Notes on Costa Rica’s Switch from Taipei to Beijing

In a presentation given at the National Defense University on November 6, 2009, Kevin Casas-Zamora discusses Costa Rica’s decision to switch diplomatic recognition from Taipei to Beijing.

On June 6, 2007, Costa Rica’s President, Oscar Arias, publicly announced his government’s decision to switch diplomatic recognition from Taiwan to the People’s Republic of China (PRC), after more than 60 years of friendly links with the government in Taipei.“This decision” –claimed Arias on the occasion—“is not the consequence of an ideological turnaround, or of geopolitical reasons or short term interests; it is an act of elemental realism, an awakening to the global context we are forced to deal with.”[1]

Thus Costa Rica became the 169th country to establish diplomatic links with Beijing, one of the eight countries to do so in the course of the past decade. If there still is some kind of geopolitical battle between Taipei and Beijing for China’s diplomatic recognition, it is very clear where the odds are. The group of countries that continue to support Taiwan is a dwindling constituency: 23 countries at last count, the largest of which is Burkina Faso. The loss of Costa Rica was a particularly painful blow for Taiwan, one that led to the immediate resignation of its then Foreign Minister, James Huang. Twelve of the countries that support Taiwan are in Latin America and the Caribbean including five of the six Central American nations. This makes Central America one of the last holdouts of support for the island.

The Costa Rican decision offers some insights about the methods employed to wage this geopolitical battle and the motives that bind small countries to one disputing party or the other. In what follows I will try to give a sense of the way in which the June 2007 decision was made in Costa Rica, as well as the economic, geostrategic and domestic political calculation behind it. Finally, I will try to assess the main effects of the decision for Costa Rica, as discernable as they may be in so short a period.

How? The convenience of switching diplomatic recognition from Taipei to Beijing was discussed in foreign policy circles in Costa Rica for well over a decade. There was, on the one hand, the subtle pressure of knowing that most Latin American countries established diplomatic relations with the PRC already in the 1970s and 1980s. On the other hand, and more poignantly, there was the increasing evidence that, since 2000, when Costa Rica’s bilateral trade with the PRC surpassed trade with Taiwan for the first time, the PRC was poised to become a vital economic partner for the country.

Although little is known publicly, the first talks between the governments of Costa Rica and the PRC to explore the establishment of diplomatic links between them probably took place in the late 1990s, during the administration of Costa Rican President Miguel Angel Rodríguez (1998-2002). This effort was blocked by myriad factors, including the strong domestic interests that stood to lose from the switch. Through a combination of means –ranging from official development aid to the lavishness routinely bestowed upon key political actors—the Taiwanese government was able to create and nurture over the decades a strong pro-Taipei constituency in Costa Rica. For years, any attempt to publicly suggest the convenience of rethinking the diplomatic links with Taiwan was drowned by a chorus of voices in the political system and the media accusing the proponent of betraying the dear democratic principles that bound together Costa Rica and Taiwan. Conversely, no clear pro-Beijing constituency ever emerged, not even after trade links between Costa Rica and the PRC began to grow explosively. The lack of such a constituency had a direct bearing on the nature of the negotiation to establish diplomatic links between San Jose and Beijing, for it was obvious from the outset that an aid package of some magnitude was essential to soften the domestic political impact that the diplomatic switch would generate in Costa Rica.

In 2006, President Arias returned to power in Costa Rica. Two important tenets of his political platform were the intention to deepen the country’s integration with the world economy and improve Costa Rica’s international standing, somewhat deteriorated in the wake of the country’s controversial decision to lend initial support to the invasion of Iraq in 2003.[2] These objectives were at the root of his promise to ratify CAFTA, but also of his stated intention to seek membership in the Asian-Pacific Economic Cooperation Forum (APEC) and a non-permanent seat at the UN Security Council. Arias, a Peace Nobel Laureate and well known statesman, made clear from the outset that he intended to play a very active international role and that he felt that he enjoyed a broader-than-usual leeway to shape the country’s foreign policy.

