In an announcement that alarmed many people in Taiwan, Paraguay's President Mario Abdo Benitez urged Taipei to invest $1 billion (€1.02 billion) in his country as he resists domestic pressure to switch diplomatic recognition to the People's Republic of China (PRC).  

In an interview with the Financial Times newspaper last week, Abdo said agricultural producers in the South American nation have been urging the government to gain access to the Chinese market amid falling meat prices.

"We are working with the president of Taiwan so that the Paraguayan people feel the real benefits of the strategic alliance," he told the FT during a trip to the US. "There is Taiwanese investment of more than $6 billion in countries which don't have diplomatic relations with Taiwan, we want from that $1 billion to be put in Paraguay."

Abdo's comments raise concerns in Taiwan about potentially losing another diplomatic ally to China. Since 2016, four countries in the region have switched diplomatic recognition from Taiwan to China, reducing the number of Taipei's diplomatic allies to only 14 worldwide.

Paraguay denies tying funding to recognition 

China views self-governing democratic Taiwan as part of its territory and vows to annex it by force if necessary. The government in Taipei rejects Beijing's claim, insisting Taiwan is already a de facto sovereign nation.

China has tried hard to stop any international recognition of the island and only 14 nations worldwide currently have formal diplomatic relations with Taiwan.

Beijing often poaches Taipei's diplomatic allies by promising increased trade, loans and investment. Paraguay is currently the biggest country by size that still recognizes Taiwan as a country and losing it would mean that Taiwan no longer has diplomatic allies in South America.

After the Paraguayan president's comments, the nation's Foreign Ministry immediately came out to reaffirm the diplomatic relationship with Taiwan, saying "at no time during the interview did the president refer to conditioning the relationship with Taiwan, much less subjecting it to some amount."

Taiwan's Foreign Ministry also said officials from both sides had cleared things up, and that there were no strings attached to the relationship.

However, Francisco Urdinez, a political scientist at the Pontifical Catholic University of Chile, said the Paraguayan president's remarks could be an indication that Paraguay was considering other alternatives.

"I think Paraguay is trying to show ambivalence and they want to show that Paraguay is not 100% committed to maintaining ties with Taiwan," he told DW.

"We have been expecting Paraguay's agricultural businesses to start lobbying in favor of a diplomatic switch. The reason is quite obvious, as it has to do with the comparative advantages and how much the businesses can benefit from having a larger market to sell their products," he added. 

In a paper published in the journal Foreign Policy Analysis last year, Urdinez and his co-author Tom Long estimated that Paraguay's diplomatic relationship with Taiwan may have cost the South American country aid and investment from China equivalent to 1% of its GDP between 2005 and 2014. "Paraguay received nil from China," they wrote in the paper. "This was not offset by flows from Taiwan."

Taiwan's dilemma

While Taiwan has sent two investment delegations to Paraguay in 2022, Urdinez stressed that the Paraguayan president's call for more investment is a huge problem for Taipei.

"Compared to China, the Taiwanese government doesn't have the leverage over private sector to force Taiwanese companies to invest $1 billion in Paraguay," the expert said.

"Beijing does have leverage over their state-owned enterprises and through government-to-government deals, they can make sure that some capital may flow. For Taiwan, it's a tricky situation that they can't guarantee that investment may flow to Paraguay. That depends on the business environment and opportunities," he added. 

Trade between Taiwan and Paraguay hit a record $196 million in 2021, but it represented less than 1% of the South American nation's total trade that year, according to Bloomberg.

Paraguay, which has a GDP of about $39 billion, relies heavily on agriculture, particularly on the exports of soybeans and beef.

Given that the country is already one of the largest beef exporters to Taiwan, some experts say there is limited room for bilateral trade to expand further.

"On the contrary, Paraguay always has the desire to gain access to the Chinese market, since it's one of the largest markets in the world and the beef consumption in China is also high," said Kung Kwo-Wei, director of the Graduate Institute of Latin American Studies at Tamkang University in Taiwan.

Kung added that while Taiwan keeps sending trade delegations to Paraguay and works hard on procuring more products from there, the list of products that Taiwan can buy is limited. "I think the Paraguayan president should re-evaluate which sectors in Paraguay can other countries invest in or what opportunities exist between Taiwan and Paraguay," he told DW.

Apart from the economic reasons, Urdinez said, Paraguay's struggle to get enough COVID-19 vaccines has also had an impact on the public opinion about its diplomatic alliance with Taiwan.

Only about 50% of the Paraguayan population have so far been fully vaccinated, which is below the global average of 63.5%. "They couldn't access the Chinese vaccines and they have had to buy Chinese doses through third parties," he pointed out. "Amid COVID-related deaths, it became a very important issue."

What's Taiwan's diplomatic strategy moving forward?

While both governments say the bilateral relationship between Taiwan and Paraguay remains strong, Urdinez believes if there is a change of guard in Paraguay after next year's presidential election, it is very likely that the topic of switching diplomatic recognition will resurface.

"The left-wing coalition in Paraguay is very clear about their intention of switching diplomatic recognition to China, even though Taiwan has been doing its best to stop that from happening," he said.

Sana Hashmi, a fellow at the Taiwan-Asia Exchange Foundation in Taipei, said that losing more diplomatic allies could be a setback for Taiwan. And she stressed that it is important for the democratic island to consider what diplomatic strategy might be beneficial for itself moving forward.

"I believe relationship with diplomatic allies should be on the basis of mutual benefits," she said.

"We also have to see the tangible benefits. I believe that Taiwan needs to reach out to countries that have more say and think about highlighting its strength and motivate them to collaborate with Taiwan. For example, when the US, Japan or India mentions Taiwan, it becomes a bigger news and it has impact and weight," she argued.

Kung from Tamkang University however believes Taiwan should pull out all the stops to maintain its relations with existing diplomatic allies. "In order to participate in the international community, you need support," he said.

"While the US, EU and Japan support Taiwan now, there is a big difference between having 20 to 30 diplomatic allies helping you make your voice heard in the United Nations versus having only 10 or 8 allies speaking up for you."

Edited by: Srinivas Mazumdaru