The Pacific Island microstate has been a steadfast ally of Taipei and needs its support to resist the PRC’s relentless quest for dominance.

In late November, the Ministry of Foreign Affairs (MOFA) announced that President Lai Ching-te had taken off to visit Taiwan’s diplomatic allies in the South Pacific, including the small sovereign state of Palau. Despite the rising geopolitical importance of the various islands in the Pacific – where China is jockeying for influence against the United States, Australia, and New Zealand – a sitting Taiwanese president has not traveled to Palau since then-president Tsai Ing-wen’s visit in 2018.

With only 466 square kilometers of land and a population of around 18,000, Palau certainly punches above its weight. The country has secured important global partnerships thanks to its strategic location and strong diplomatic influence, and it has been a strong support of Taiwan in international arenas. For example, former Palauan president Tommy Remengesau voiced strong support for Taiwan’s participation in the 2017 World Health Assembly despite a block by the Chinese government. Palau also plays a significant role in championing democracy and climate change action, demonstrating that its influence extends far beyond its size.

However, Taiwan’s diplomatic strategy in recent years has leaned into unofficial relationships with democratic partners in the West. While there is sound logic behind this strategy to gain political support and security assistance, most of those countries do not recognize Taiwan as a sovereign state or speak on its behalf in international organizations like the United Nations. Such support increasingly matters at a time of relentless propaganda from the People’s Republic of China (PRC) claiming Taiwan as its territory and mischaracterizing UN Resolution 2758, which in 1971 established the PRC as the sole legal government of China without explicitly mentioning Taiwan’s status.

Palauan President Samuel Whipps Jr., who won re-election last month, told the Central News Agency (CNA) in a November interview that “the 23 million people in Taiwan deserve to have a voice” in the United Nations.

During the interview, Whipps also emphasized economic cooperation with Taiwan. “We want Taiwanese investment in Palau,” he said. “We look at Palau as a small island with potential in certain sectors.”

Palau’s paramount tourism sector was hit hard by the Covid-19 pandemic and China’s earlier weaponization of its massive market, which at its peak in 2017 accounted for 70% of arrivals to the Pacific Island country.

PRC officials tried to entice Palau to establish diplomatic ties – which would require derecognizing Taiwan – by promising “great money to be made from Chinese tourists,” says John Hennessy-Niland, a professor at Texas A&M University’s Bush School of Government and Public Service and former U.S. Ambassador to the Pacific Island country. When Palau declined, Beijing retaliated by removing it from the approved designations list for Chinese tourists. “There is actually now a travel warning issued by the PRC government advising Chinese travelers not to visit Palau,” he explains.

Since the unofficial blacklisting, Chinese visitors to Palau have plummeted. Arrivals from China had reached a high of 90,000 in 2015 before sliding to 28,000 in 2019 after Beijing’s 2017 move to punish Palau. However, China remains the dominant source of arrivals at 33% of the market, according to data compiled by the Palauan government. Taiwan is second with 21%, while the United States and Canada combined are third with 21%.

“The PRC certainly realizes that Palau has few economic options other than tourism and that it can incentivize tourist numbers far higher than Taiwan,” says Timothy Rich, a political science professor at Western Kentucky University. Palau’s modest economic sectors, including fishing, agriculture, and environmental services, are dwarfed by its tourism industry, which contributes more than 50% of the nation’s GDP.

From June to July, the number of Chinese tourists visiting Palau saw the largest increase, rising from 1,194 to 1,709, according to the Palauan news outlet Island Times. In contrast, Taiwanese tourist numbers declined during the same period, dropping from 1,569 to 1,274.

In May, China prevented Palauan tourism industry representatives from entering its special administrative region of Macau for an important industry conference. Whipps told Nikkei Asia in July that Beijing is exerting a “new level” of pressure on his country.

Pai Lee, secretary of the Palau Chamber of Commerce, acknowledges that China is by far Palau’s largest addressable tourism market. However, he believes that several factors may limit its appeal for the Pacific Island country.

Lee highlights China’s distinctive business model for outbound group tourism, in which Chinese companies maintain control over key aspects of the travel experience, including lodging, restaurants, and activities. This structure, he explains, prevents much of the revenue from Chinese tourists from entering Palau’s local economy, instead keeping it within China. “It is important to look beyond the volume of tourists,” he says.