Hence, it was not entirely surprising when barely 3 months into his administration, Arias reversed the decision made by the Costa Rican government in 1982 of moving its embassy in Israel from Tel Aviv to Jerusalem, a policy that had left the country isolated from most of the Arab and Muslim worlds.[3] Even expecting a stern reaction from the powerful pro-Israel community in Costa Rica, Arias went ahead with the reversal, claiming that for an unarmed country of Costa Rica’s size it was not just convenient, but indeed essential to broaden its international alliances and commercial links. Given this strategic goal and his willingness to invest political capital in it, it was only a matter of time before Arias set out to redefine Costa Rica’s relationship with China.

Besides strategic considerations, there were also tactical ones. With Central America showing unanimous support for Taipei, it was obvious that the first Central American country to break ranks with Taipei would enjoy an inordinate amount of attention from the PRC. While running for office in 2005, President Daniel Ortega, of Nicaragua had hinted very clearly that if elected he would switch support to the PRC, a position that, for as yet unexplained reasons, he reversed upon coming to power in January 2007.[4] This created a sense of urgency amongst policy makers in other countries in the region, particularly Costa Rica and Guatemala.

This perceived urgency prompted Arias to approach the government of the PRC in the second half of 2006. Once approached, the PRC diplomats were very eager to proceed with the negotiation. This was a long awaited opportunity to establish a beachhead in Central America, and turn Costa Rica into a regional showcase of the benefits of establishing a relationship with the PRC. Moreover, as the Chinese diplomats would later acknowledge, there was a small prestige premium to be reaped by establishing such a  beachhead in Costa Rica, an influential regional actor, and by dealing with President Arias, a respected international figure.

Arias’ decision to approach China was closely guarded within a circle of probably no more than 5 people. Two cabinet-level Costa Rican missions discreetly flew to Beijing in 2006 and 2007 to discuss with their peers the terms of the eventual switch. Most of the discussion revolved around the commitments that the PRC government would have to assume if official Taiwanese aid to Costa Rica was to be quickly replaced. Also, broad investment and trade goals were debated, including the prospect of crafting a free trade agreement between both countries in the short term. Beyond the diplomatic recognition of the PRC by Costa Rica, and the PRC’s support for Costa Rica’s bids at the Security Council and APEC, no other foreign policy commitment was mentioned in the course of the talks.

Even with all the discretion involved, once agreement on the main issues was reached between both countries, there were signs that something was afoot. The most visible of them was Costa Rica’s decision to abstain for the first time when voting on Taiwan’s accession to the World Health Organization in late May 2007. This prompted a diplomatic flurry that forced the Costa Rican Foreign Minister, Bruno Stagno, to publicly deny any change in the official policy and decry in harsh terms the “unfounded journalistic speculations.”[5] Three days later, however, a Memorandum of Understanding between the governments of Costa Rica and the PRC was signed in Beijing. It called for the establishment of diplomatic relations between both countries, the opening of embassies in San José and Beijing within a few weeks, and the implementation of a series of bilateral agreements on official aid, trade and investment.[6]

Why? The issue of why the decision happened the way it did and when it did, is of course different from the issue of why it happened at all. Upon announcing the decision, President Arias was particularly blunt about his goals: “(The People’s Republic of) China is the one that sits on the Security Council of the UN, and will soon be the second world power, and is going to invest in Costa Rica… The reasons for which we have relations with China are very evident. Our embassy in Beijing will be the second most important, after that of Washington.”[7] Here it is useful to examine in more detail three sets of considerations that weighed heavily on President Arias’ calculation.

