PARAGUAY AND TAIWAN MAINTAIN DIPLOMATIC RELATIONS

C O N F I D E N T I A L ASUNCION 000740

SIPDIS

STATE FOR WHA/BSC MDASCHBACH

E.O. 12958: DECL: 12/31/2033
TAGS: PREL PGOV PA CH TW
SUBJECT: PARAGUAY AND TAIWAN MAINTAIN DIPLOMATIC RELATIONS

Classified By: Deputy Chief of Mission Michael J. Fitzpatrick for reaso
ns 1.4 (b) and (d).

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SUMMARY
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1. (C) Paraguay's new Lugo government redefined Paraguay's
relationship with the Republic of China (Taiwan) when it
announced August 31 that it would no longer actively support
Taiwan's interests in the United Nations. Taiwan reacted by
hinting September 11 that it might cut off financial aid to
Paraguay. The Lugo administration softened its position on
relations with Taiwan following the Paraguayan Congress'
September 17 approval of Taiwan's proposed financial aid
package. Despite Lugo's interest in realigning Paraguay with
the People's Republic of China (PRC),the PRC appears to
respect Taiwan's "claim" to relations with Paraguay. The
Lugo government's contradictory statements on the PRC and
Taiwan and Lugo's latest pronouncement that Paraguay wants
relations with both governments demonstrate the Lugo
administration's lack of foreign policy experience. END
SUMMARY.

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PARAGUAY PULLS AWAY FROM TAIWAN
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2. (U) The already-installed Lugo government redefined
Paraguay's long-standing relationship with Taiwan when it
announced August 31 that it would no longer actively support
Taiwan's interests in the United Nations. The Paraguayan
government signaled that Paraguay intended to seek formal
relations with the PRC. President Fernando Lugo stated that
Paraguayans desire closer relations with the PRC, and noted
that Paraguay is the only country in South America that
continues to maintain diplomatic ties with Taiwan. Foreign
Minister Alejandro Hamed Franco told the press September 6
that the Paraguayan government planned to "establish
relations with the PRC." Vice President Federico Franco
questioned September 7 Paraguay's relationship with Taiwan,
asserting, "(Taiwan) has always supported us, and it has
never achieved anything. The question is -- is it (the
relationship) worth continuing?"


3. (U) Taiwan reacted to Paraguay's decision not to support
its interests by suggesting September 11 that it might cut
off financial aid to Paraguay. Taiwanese Foreign Ministry
Spokesperson Henry Chen denied that Taiwan had agreed to give
Paraguay a USD 71 million financial aid package. He also
stated that delivery of the financial aid package was
contingent upon whether Paraguay submitted a detailed action
plan to the Taiwanese government for approval -- which he
contended Paraguay has not yet done. Chen also alleged that
Paraguay initially requested financial assistance from the
PRC in exchange for diplomatic relations but that the PRC had
rejected Paraguay's overtures -- prompting Paraguay to come
back to Taiwan for assistance.

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PARAGUAY AND TAIWAN BACK TOGETHER
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4. (C) The Lugo administration softened its position on
relations with Taiwan following the Paraguayan Congress'
September 17 approval of Taiwan's proposed financial aid
package. (NOTE: The Senate approved the USD 71 million
financial aid package September 10; the Chamber of Deputies
September 17. The donation would augment the budgets of
several Paraguayan ministries. END NOTE.) Lugo told the
press September 22 that Paraguay had made no "commitments" on
relations with the PRC or Taiwan. He suggested that Paraguay
would continue to maintain diplomatic relations with Taiwan,
and at the same time strengthen ties to the PRC. Lugo also
said that Paraguay would make an "independent" decision on
diplomatic recognition -- implying that his government would
not allow economic incentives to decide whether Paraguay
would formally recognize the PRC. (NOTE: Taiwan actively
engages in "dollar diplomacy" with Paraguay in exchange for
Paraguay's diplomatic recognition. END NOTE.)


5. (C) Despite Lugo's interest in realigning Paraguay with
the PRC, the PRC appears to respect Taiwan's "claim" to
relations with Paraguay. Taiwanese Spokesperson Wang Yu-qi
announced October 15 that the PRC had accepted a diplomatic
truce with Taiwan, and that Taiwan -- not the PRC -- would
continue to maintain diplomatic relations with Paraguay. The
Taiwanese also acknowledged that Paraguay could cultivate a
relationship with the PRC without jeopardizing its bilateral
relationship with Taiwan.

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COMMENT
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6. (C) The Lugo government's contradictory statements on the
PRC and Taiwan and Lugo's latest pronouncement that Paraguay
wants relations with both governments demonstrate the Lugo
administration's lack of foreign policy experience. A Lugo
insider told DCM that there is little discussion of foreign
policy issues with Lugo. In this case, someone suggested to
Lugo that Paraguay break with Taiwan's dollar diplomacy in
favor of the PRC and Lugo said "ok." It is not clear who is
driving Lugo's foreign policy, but this case indicates that
the decision is not always top-down. The Lugo government
clearly favors establishing diplomatic relations with the PRC
-- which it sees as an opportunity to realign politically
with the rest of South America and secure trade benefits. If
all other things remained equal, Paraguay would have opted
for the PRC. However, the PRC-Taiwan truce suggests that
Paraguay will maintain relations with Taiwan for the
foreseeable future. END COMMENT.

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Fitzpatrick