By Lucy Hornby and Luc Cohen
BEIJING/MEXICO CITY (Reuters) - Taiwan's last remaining diplomatic allies are developing increasingly tight economic ties with China, in a trend that could increase Taiwan's diplomatic isolation if the current detente between Beijing and Taipei fails.
The world's second-largest economy is gaining soft power with a series of investment commitments in Central America, home to the last significant bloc of countries that still maintain formal ties with Taiwan.
But instead of jumping on the chance to make new allies, China is stalling on Central American requests to establish diplomatic relations. The goal is to avoid galling Taiwanese voters, as Beijing is also courting the administration of the island's president, Ma Ying-jeou.
That leaves China with a trump card if cross-straits relations turn cooler under future administrations. It could then pull the diplomatic rug out from under Taiwan by engineering a mass defection of its remaining friends, analysts say.
"The economics are hot although the politics are still cold," said Zhang Zhexin, who studies Taiwan policy at the Shanghai Institute for International Studies. He estimates China has rebuffed at least five countries' requests to switch diplomatic recognition to Beijing.
"If it weren't for the desire to support Ma, we would have let them switch already. But now we are not as much in a rush as before."
Costa Rica was the most recent nation to recognize Beijing in 2007, leaving Taiwan with 23 allies ranging in size from Paraguay to the tiny Pacific island nation of Nauru.
A U.S. State Department cable released by Wikileaks indicates that Panama sought to recognize Beijing in 2009, but was rebuffed.
"It doesn't make any sense anymore economically speaking to be affiliated with Taiwan," said Margaret Myers, director of the China and Latin America program at the Interamerican Dialogue.
Beijing became more conciliatory towards Ma's ruling Nationalist Party under China's previous president, Hu Jintao, and tried to woo Taiwan's people with carrots rather than sticks.
China and Taiwan have signed a series of landmark trade and economic deals since the China-friendly Ma was elected in 2008, and the two sides have since observed an unofficial truce in the competition to lure diplomatic recognition with expensive investment deals.
Nonetheless, Beijing - the People's Republic of China (PRC) - regards separately ruled Taiwan as a renegade province, to be reunited with force if necessary. The two have been governed separately since the Communist Party won the Chinese civil war in 1949, and the Nationalists fled to Taiwan.
"The PRC now wants to be in a position without violating the truce of effectively being able to say ... 'we are essentially in a position where we can take away the last remaining pieces of your diplomatic legitimacy'," said Evan Ellis, assistant professor at the William J. Perry Center for Hemispheric Defense Studies in Washington, D.C.
BUSINESS TIES THAT BIND
A number of Central American "dream" projects might have strategic interest for China as it seeks cheaper shipping routes for gas, ore and soybeans from the Caribbean or the Atlantic ports. But the greater allure seems to be for Central American politicians, who envision Chinese funding for their grand plans.
Daniel Ortega, president of Nicaragua, which has ties with Taiwan, has granted a 50-year concession to a Chinese telecoms businessman with no experience in infrastructure projects, to build a canal from the Caribbean to the Pacific Ocean that would challenge the Panama Canal's dominance. The price tag for this project, long desired by Nicaragua, is about $40 billion.
Not to be outdone, the president of Honduras, which also has ties with Taiwan, announced that China Harbour Engineering Corp (CHEC) was conducting a feasibility study for a $20 billion port and rail project, also to cross the isthmus. China Harbour executives said they agreed to do the study, but have not yet received a contract.
Meanwhile, plans for China Railway Group to build a trans-isthmus rail and port project in Colombia, which recognizes Beijing, have seen little progress since they were announced by President Juan Manuel Santos in 2010, diplomats say.
And Guatemala is trying to tap Taiwan to finance the revival of its national train system, which has not operated for several years. Taiwan, which has ties with Guatemala, has agreed to develop a blueprint.
Beijing's single Central American ally, Costa Rica, has asked for help developing a special economic zone in impoverished port regions.
Still, in practice, Chinese firms prefer to take less risky roles as cost-effective contractors on projects that range from American-backed power plants in Guatemala to Panamanian port projects.
"In terms of our business development, we can participate in a project regardless of whether there is diplomatic recognition," said CHEC vice president Shi Yingtao. His company has worked on Panamanian port projects for Taiwanese shipping firm Evergreen Marine Corp.
While Chinese money might threaten Taiwan's diplomatic standing, Taiwan's vibrant business community has not lost out. They continue to operate export-oriented factories in Southeast Asia - despite a lack of diplomatic recognition - and in mainland China, where their investments were a major driving force for the spectacular growth of the past three decades.
In fact, politically driven overseas projects by the Taiwan government have in the past failed to attract significant interest from Taiwan businesses, to Taipei's embarrassment.
"They spent a lot of money over the years competing for recognition but without much result. There was a very low return on investment," said Chin-Ming Lin of the Graduate Institute of the Americas at Tamkang University in Taiwan.
(Additional reporting by Mike McDonald in Guatemala City, Gustavo Palencia in Tegucigalpa, Ivan Castro in Managua, Isabella Cota in San Jose and Lomi Kriel in Panama City; Editing by Robert Birsel)