Monday, August 17, 2020

What are Taiwan, China, and the United States Doing in Somaliland?

Typical sign for Taiwan's representative offices
(revised August 20). Taiwan has been courting Somaliland, a breakaway region of the failed state of Somalia. As Wikipedia puts it, "Somaliland, officially the Republic of Somaliland, is a self-declared state, internationally considered to be part of Somalia." 

Some were wondering if China would react with a heavy hand.

I originally thought they would ignore it. But that didn't happen. As Eric Olander has noted at the China Africa project: China's response was delayed and so far remains rhetorical, but they took (sharp) notice.  

Why did China not ignore this new office, as it has Taiwan's establishment of representative offices around the world? This is not simply a Taiwan-Somaliland-China-Somalia dispute. It involves the US. And it involves Hong Kong. 

What Happened in Somaliland?

What happened in Somaliland was Taiwan's establishment of a representative office, not an embassy. This is common practice for Taiwan around the world in the countries that have switched recognition (i.e. official diplomatic ties) from Taiwan to Beijing. (The photo here is courtesy of Wikipedia and shows a similar office in the UK.)

Taiwan has had a representative office just like this since 1979 in Washington, DC and in 12 other locations around the United States. It has similar offices in at least 57 other countries that are important for Taiwan's trade and consular activities. 

Beijing doesn't fight these, aside from pressure to have them located in commercial centers (e.g. Lagos, in Nigeria's case) rather than diplomatic capitals (Abuja). After all, despite the tension of geopolitics, the island and the east coast of China 100 miles away have had their own thick web of family and business ties: around $180 billion in cumulative investment from Taiwan into China as of 2019. The world has welcomed investors from Taiwan, and trade with Taiwan, just as China has. 

It's no doubt annoying to Beijing, but the office established in Somaliland (a region of the legally recognized state of Somalia) is juridically no different than the 12 regional offices Taiwan has in the United States. Or the dozens of similar representation offices in Nigeria, South Africa and around the world. It was not the act of a sovereign state. 

Diplomatic recognition with a real, internationally recognized sovereign state, is a different kettle of fish. And Taiwan gaining an official seat in international organizations that are reserved for states: that's politics, not commerce. That's why Beijing fights with tooth and nail to keep Taiwan out of international organizations. It's not just de facto recognition, it's de jure.

Then why did Beijing react so strongly this time? It's about the United States, and it's about Hong Kong. Somaliland (like Hong Kong) was originally a British colony, “one of Britain’s least rewarding possessions”.  The timing of the Taiwan courtship, and the US connection to this, has to be seen against the background of China's recent crackdown on Hong Kong's hopes for increased autonomy.

About the United States role, here's Taiwan's press release on the opening of the office: "Taiwan’s Minister of Foreign Affairs Joseph Wu (吳釗燮) posted on Twitter on Aug. 9 to welcome [the arrival of Taiwan's representative in Somaliland] and thank the U.S. National Security Council for its positive feedback on the emerging ties between Taiwan and Somaliland."

It's helpful also to remember--especially these days as we seem to be sliding blindly into a new Cold War--how the Taiwan-China diplomatic struggle came about, and the role the United States played. So here's a quick history lesson.

Appendix: Short History of US-China-Taiwan Relations and Why it Matters for Africa

I lived in Taiwan from 1979 to 1980 doing four hours a day of intensive Mandarin and teaching English to support myself. I remember this as one of the happiest years of my life. But my time in Taiwan was also a time of great uncertainty for the island. 

At the end of 1978 the United States had finally established diplomatic ties with Beijing, breaking them with the Republic of China (Taiwan). The US withdrew the large military garrison we had established there. No one was sure what would happen next.

It seems to be largely forgotten in Washington today that the "Taiwan issue" was jointly created by Japan, which took the island of Taiwan from China in 1895 after attacking the crumbling Qing empire (see 1895 Treaty of Shimonoseki) and the United States, which used our naval forces to (peacefully) intervene in the Chinese civil war during the 1950s.

Here's a quick reprise of our US role. 

In 1945, after losing World War II, Japan returned the island of Taiwan to China, then governed by the Kuomintang (KMT, the National People's Party), which was fighting a civil war against the Chinese Communist Party (CCP). 

In 1949, when the communists were about to win the war in China, the KMT fled to Taiwan, 100 miles offshore. 

In 1950, after the outbreak of the Korean War, the US established a naval blockade between Taiwan and mainland China, sending the Seventh Fleet to patrol the Taiwan straits. We then signed a mutual defense treaty with the KMT in Taiwan. We organized an international trade embargo against China that lasted for 21 years (Nixon lifted it in 1971). And between 1949 and 1971, the United States blocked Beijing from taking the China seat in the United Nations, keeping the KMT government artificially propped up as "China". 

So why does all this Cold War history matter for Africans? 

First, it was largely the African governments of countries emerging from colonialism in the 1960s that provided the votes in 1971 that enabled Beijing to be seated at the United Nations. The 54 legally recognized countries on the African continent were (and remain) hugely important in China's diplomacy. 

Second, the Cold War, of course, is no longer a distant memory. And the fingerprints of the Trump administration are not a mystery in the Somaliland story.

Let's hope that the ripples from this little story in far away Somaliland do not go down in history as one of the first shots of something worse than a cold war. 