Economic benefits. The first and predominant set of issues was of an economic nature. Both by need and by choice, Costa Rica is a very open economy, with foreign trade comprising more than 100% of GDP in 2006.[8] Even excluding Hong Kong, in the decade preceding the establishment of diplomatic relations, bilateral trade between Costa Rica and the PRC grew 30-fold to more than $1.1 billion. For Costa Rican exports to the PRC –heavily dominated by electronic chips and computer parts— growth was even more spectacular: they grew by a factor of 42, allowing the country to achieve a small trade surplus in its relationship with the Asian giant. By 2006, the PRC had become Costa Rica’s second most important trade partner after the U.S., one much more important than Taiwan. Indeed, trade flows with Taiwan grew at a much slower pace and in 2006 were barely one fourth of those with the PRC.[9]

This is a crucial point, which sets Costa Rica apart from the rest of Central America. While nearly 8% of Costa Rican exports were travelling to the PRC in 2006, for the other Central American countries the PRC’s market represented less than or barely above 1% of their total foreign sales.[10] By the time the Arias administration approached the government of the PRC, trade links with China were far more important for Costa Rica than for any other country in the region.

These trade links had already reached a critical mass that was enough to compensate the one factor that made Taiwan economically attractive for Costa Rica: official development assistance. Between 2000 and 2005, the country received $341 million in assistance from Taiwan, enough to make it Costa Rica’s second largest source of bilateral cooperation. The vast majority of those resources came in the shape of loans, with grants comprising less than $10 million per year.[11] These grants were, however, allocated in ways that maximized their impact on Costa Rican public opinion. Thus, for instance, it was Taiwan’s assistance that came to the rescue to rebuild an entire wing of one of San Jose’s public hospitals destroyed in an arson fire in 2004 or to build a long bridge that opened to development one of the country’s poorest regions in 2003. Even if it had a grossly overblown sense of the magnitude of the Taiwanese aid, the Costa Rican public was justifiably grateful for it.[12] 

Regardless of the public sentiment, what is crucial to understand is that for a middle income country like Costa Rica official development assistance is of marginal importance, comprising less than 3% of GDP at any given year and less than 0.3% if only non-reimbursable grants are included. This is not the situation of Nicaragua, where development aid is nearly one seventh of the economy, or Honduras, where it is about 7%.[13] There, the future benefits of as yet underdeveloped commercial links with the PRC pale into insignificance when compared to the immediate economic and political benefits derived from Taiwanese aid.

In a way, it was simply the higher level of development of the Costa Rican economy that rendered attractive the diplomatic switch towards Beijing. For a small, open, middle income economy, such as Costa Rica, placing on a sound and secure basis its vigorous trade links with the PRC is a pretty reasonable proposition. Even more reasonable it is opening the doors to potential investment flows from the PRC, flows that were nearly impossible to tap into in the absence of diplomatic links, as the Chinese officials made clear from the outset of the bilateral talks with Costa Rica.[14] 

Indeed, for the Costa Ricans the expectation of attracting investment from the PRC ranked above the intention of securing bilateral trade links. Trade links, after all, had grown rapidly in the recent past even in the absence of diplomatic relations. Moreover, besides coffee and electronics –where there is great potential for intra-industry trade between both nations—, to this day it is not entirely clear which other sectors of the Costa Rican economy can easily tap into the huge Chinese market. The hope to attract direct investment flows thus was the single most important economic determinant of the Costa Rican decision.

Geopolitical benefits. For a very small country without an army, such as Costa Rica, a vigorous and effective presence in the international system is a security priority of the highest degree. And, in fact, for different reasons –ranging from its contribution to disarmament to its image as an environmental sanctuary—Costa Rica has been able to earn a good reputation that has allowed it, on occasion, to hit well above its weight in the international arena. Yet, upon Arias’ return to power in 2006, it had become clear that previous policy choices were limiting, to a surprising degree, Costa Rica’s ability to play an active international role. Most visible amongst those were the location of the Costa Rican embassy in Jerusalem and the shunning of links with the PRC. Up until 2006, Asia, home to the majority of humankind, was a large terra incognita for Costa Rican diplomacy. The country only had diplomatic missions in Israel, Japan, South Korea and Taiwan.

