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KOROR, PALAU— Empty hotel rooms, idle tour boats and shuttered travel agencies reveal widening fissures in the tiny Pacific nation of Palau, which is caught in an escalating diplomatic tug-of-war between China and Taiwan.
Late last year, China banned tour-group traffic to the idyllic tropical archipelago, branding it an illegal destination due to its lack of diplomatic status.
As China extends its influence across the Pacific, Palau is one of Taiwan’s 18 remaining allies worldwide and is under pressure to switch allegiances.
“There is an ongoing discussion about China weaponizing tourism,” said Jeffrey Barabe, owner of the Palau Central Hotel and Palau Carolines Resort in Koror. “Some believe that the dollars were allowed to flow in and now they are pulling it back to try and get Palau to establish ties diplomatically.”
At the commercial center of Koror, the Chinese pullback is obvious: Hotel blocks and restaurants stand empty, travel agencies are boarded up and boats that take tourists to Palau’s green, mushroom shaped Rock Islands are docked at the piers.
Prior to the ban, Chinese tourists accounted for about half the visitors to Palau. Of the 122,000 visitors in 2017, 55,000 were from China and 9,000 from Taiwan.
Chinese investors had also gone on a buying frenzy, building hotels, opening businesses and securing large swaths of prime coastal real estate.
The decline since the ban was announced has been so sharp, charter airline Palau Pacific Airways announced in July it would terminate flights to China starting in September.
Beijing was “putting an effort to slow or stop tourists going to Palau,” said the Taiwanese-controlled airline, which has experienced a 50percent fall in bookings since the China restrictions began.
One-China principle
Beijing has previously used its tourism clout as a diplomatic tool, last year halting tours to South Korea after Seoul installed a controversial US missile defense system.
Asked if designating Palau an illegal destination was a way of putting pressure on the tiny nation to move away from Taiwan, China’s foreign ministry said relations with other countries had to happen under the framework of the so-called one-China principle.
“The one-China principle is the precondition and political foundation for China to maintain and develop friendly cooperative relations with all countries around the world,” the foreign ministry said in a statement to Reuters, without specifically addressing the Palau issue.
The one-China principle is a core government policy that states Taiwan is an inseparable part of China.
Taiwan’s Ministry of Foreign Affairs says China has lured four countries to switch diplomatic recognition from Taipei to Beijing in the past two years by offering generous aid packages and investment.
“While Taiwan faces serious diplomatic challenges, the government will not bow down to pressure from Beijing,” the ministry said on its website.
“Taiwan will work with friendly nations to uphold regional peace and stability, and ensure our rightful place in the international community,” it added.
Shift in focus
Palau President Tommy Remengesau Jr. said there had been no official communication from Beijing on the tourism restrictions.
“It is not a secret that China would like us and the diplomatic friends of Taiwan to switch to them, but for Palau it is not our choosing to decide the one-China policy,” he told Reuters.
Remengesau, whose second and final presidential term ends in January 2021, said Palau welcomed investment and tourism from China but the current administration’s principles and democratic ideals aligned more closely with Taiwan.
Palau was adapting to the China pullback by focusing on higher spending visitors rather than mass tourism, which had taken a toll on the environment, Remengesau said.
“The reality is that numbers did not mean big revenues for Palau. It actually made us more determined to seek the policy of quality versus quantity,” said Remengesau, who in 2015 declared most of Palau’s territorial waters a marine sanctuary the size of California.
Cementing influence
Former Palau government officials say Beijing is trying to cement its influence in the region ahead of the expiry of the Compact Funding agreements between the United States, the Federated States of Micronesia, the Marshall Islands and Palau in 2023 and 2024.
The United States provides around $200 million a year on average to the Compact states and is responsible for the defense of the three countries, which each hold a seat in the United Nations.
Last December, the United States belatedly approved $124 million in assistance for Palau through till 2024, but has not announced any plans to extend the Compact agreements.
“The United States and China are not zero-sum competitors,” a US Department of State spokesperson told Reuters. “However, we have concerns about the sustainability of debt loads for countries highly indebted to China, as well as the environmental, social, or labor conditions that often come along with Chinese-financed projects.”
China’s priorities
A June security report from the US-China Economic and Security Review Commission said Beijing’s increasing economic engagement in the Pacific was driven by its diplomatic and strategic priorities, including reducing Taiwan’s international presence, gaining access to natural resources and developing a blue water Navy.
Palau receives $10 million annually from Taiwan, as well as education and medical scholarships.
China has quickly become one of the dominant economic players in the Pacific, spending billions of dollars in trade, investment, aid and tourism across Micronesia and the broader region.
Beijing vs Washington
China’s total goods trade with member countries of the Pacific Island Forum reached $8.2 billion in 2017 versus $1.6 billion for the United States, according to the US security report. Beijing’s concessional loans to Pacific islands have also risen sharply.
In contrast, Washington’s efforts to strengthen its position in Palau have been largely superficial, according to locals who cite examples of bigger US flags on their official vehicles and increased public signage.
Chinese activity, however, has slowed significantly.
Barabe, the resort owner, said Chinese investors had secured 99-year leases for around 60 hotel projects prior to 2017, but construction has been largely put on hold.