It can't be repeated often enough that in the Cold War as it was fought across Africa--from Mozambique to South Africa, from the Congo to Angola--there were no winners when the elephants fought. The grass was trampled.

This post was revised on August 20 to reflect the Chinese reaction to Taiwan's move and to note the relationship between current events in Hong Kong and Somaliland's historical status as a British colony. 

 




Monday, August 3, 2020

Guest Post – Investment in Africa: China vs “traditional partners” – Part 2

This guest post, the second of two, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS). [1]

In the first part of this post, I used Eurostat (the statistical office of the European Commission) statistical data issued in March 2020 to assess the investment efforts of traditional partners in comparison with China. My conclusion was twofold. It was, of course, the confirmation of the importance of China's role with the caveat about the effects of offshore financial centres. I will discuss this further in the first section of this post. Secondly, it appeared that the traditional partners had by no means forsaken Africa as a narrative repeated ad nauseam would have it. The question is therefore whether or not European countries show a preference for Africa. That will be the second point I will address.

Offshore Financial Centres

There is no single, clear and objective criterion for identifying a country as a tax haven or an offshore financial centre. What will often distinguish such a haven will be that it enables companies (but also individuals) to carry out tax and financial operations otherwise considered fraudulent in their own country or in a third country.

In the case of the Netherlands, a report commissioned in 2016 by the Dutch Ministry of Foreign Affairs concluded that at least one third of companies operating in developing countries’ extractive sector were directly or indirectly financed or owned by Dutch shell companies on behalf of multinationals. These multinationals, from a wide range of countries, used these shell companies for the sole purpose of avoiding corporate income taxes payable to developing country governments. According to Eurostat, in this highly opaque background, during the six years 2013-2018, almost a third of Dutch investment flows were intended for war-torn Libya. Regardless of the statistical weight of flows labelled as Dutch, it is impossible to ascribe them to any specific country or even to consider them as genuine investments. 

Hong Kong is not only a tax haven but also a judicial haven (a territory, which is not subject to the laws commonly accepted in most other countries). It is also a bridge through which China has more easily connected with the outside world. Official Chinese statistics reveal that, at the end of 2018, 81% of China's outward FDI stock (present value of accumulated annual FDI flows) is reportedly held in tax havens, of which Hong Kong accounts for more than two thirds (69%). This phenomenon is not expected to stop in the coming years even if the share of annual flows decreases slightly. Hong Kong statistics tell us how these funds are then redirected from the former colony.

Hong Kong's outward direct investment statistics are published online by the Census and Statistics Department, Table 1 gives the figures for the last four years (2015,  2016, 2017 and 2018). These figures show a very significant distribution of destinations (see Table 2). The first thing to note is that, despite the change in tax rules benefiting foreign companies on the Chinese mainland, the old practice of round-tripping seems to be perpetuated to such an extent that 62% of Hong Kong's FDI flows in 2018 were rerouted to mainland China. It is also noteworthy that 44% of Hong Kong's FDI stock has been accumulated in tax, banking, and even judicial havens (offshore havens), including the Netherlands. This means that only 11% of Hong Kong's FDI stock has been accrued in countries other than China and the six mentioned tax havens, i.e. accrued in 190 countries, 54 of which are African. Furthermore, only 2.5% of Hong Kong's total FDI stock is invested in the manufacturing sector. As such, the potential impact on the industrialisation of the African continent would be very limited, even if a small boost might be significant in some countries. 



China vs Africa

In a previous post in the CARI Blog (China in Africa: Much Ado about Investment) and elsewhere, I made it clear that China's investment in Africa is a very small percentage of Chinese outward investment. The same is true for all other countries investing in Africa: according to UNCTAD, in 2019, only 2.9% of global FDI flows went to this continent of 54 countries. This is not a one-time drop since Africa's inward FDI stock was only 2.6% of the world stock in 2019. No wonder. Most FDI originates from developed countries (76%) which invest primarily in other developed countries (67%). The question then is whether traditional partners treat Africa differently from the way it treats China (see Table 3).


In Table 3, I have included only European countries with a colonial past in Africa, except for the Netherlands because of its investments' uncertain origin (see supra). For comparison, I have added the USA and Japan for which Eurostat gives figures. In 2018, the stock of European direct investment (28 countries) in Africa was one and a half times higher than that of the same 28 countries in China. The stocks of France, the United Kingdom, Italy and Spain in Africa would have been about two and a half times higher than their investment stock in China. As for Portugal, while it invests in Africa, it recorded no investments in China. 

Conversely the German FDI stock in China is about six times higher than in Africa. Belgium, for its part, expresses an infinitesimal preference for China, but neither Africa nor China are important targets for its FDIs. As a rule, northern and eastern European countries (with the exception of Germany) hardly invest in Africa or China. Except for Belgium, European countries that invest preferentially in Africa are maritime countries with an African colonial past. 

I would posit that history and geography are therefore very significant factors in explaining such a situation. Therefore, it comes as no surprise that the United States and Japan are targeting China instead of Africa for investment: both were much more active players in China before 1949 than European countries (except the United Kingdom). 

The question that might now arise is whether comparisons between countries or groups of countries still make sense from an economic point of view when multinationals, including Chinese ones, enjoy de facto autonomy that international institutions can hardly control.