Arias understood that this had to be reversed if some of the specific objectives that he defined for Costa Rica’s foreign policy in the short term were to be achieved, particularly winning a non-permanent seat at the Security Council and gaining admission at APEC. The former task was made more difficult by the fact that Costa Rica had been a member of the Council twice over the past 30 years and by the country’s uneasy relationship with the Non-Aligned Movement, in which it has observer status. While the relationship with the PRC was not a pre-requisite for success, it was obvious that it would facilitate considerably the job of the Costa Rican diplomacy. On the other hand, admission to APEC was simply unthinkable in the absence of formal links with Beijing.

Yet, besides the strategic calculations there was a glaring truth: belonging to the vanishing and very peculiar club of countries with diplomatic links with Taiwan had become a disservice to Costa Rica’s international image. When commenting on President Arias’ decision, a former Costa Rican Representative to the U.N. summed up the situation in very stark terms: “By defending Taiwan’s fruitless attempts to gain admission to all the international institutions we were making fools of ourselves.”[15] Quite simply, there are some clubs that you don’t want to belong to.

Domestic political benefits. Why Costa Rica insisted on being part of that club for so long is a complicated story with some chapters that are less than pretty. To put it shortly: as in the case of other countries, Costa Rica’s relationship with Taiwan was fraught with conflicts of interest and outright corruption. The list of examples is long and it’s pointless to repeat it here. It includes the legendary “fact finding” trip to Taiwan that was routinely offered to politicians, journalists, trade union leaders, etc., in which they were given super-VIP treatment and lavished with, literally, thousands of dollars in gifts and shopping vouchers.[16] It was also the hundreds of thousands of dollars contributed by the Taiwanese government to the election campaigns of the main political parties in Costa Rica, something that was well known to political insiders in the country but that broke into the open in the wake of the 2002 election. Then, a journalistic investigation showed that, defying the electoral law that banned foreign contributions, President Abel Pacheco’s campaign had received at least $500,000 from two Taiwanese companies through a bank account in Panama.[17] Given the well established use by Taipei of slush funds to buy influence in the developing world, it was widely presumed that the Taiwanese government was behind the donations.[18] Most disturbing of all was the creation of a Taiwan-sponsored charity, the “Chinese-Costa Rican Association”, which for years made donations to top up the salaries of civil servants at the Ministry of Foreign Affairs in Costa Rica.[19]

The relationship with Taiwan had become a corrupting cancer at the heart of Costa Rica’s foreign policy, a tumor that had to be extirpated. President Arias’ decision to approach the PRC government and hit the reset button with China, was partly motivated by the hope that the relationship with the PRC would be a far more transparent and institutional affair than was the case with Taiwan.

These long-term gains in terms of political transparency were, of course, scant consolation for the many domestic actors that stood to lose out in the short run. The latter took the matter to the public opinion, presenting President Arias’ decision as a betrayal of human rights, and as the ultimate slap in the face of the generous Taiwanese government. That’s why negotiating a hefty assistance package from the PRC, one which included, amongst other things, the continuation of each and every project hitherto funded by Taiwan, was essential for President Arias to contain the public opinion fallout.

Was it worth it? The relationship between Costa Rica and the PRC has gotten off to a good start, despite the relatively modest economic gains seen so far. Severely affected by the contraction of the world economy, Costa Rican exports to China fell by 20% in 2008, although the data point to an equally strong recovery in the first nine months of 2009.[20] Meanwhile, investment flows from the PRC are yet to see a significant increase, having remained at very low levels in 2007 and 2008, although that is likely to change soon due to the approval of a $1 billion joint venture between the China National Oil Offshore Corporation (CNOOC) and the state-owned Costa Rican Oil Refinery (RECOPE) to modernize Costa Rica’s oil refining capacities.[21] More promising is the fact that the negotiation of a FTA between both countries is at an advanced stage and is expected to end in the first quarter of 2010. It should be said, however, that the agreement has elicited the resistance from some domestic business sectors to a degree not seen with any other trade pact negotiated by Costa Rica in the past.[22] The fear of displacement of light domestic industries is real and is intensely felt, in spite of the efforts of the negotiators to craft an agreement that acknowledges the obvious asymmetries between both economies.

