nationalist Party forces, who subsequently fled mainland China, relocating the government of the Republic of China to Taipei, the capital of the island of Taiwan. China’s victorious Communist Party established a rival government, the People’s Republic of China in Beijing to govern the rest of Chinese territory. Meanwhile, the initial ideological alignment between Taiwan and Paraguay continues in a different form today. In the aftermath of the Cold War, before the end of the 20th century both Taiwan and Paraguay embraced democracy, with open elections held in Paraguay starting in 1992 and in Taiwan from 1996.
Free trade access to China’s consumer market has proved a powerful rationale for developing nations like Paraguay to recognize China over Taiwan. Other Latin American countries—such as Panama, the Dominican Republic, Nicaragua, and Honduras—have all recanted their recognition of Taiwan in the last decade due to China’s massive consumer market, as well as eager Chinese investment into the region in recent years. China, partly motivated by a desire to eradicate all international recognition of Taiwan, have made clear their willingness to dramatically outspend Taiwan in any country that continues to recognize them, solidifying the massive imbalance in economic might between the two states. China has invested an average of $4.5 billion annually into Latin America and the Caribbean since 2017, long since overtaking the United States as the largest foreign investor in many nations across the region. This investment has included infrastructure projects to the tune of billions of dollars, such as a $1.3 billion deep water port in Peru, opened by Chinese President Xi Jinping in November of this year. Additionally, Paraguay’s recognition of Taiwan comes in the face of China’s rising importance to South American trade. Trade between China and Latin America grew from 12 to 315 billion between 2000 and 2020, and countries in the region now have an average of 20 percent of their exports going to China, with countries like Brazil and Chile sending over 30 percent of their exports to the PRC.
Taiwan’s waning ability to effectively practice dollar diplomacy has become apparent as China's influence in Latin America has grown. Although Taiwan has made substantial investments in Paraguayan infrastructure and industry, its investments do not come close in value to those of China. While Taiwan has a population of roughly 24 million and a gross domestic product (GDP) of over $1 trillion, China’s population is upwards of 1.4 billion and their GDP is over $31 trillion. As a result of this imbalance in financial might, Taiwanese efforts at “dollar diplomacy” in Paraguay have been relatively small compared to China’s billion dollar projects across the region. Since 2020, Taiwanese aid to Paraguay has increased to an average of $30 million a year, doubling from its previous average of roughly $14 million. Money from Taiwan is directed to Paraguayan projects in public health, infrastructure, and education. Millions of dollars were put towards housing projects, a new congress building, and the creation of a Taiwanese-Paraguayan engineering university in Asunción. Additionally, Taiwan funds hundreds of scholarships each year for Paraguayan students to study in Taiwan. Taiwan’s increasing investment in Paraguay is indicative of the increasing anxiety over the possibility of the recent regional domino effect towards China challenging Paraguay’s relationship with Taiwan.
Increasingly, Paraguay’s continued recognition of Taiwan has come at an economic cost in terms of the nation’s export potential. Despite China being the world’s largest consumer of Paraguay’s two principal exports, beef and soybeans, Paraguay’s participation in this emerging exchange has been severely limited. China’s refusal to trade directly with nations that recognize Taiwan means that Paraguay has been forced to export their products indirectly through PRC-friendly neighbors, eroding Paraguayan bargaining power and profit. This is especially harmful because despite Paraguay’s diplomatic loyalty to Taiwan, far more of their trade is actually indirectly conducted with China. Though trade with Taiwan is less than 10 percent of Paraguay’s total, almost 30 percent of Paraguay’s imports come from China. Paraguay’s demand for Chinese manufactured goods and inability to export their agricultural products to China at scale has given them a massive trade deficit. Economists have estimated that Paraguay’s loyalty to Taiwan, and the consequences imposed on them by China for it, comes at a cost of over 1 percent of Paraguayan GDP annually—a significant figure for a relatively small, developing economy still largely reliant on agricultural exports. As a result, there is a rising sentiment in Paraguay in favor of PRC recognition, led by an agricultural lobby of farmers who see neighboring countries profiting off the export demand in China.