A second factor is a broader slowing of outbound tourism from China. Lee notes that China’s domestic tourism has surged in popularity since the pandemic when its travel restrictions made outbound trips too troublesome. “China is not encouraging tourists to go abroad anymore,” he says. Beijing prefers that “they stay in the country to support the domestic economy,” which is struggling.

Broader cooperation

Since President Lai Ching-te took office in May, Taiwan and Palau have been working to deepen their economic ties. In September, a large Taiwanese business delegation visited Palau. According to the Ministry of Foreign Affairs (MOFA), the delegation discussed a wide array of investment opportunities with Palauan officials during the visit. These included hotel renovations, the launch of international brand chains and duty-free shops, increasing solar energy systems, sea salt and fish production, and land development.

While no formal agreements were signed during the visit, MOFA stated on the Taiwanese Embassy in Palau website that “both sides agreed that this visit was a significant step toward investing in Palau.”

For his part, Hennessy-Nyland sees opportunities for trilateral cooperation among Taiwan, Palau, and the United States. He notes that the three countries already work together in the maritime domain, where their coast guards are active. There is also cooperation in helping Palau with disaster preparedness and emergency response. “We all know the danger of typhoons and adverse weather – a major issue for a small island nation,” he says. 

Also faced with frequent typhoons and earthquakes, Taiwan has invested considerable resources in disaster preparedness. This expertise could likely be shared with Palau.

Sustainable development is another area in which Taiwan and Palau share interests. Speaking at the UN General Assembly in September, Whipps emphasized Palau’s focus on marine conservation. He noted Palau’s participation in the Unlocking Blue Pacific Prosperity initiative, which aims to create a regional movement that promotes “100% effective ocean management,” resilient food systems, and sustainable financing for development. “Investments are underway, but we call for even greater investments to ensure its full potential is realized,” Whipps said.

While Taiwan cannot participate in UN projects due to PRC opposition, it can still work with Palau on sustainable development in other ways. Whipps even mentioned Taiwan in a recent UN speech. “We acknowledge Taiwan’s valuable contributions to global sustainable development and technical cooperation,” he said.

Like Palau, Taiwan is increasingly focused on marine conservation. In February, the Executive Yuan further approved a draft bill for the Marine Conservation Act. This legislation is aimed at better protecting marine ecosystems, the effective administration of marine protected areas (MPAs), and the conservation and restoration of marine biodiversity. The Executive Yuan said on its official website that the act “will help create a healthy marine ecosystem that balances sustainable resource use alongside the ‘blue economy’ of ocean-related industries.”

At the same time, some analysts see Taiwan as well positioned to help Palau deal with Chinese organized crime. Since 2019, the Pacific Island nation has experienced a rise in illegal gambling linked to Chinese criminal gangs. More ominously, drug trafficking from China and the Philippines to Palau “has increased exponentially over the past two decades,” according to an October 2024 research report published by the national security think tank Australia Strategic Policy Institute (ASPI). Palau has limited resources to tackle narcotics trafficking, the report notes.

“Taiwan is in a unique position to be able to help partners understand the shape and scope and nature of that PRC criminal activity,” says Cleo Paskal, a non-resident fellow at the Washington, D.C.-based think tank Foundation for Defense of Democracies (FDD) and expert on the Pacific nations. “It has the language skills. It is tracking PRC organized crime anyway.”

If knowledge is shared or, even better, collaborated with partners like Palau on investigations to help in their ability to prosecute, security can be mutually improved. This raises the cost for the locals who take PRC money and think they can get away with it, she adds.

Looking ahead, to strengthen the foundation of the bilateral relationship, Western Kentucky State University’s Rich recommends that Taiwan “train a next generation of [Palauan] leaders who are better equipped to negotiate with China. Options may be to develop short-term options that incentivize more students to understand relations with Taiwan,” he says.

“I think these efforts to deepen relations with Taiwan’s formal diplomatic partners are important, and to find roles for non-state actors and people-to-people diplomacy is a move in the right direction,” he adds.