The most visible effect of the relationship has been seen in the flows of official development assistance from the PRC, which have more than replaced Taiwanese aid. With nearly $180 million disbursed in the 18 months that followed the shift to Beijing, the PRC has become, by a significant margin, the largest source of bilateral assistance to Costa Rica, with almost 60% of total disbursements.[23] The vast majority of those funds come in the shape of non-reimbursable technical and financial programs. To this we have to add the purchase by the PRC of $300 million in Costa Rican bonds under very favorable conditions.

For Costa Rica, the geopolitical effects of the change have also been visible. Both the decision to approach Beijing as well as the decision to relocate the Costa Rican Embassy in Israel, have given way to an ostensible expansion of Costa Rica’s presence in Asia. Following the opening of its embassy in Beijing, new embassies have been opened or announced in India, Turkey and Singapore, and a FTA is under negotiation with Singapore. With the support of the PRC Costa Rica did reach the Security Council for the third time in 2007, handily defeating the Dominican Republic, precisely one of the countries that still maintain diplomatic links with Taiwan. Conversely, Costa Rica’s bid to join APEC, while supported by the PRC, has stalled due to the forum’s existing moratorium on the accession of new members, which will not be lifted until 2010 at earliest.

More ambiguous are the domestic political effects of the change. While it is generally recognized that the bilateral links are conducted in a more professional and institutional way than was the case with Taiwan, the relationship got off to a rocky start with the local press. Acting upon a tip from the Taiwanese secret services, a local newspaper demanded that the terms of the bond purchase agreed between the governments of the PRC and Costa Rica be made public. The secrecy of those clauses had been explicitly requested by the PRC, in light of the signaling effect that they could have for other nations in the future. Eventually, Costa Rica’s Constitutional Court ordered the publication of the documents, against the resistance of the Costa Rican government.[24] The scandal left a lingering perception that improved transparency is not necessarily one of the by-products of Costa Rica’s embrace of Beijing. This certainly had an impact on the country’s public opinion that in late 2008 by a margin of nearly 2 to 1 still opposed the decision of severing diplomatic links with Taiwan.[25]

All things considered, the question of whether Costa Rica gained in making the switch from Taipei to Beijing must be answered with a resounding yes. While not welcome by all, this move has come to be widely seen as the single most important foreign policy decision made by the country in the past 20 years.

Is it a harbinger of things to come in the rest of Central America? Almost surely yes, but not immediately. It was predicted that the Costa Rican move would spark a chain reaction in the region. So far that has not proved to be the case. Armed with promises of increased development assistance and improved trade links Taiwan has increased its charm offensive in Central America and the Caribbean. Today, amongst its Central American supporters, only Honduras lacks a FTA with Taipei.

As argued before, unlike Costa Rica, it is far from clear that the other Central American countries have a lot to gain from trade with the PRC. Here it is important to bear in mind that the bulk of Costa Rican exports towards the PRC is comprised of high tech intra-industry sales, a feature certainly linked to the presence of a large Intel plant in the outskirts of San José. That’s not easily replicable for any of the other countries. In the light of those limited trade prospects the promise of increased Taiwanese aid holds significant power to entrench the status quo.

Notwithstanding this, the generosity of the PRC’s assistance to Costa Rica in the past two years is likely to get a few hearts racing in the rest of Central America. While such generosity in unlikely to be replicated with the next country to make the switch, those aid flows will be watched closely in the region. And the same applies to foreign direct investment flows into Costa Rica. The PRC’s perceived interest in Central America as an investment destination could change significantly the economic equation that, as of today, continues to bind the rest of Central America to Taiwan.

