Nicaragua’s diplomatic switch to recognize China over Taiwan will likely increase investment in Nicaragua and help make Central America a focal point of the U.S.-China competition for global influence. Nicaragua’s foreign minister announced on Dec. 9 that the country had decided to break relations with Taiwan and would no longer formally recognize the island as separate from China. Specifically, he said Nicaragua recognized the “People’s Republic of China as the only legitimate government that represents all of China, and Taiwan is an inalienable part of Chinese territory.” The U.S. State Department condemned the move and said it could not “reflect the will of the Nicaraguan people,” referring to the widely disputed Nov. 7 election that saw Nicaragua’s 76-year-old president Daniel Ortega – already the longest-standing leader in the Americas – secure yet another term.

Following Nicaragua’s switch, Taiwan now has 15 remaining allies in the world. Eight of those countries are in Latin America and the Caribbean, which include Belize, Guatemala, Haiti, Honduras, Paraguay, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines.
Taiwan and Nicaragua have had diplomatic relations since 1990. Taiwan is also currently Nicaragua’s largest bilateral donor, financing 27 projects in food production in the Central American country worth between $30-50 million.
Nicaragua is likely attempting to build closer relations with China in an effort to shield itself from the potentially devastating economic effects of losing its largest trading partner, the United States, to the White House’s anti-corruption push. Since taking office in January, the administration of U.S. President Joe Biden has focused on promoting economic development and rooting out graft in Central America as a way to curb migration flows to the United States by improving living conditions in the region. This push has seen the White House impose sanctions on high-level officials alleged to be involved in corruption in Nicaragua, El Salvador, Honduras and Guatemala. In Nicaragua, in particular, Washington has also threatened to impose trade sanctions and kick the country out of its Central America Free Trade Agreement (which also includes Guatemala, El Salvador, Honduras, Costa Rica and the Dominican Republic) in response to Ortega’s continued power grabs. In addition, the White House said it would seek to partner with Canada and the European Union to increase economic pressure on the Ortega administration.

On Nov. 10, shortly after Ortega’s disputed electoral victory, Biden signed the Reinforcing Nicaragua's Adherence to Conditions for Electoral Reform Act of 2021, which allows the United States to impose sanctions on high-level officials in Ortega’s ruling party, restricts multilateral bank loans, and requires further intelligence reports on military ties between Russia and Nicaragua.
Over the past year, the United States and European Union have both sanctioned high-level Nicaraguan officials over their alleged involvement in corruption and undermining democracy in the Central American country.
While China will likely invest in Nicaraguan development projects, Beijing is unlikely to pursue significant economic integration. Dropping recognition of Taiwan will enable Nicaragua to join China’s massive Belt and Road initiative, as well as issue memorandums of understanding on areas of cooperation with Beijing. This will likely see increased Chinese collaboration on infrastructure projects for ports and roads in the country, as well as the further establishment of special economic zones, potentially leading to hundreds of millions of dollars of promised investment for Nicaragua. Beijing may also invest in mine development to extract the country’s untapped copper and zinc reserves. However, the two countries’ economic integration will likely be limited since Nicaragua’s current exports are concentrated in coffee, sugar and textiles – all products China can import for cheaper from Asian countries, thus leaving little room for a significant increase in bilateral trade.

In Latin America, China is primarily interested in securing metals, minerals, hydrocarbons, grains and oilseeds.
Increased Chinese investment may also reignite talks of building a Nicaraguan canal — a long-imagined initiative to reduce China’s reliance on the Panama Canal in accessing South American exporters Brazil and Argentina. However, the project will continue to face considerable logistical challenges that make its construction highly unlikely.
More broadly, Nicaragua’s switch to China will further solidify Central America’s emergence as a theater for U.S.-China strategic competition. As the Biden administration continues to increase sanctions pressure on Central American countries as part of its anti-corruption push to curb migration, governments in the region may look to China in an effort to reduce economic dependence on trade with the United States. Beijing, for its part, will likely be quick to embrace the opportunity by increasing cooperation with not only Nicaragua but El Salvador to create strategic free trade zones or port development, while also pressuring Honduras and Guatemala to break ties with Taiwan. The United States, in turn, is likely to offer counter incentives such as increased trade or funding for economic development in an effort to reassert its influence in geographically close countries.

El Salvador and Panama ​​also broke their formal diplomatic ties with Taiwan in the past four years, but the United States offered both countries counter incentives to limit cooperation with China.
In Honduras, incoming President Xiomara Castro’s Libre party announced that she would seek to establish formal diplomatic relations with Beijing on the campaign trail. But neither Castro nor her party has committed to a stance on China since winning the election.