The Marshall Islands and Palau are two of the three Pacific nations that have especially close economic and security partnerships with the United States through Compacts of Free Association. The concern for the United States is what China can do with an increasing regional presence, and how the financial vulnerabilities of Pacific island nations create openings for Beijing that could undermine regional stability.

Nauru’s decision this week to switch diplomatic recognition from Taiwan to China is an accomplishment for Beijing — and a poke in the eye for Taipei’s newly elected government. And it is part of an accelerating trend. Six Pacific countries recognized Taiwan six years ago and now — after Kiribati and Solomon Islands switched in 2019 — the number is half that. 

Diplomatic Recognition for Cash

Nauru is an eight-square-mile central Pacific island nation with a bleak history. Originally a German colony, it came under Australian administration through a United Nations trusteeship that exploited the country’s major resource — phosphate. The country’s history since independence is a riches-to-rags tale. In the 1970s, phosphate sales made Nauru one of the richest countries in the world on a per-capita basis. Mining turned the island’s interior into a pockmarked wasteland, with the country’s roughly 10,000 people living along the coast. Nauruan leaders did not steward their resources well, frittering money on anything from failed property deals to a dud musical about Leonardo da Vinci to a Lamborghini for a police chief. 

By 2000 the country was destitute. Its leaders began to exploit the single valuable asset they had remaining: their country’s sovereignty. Nauru eased banking and tax regulations to draw foreign funds and became a money-laundering haven, home to 400 banks in the 1990s. In 1998 alone, a Russian central bank official estimated, Russian mafias laundered $70 billion through these entities.  

Money has often influenced Nauru’s foreign policy and choices of whom to diplomatically recognize. The country’s leaders have a darkly entrepreneurial history of exploiting their nation’s sovereignty and allowing other states to do the same. Nauru recognized Taiwan up until 2002, recognized China from 2002-2005, and recognized Taiwan again until this week. Nauru has played the recognition game in Europe, too. It recognized the independence of Kosovo when the former Serbian province declared independence in 2008 but de-recognized it in 2019. Nauru is one of only four countries that recognizes the sovereignty of Abkhazia and South Ossetia, breakaway parts of Georgia. Shortly after it announced that decision, Russia — which backs those territories — provided Nauru with $50 million in humanitarian aid. 

Last year, financial difficulties arose. For years, Nauru has financed as much as two-thirds of its state budget with fees paid by Australia for Nauru’s hosting of an Australian government processing center for people seeking asylum in Australia. In June, Australia evacuated those refugees (while continuing to maintain the offshore processing center) and the reduction in fees created a budget shortfall that Taiwan could not help Nauru to fill. That paved the way for the switch in recognition. Kiribati and Solomon Islands also switched amid financial issues: Kiribati because Taiwan wouldn’t buy it commercial aircraft and Solomon Islands reportedly in exchange for $8.5 million in development funds.

Ironically, the last time Nauru and China made headlines together they were at diplomatic loggerheads. In 2018, Nauru hosted the annual Pacific Islands Forum, the region’s preeminent intergovernmental organization. When the Chinese delegation tried to interrupt the prime minister of Tuvalu, Nauru’s president, Baron Waqa, didn’t let them speak, and the Chinese delegates stormed out of the meeting. Waqa labelled China’s envoy a “bully” and demanded an apology. It remains to be seen how Waqa, who is expected to become the next secretary-general of the forum, and who has long been pro-Taiwan, will handle diplomatic relations with a nation he so heavily criticized.  

Implications for the Pacific — and U.S. Interests

Establishing new embassies can allow China to conduct more extensive influence activities. Last year outgoing Federated States of Micronesia President David Panuelo described “political warfare” by China through its embassy, including clandestine intelligence operations, interference in government affairs and bribery of government officials to further Beijing’s interests. These activities undermined the sovereignty of the Federated States of Micronesia, according to Panuelo.

The United States is seeking to prevent China from gaining influence in the Freely Associated States, where Washington has key interests. These countries — which include the Federated States of Micronesia, the Marshall Islands and Palau — have Compacts of Free Association with the United States that allow them to receive U.S. grant aid, security guarantees and other benefits. In exchange, the U.S. military has the right to construct military facilities there and can deny third parties use of the islands’ airspace, territories and territorial waters for military purposes. The Freely Associated States, already important because of U.S. defense installations, are only becoming more strategically relevant as regional tensions rise.

Without formal diplomatic ties to Palau and the Marshall Islands, China engages with these countries clandestinely or through proxies. That has included using Chinese triads and businesspeople to further China’s interests and attempting to influence the media environment. A USIP team visiting the Marshall Islands last year learned that the caretakers of China’s old embassy were holding private meetings with the Marshallese government. (The country itself once recognized Beijing from 1990-1998.) But the extent of China’s influence activities in the Marshall Islands and Palau would be far greater if they switched recognition, as the experience of the Federated States of Micronesia shows.

Support for Taiwan currently appears robust in the Marshall Islands, Palau and Tuvalu. This month the Marshall Islands re-elected President Hilda Heine, a staunch Taiwan ally. Her predecessor, David Kabua, also maintained close ties to Taiwan. Palauan President Surangel Whipps Jr. has been a vocal supporter of Taiwan, as has Tuvalu Prime Minister Kausea Natano. Tuvalu is holding elections this month. A factor in the campaign will likely be a security agreement signed by the outgoing government that would give Australia a veto over any security arrangement Tuvalu might seek with another state — diplomatic language for trying to stifle China. 

However, support for Taiwan is not guaranteed anywhere. First, national elections this year could shift policy in Tuvalu or Palau. Second, while support for Taipei in all three countries appears to stem from an affinity with Taiwan and satisfaction with Taiwanese aid and projects, the recognition question is fundamentally one of pragmatism — and money. 

As Nauru, Kiribati and Solomon Islands demonstrate, budgetary stress is a significant vulnerability that can lead Pacific island countries to switch recognition quickly from Taiwan to China. Both the Marshall Islands and Palau may soon be in dire financial straits, having signed agreements with the United States last year to renew funding under the Compacts of Free Association, but the money hangs on the United States’ own budgeting process. Absent funding, even loyal Taiwan allies like the Marshall Islands and Palau may have to reconsider their policies.