This sentiment has found support in the Paraguayan opposition, the Liberal Party. In the presidential election last year, the Liberal candidate Efrain Alegre campaigned on a promise to switch recognition to China due to the likely resulting increase in exports of beef and soybeans.
Paraguay’s continued recognition of Taiwan is also closely connected to Taiwan’s friendly relationship with Paraguay’s ruling Colorado Party. The Colorados, who were the sole political party under the dictatorship of Alfredo Stroessner, have continued to dominate Paraguayan politics since the transition to democracy, winning all but one presidential election in the last 75 years. As a result of the one-sided nature of Taiwan’s relationship in Paraguayan politics, there are concrete fears that a change in power in Paraguay could have ramifications for the continued recognition of Taiwan.
Despite the potential for immediate economic benefits through China, Paraguay should remain steadfast in its recognition of Taiwan. One reason for this is China’s lending model, which has led to economic complications in other South American nations. Countries such as Ecuador and Venezuela have “defaulted on [their] loans” and agreed to surrender some control of their oil resources to China as payment for their debts. Venezuela’s accrual of over $60 billion in debt to China has exacerbated its economic crisis and highlights the risks of accepting high levels of Chinese investment. China’s lending practices in developing nations around the world has also raised concerns about their opaque terms and the restrictions placed on debt negotiation or restructuring. Unable to repay its billions of dollars of debt to China, Sri Lanka ceded control of Hambantota Port to China on a 99 year lease, which has sparked concerns that the true aim of Chinese investment in that nation was political power projection across the globe. Moreover, China’s lending practices often include stipulations that promote Chinese corporations and labor over local industry, limiting job creation and economic benefits for borrowing countries. This practice has brought about concerns over economic sovereignty from China among Central Asian nations, who have favored Chinese investment in factories and processing plants that employ locals over expensive infrastructure projects built by Chinese workers since 2014. For Paraguay, aligning with China would represent an embrace of evident long-term risks to their financial health and economic sovereignty in favor of a short-term increase in investment and exports.
Additionally, there is a sense that Paraguay’s continued loyalty to Taiwan has the potential to win approval and investment from democratic nations on the world stage, most notably the United States. When Paraguay first recognized Taiwan in the 1950s, it was in adherence to the international status quo, but now it represents an island of Taiwanese loyalty in a global sea of Chinese diplomatic allegiance. In spite of China’s efforts to chip away at Taiwan’s formal international recognition, Paraguay has remained a constant voice of support for Taiwan’s desire for recognition and independence from China in global fora, such as the United Nations and World Health Organization. Paraguay has consistently voiced its support for Taiwanese acceptance into the United Nations at the annual General Assembly, providing vital visibility as one of only 11 UN member states, and the only South American state to continue its recognition of Taiwan. This has won them support from politicians in the United States skeptical of China’s real ambitions in the Western hemisphere. Most notably, President-elect Donald Trump’s nominee for Secretary of State Marco Rubio visited Paraguay in February of this year, and importantly, he met with Taiwan’s ambassador while there. Rubio has been outspoken in his support of their continued recognition of Taiwan, writing an opinion piece earlier this year that called for the United States to provide concrete support for Paraguay’s “stand for freedom” against Chinese “bullying” in Latin America. Rubio’s support suggests that the United States, which officially abides by the One China policy but also sells Taiwan weapons for defense against China, could increase investment in Latin American nations that continue to resist the temptation of switching recognition to China.
Ultimately, Paraguay stands at a crossroads. The incentives for switching to PRC recognition are clear, as this would likely provide an immediate short-term boost to its agricultural sector and economy. However, the risks associated with Chinese loans and the loss of political autonomy should give Paraguayans pause. While economic realities make the option of recognizing China tempting, Paraguay’s current government under the Colorado Party is committed to maintaining its alliance with Taiwan for the foreseeable future. Although regional dynamics could continue to increase the opportunity cost of Taiwanese recognition, at the present moment Paraguay’s close relationship with Taiwan and political advantages from their friendship should be favored by the Paraguayan government over potential recognition of the People’s Republic of China.
Thomas Cordingley (CC ’27) is a staff writer at CPR studying history and computer science. His 8 year old brother, Charlie, is a Detroit Lions fan, despite being born and raised in New York City.