Beijing’s strategy towards a Tsai Ing-wen administration that refuses to accept the “1992 Consensus” (a way for Taiwan to acknowledge “one China” that enabled productive relations and a ‘diplomatic truce’ under Ma Ying-jeou) is to incrementally increase pressure. Since Tsai assumed the ROC presidency in May 2016 Beijing has broken off direct communications, reduced tourist numbers, blocked Taiwan’s WHA observership, arrested a Taiwanese rights activist etc. This is pretty low level pressure and cross-Strait economic interactions and non-governmental & p2p exchanges continue. Given the intense integration of the two economies, punishing Taiwanese businesses in Taiwan would also hurt the Chinese economy, at a time when there are already domestic economic pressures. But going after Taiwan’s allies has very little downside for China. It symbolizes Taiwan’s diplomatic marginalization and in relative terms is good value (and unlike blocking Taiwan in WHA, there’s no blowback). I expect the PRC to continue targeting Taiwan’s allies and to capitalize on any opportunity to encourage a split (the Vatican is the big prize, but also the most complicated due to the Catholic Church in China).
Panama itself is a special case for Taiwan. With the exception of the Vatican, which has extra symbolic value because it is the only European ally left, Panama was Taiwan’s most important ally. Relations were established more than 100 years ago and was Taiwan’s first FTA partner in 2003. It is also an influential country among Taiwan’s allies in Central America and the Caribbean, where half of all their allies are located. The implications are largely symbolic, but this is an arena in which symbolism is very important. The real fear is that Panama’s switch may prompt others to follow. Since half of Taiwan’s allies are in Central America and the Caribbean, this is a real concern and one that underpinned Tsai’s visit to the region almost as soon as she was inaugurated last summer.
The Tsai administration has focused on domestic issues and maintaining as stable cross-Strait relations as Beijing will allow, and although Tsai’s approval ratings have declined substantially, it hasn’t been due to her China or foreign policy. Until now, dissatisfaction with Tsai has mainly been due to her faltering domestic agenda, and the slowdown/shutdown of cross-Strait relations has not harmed her that much. Taiwanese are very conscious of their international marginalisation, and the symbolism of an important ally is a hit to ‘national dignity’ and ‘respect’ that are highly salient in political discourse. There is little sign that this will stop or reverse national identity trends though: the massive increase in Taiwanese-only identifiers has occurred in the same period that Taiwan has lost one third of its diplomatic allies.
If, however, a number of allies were to switch, it may bring pressure to bear on Tsai’s China policy. It remains to be seen how public opinion would react to a (hypothetical) succession of diplomatic switches. Tsai’s main domestic opposition (the KMT, which supports closer and friendlier relations with China) is currently weak and not in position at the moment to bring much pressure to bear on Tsai. Public opinion on Taiwan’s marginalisation is important, but Taiwanese also appear to accept that some things are out of the government’s control. The fact is, the decision to switch is up to the respective allies, who make their own cost-benefit calculations. Taiwan has invested heavily in maintaining and servicing its diplomatic relationships, but sometimes the PRC is a more attractive proposition.
Public opinion in Taiwan is pretty clear: Taiwanese want peaceful and productive economic relations with the PRC but they prefer to maintain their functional autonomy and do not want political unification. On one hand, PRC pressure and military option is necessary to keep “Taiwan independence” off the table as a realistic option. On the other, moves which appear to Taiwanese people to be unfair bullying do not play well. Given the current configuration, if Taiwan were to choose unification it would have to be at the agreement of Taiwanese voters – and moves that hurt Taiwan, diminish its ‘national dignity’ etc, are unlikely to succeed in winning these voters over.