[1] “Arias rompe con Taiwán tras sigiloso acercamiento a China”, La Nación (Costa Rica), June 7, 2007.

[2] See: Ministerio de Planificación Nacional y Política Económica de Costa Rica, Plan Nacional de Desarrollo “Jorge Manuel Dengo Obregón” 2006-2010; San José, MIDEPLAN, 2007. Available at: www.mideplan.go.cr/content/view/69/371/

[3] “País pasa sede en Israel, de Jerusalén a Tel Aviv”, La Nación (Costa Rica), August 16, 2006.

[4] On April 29, 2005, a press release signed by Ortega as Secretary General of his party, the Sandinista Front for National Liberation (FSLN), criticized in harsh terms the decision made by Nicaragua’s National Assembly to support Taiwan’s membership in the UN. The text stated that “on this issue, the Sandinista Front ratifies its consistent position, already put in practice when the FSLN was at the helm of the government and established fraternal relations with the People’s Republic of China.” See: www.conamornicaragua.org.ni/Docuementos%20Web/COMUNICADO%20ONU%20TAIWAN.doc

[5] “Arias rompe con Taiwán tras sigiloso acercamiento a China”, La Nación (Costa Rica), June 7, 2007.

[6] See the text of the agreement in: www.nacion.com/ln_ee/2008/septiembre/10/opinion1695379.html

[7] “Costa Rica’s sophisticated and successful campaign for third term on Security Council”, Central American and Caribbean Affairs, November 1, 2007.

[8] Proyecto Estado de la Nación, Estado de la Región en Desarrollo Humano Sostenible 2008; San José, Proyecto Estado de la Nación, 2008, p.550.

[9] Trade figures between Costa Rica and the PRC and Costa Rica and Taiwan from the Central Bank of Costa Rica (BCCR) and Costa Rica’s External Trade Promoting Agency (PROCOMER). See: www.bccr.fi.cr and www.procomer.com.

[10] Figures from ECLAC. See: www.eclac.org

[11] Figures from the Ministry of National Planning and Economic Policy of Costa Rica (MIDEPLAN). See: www.mideplan.go.cr.

[12] See: “La copiosa herencia de Taiwán”, La Nación (Costa Rica), June 10, 2007.

[13] Figures on Nicaragua and Honduras from: http://www.unicef.org/infobycountry

[14] “China ofrece invertir aquí”, La Nación (Costa Rica), June 9, 2007.

[15] “La copiosa herencia de Taiwán”, La Nación (Costa Rica), June 10, 2007

[16] I was offered one of those trips in May of 2006 within one week of being in office. I politely declined it.

[17] See: Casas-Zamora (Kevin), “Regulando el financiamiento político en Costa Rica: Algunas reflexiones prácticas”; in Mimi Prado, ed., Modernización del Estado Costarricense; San José, Centro Internacional para el Desarrollo Humano–Fundación Honrad Adenauer, 2004, pp.240-241; Casas-Zamora (Kevin), Paying for Democracy: Political Finance and State Funding for Parties; Colchester, European Consortium for Political Research, 2005, p.141.

[18] “Secret Taiwan fund sought friends, influence abroad”, The Washington Post, April 5, 2002.

[19] “Taiwán paga salarios en Cancillería”, La Nación (Costa Rica), May 24, 2004.

[20] Figures from PROCOMER. See: www.procomer.com.

[21] “Avalado plan con China para ampliar refinería”, La Nación (Costa Rica), September 4, 2009.

[22] See, for instance: “Industriales llaman incoherente a Ministro Ruiz por TLC con China”, La Nación, June 17, 2009.

[23] Figures from MIDEPLAN. See: www.mideplan.go.cr.

[24] “Sala IV exige al gobierno dar información de bonos chinos”, La Nación (Costa Rica), September 6, 2008.

[25] Borge & Asociados, Encuesta Costa Rica – Setiembre 2008. Available at: www.borgeya.com.