Caribbean nations get caught in China-Taiwan tug of war

Grenada, a trio of small Caribbean islands and a popular tourist destination, was awash in debt in 2005.  When China came calling with an offer of millions of dollars in aid if the country cut ties with diplomatic rival Taiwan, Grenada took the deal.  And it was rewarded: the nation received a new cricket stadium and other pricey tokens of appreciation.

But seven years later, playing up to China’s game of dollar diplomacy has come back to haunt Grenada. Taiwan is now calling in loans it made when the countries were diplomatic allies, signaling that the battle between China and Taiwan is still alive and well in the Caribbean, and directly impacting Grenada’s lifeline: tourism.

Some 426,000 tourists arrive in Grenada by plane or cruise ship each year – more than four times the country's entire population. Taiwan’s move has left the local government scrambling to prop up its independent ports authority and avert disastrous airport shutdowns, as money previously used for upkeep is funneled into loan payments.

Dollar diplomacy

The People’s Republic of China has long tried to isolate Taiwan from the international community by convincing countries to cut diplomatic ties.

The two are separated by the Taiwan Strait, and China views Taiwan as a rogue state. During the 1990s and 2000s, they engaged in a diplomacy race that included offering aid to smaller countries in exchange for their diplomatic allegiance. The competition largely ended in 2008 when Ma Ying-jeou was elected president of Taiwan and instituted a policy to improve relations across the strait.

But much to Beijing’s consternation, 23 countries retain ties with Taipei, including 12 in Central America and the Caribbean, leading to cases of countries bidding out their diplomatic ties.

“No doubt, some countries in the Caribbean and Africa have tried to milk more loans from either Taipei or Beijing by playing one against the other,” says Zhiqun Zhu, a political scientist at Bucknell University in Pennsylvania.

St. Lucia, for example, dropped its ties with Taiwan in 1997 and then restarted relations with it in 2007.

Vulnerable and in debt

Taipei and Beijing may have struck a diplomatic truce, but that has not stopped their battle for recognition from these smaller countries, and money continues to pour in. Last year, China boasted its largesse by pledging to lend $1 billion to Caribbean countries for development projects.

Many Caribbean countries have been particularly vulnerable to the lure of dollar diplomacy, in part, because they carry massive amounts of debt.

“These are among the most indebted countries in the world,” says Norman Girvan, an economist and professor at the University of the West Indies in Trinidad. “When you have a country that depends heavily on tourism and it faces a severe downturn, I’m not surprised that a country like Grenada can’t repay its loans.”

Of the 10 countries with highest debt to gross domestic product ratios, four are found in the Caribbean, including Grenada, according to International Monetary Fund data.

After a string of bad economic setbacks – including devastating hits by hurricanes Ivan and Emily in 2004 and 2005 – Grenada stopped paying back some $28 million in loans it received from Taiwan, according to court documents.  A judge in New York, who has jurisdiction under terms of the loans, ruled Grenada owes $25.9 million in outstanding principal and interest to Taiwan, and that Taiwan's Export-Import Bank could go after the money via the US legal system.  

Now, the money airlines and cruise ship operators previously paid to Grenada in landing and docking fees is going to pay off the loans, sapping the country of funds to keep its air and sea ports running. Virgin Atlantic, Delta, and British Airways recently began paying into a court-established escrow account instead of the Grenadian ports authority.

"The government has made it clear that it will do everything necessary to keep the airport from closing,” says Richard Simon, press secretary for Prime Minister Tillman Thomas. That includes loans and legal maneuvers, Mr. Simon says.

The government is also asking other Caribbean governments to help arrange a meeting with the Taiwanese to rework the original loan terms or create a payment schedule.

The Thomas administration says Taiwan’s position is, in part, retribution for the way the two countries split, but that decision was made by the previous Grenadian administration.

"We think some of this is due to the way the switch was undertaken," Simon says. “At the time it was not done properly. It was kind of done in the dark,” he says referring to granting diplomatic ties to Beijing.

Grenada’s debt, which stood at 99 percent of its GDP in 2010, according to IMF numbers, has left it with little wiggle room to repay Taiwan.

“I was a little surprised that the Ma administration did not withdraw the case,” Mr. Zhu, the political scientist, says. “It was not a particularly large sum of money.”

But, Zhu says, this case underscores the dangers in playing the diplomatic game.

“If there is a policy change either from Beijing or Taipei or both, these small countries may not get what they were promised,” he says, “which may lead to economic and diplomatic troubles.”