Game Theory and US–Taiwan Transit Diplomacy (2006–2007)

Overview

This paper analyzes a "diplomatic" mind game between the President of the United States, George W. Bush, and the leader of Taiwan, Chen Shui-Bian. The reader will be provided with detailed analysis of the situation grounded in international political theory and game theory. This is done by solving a game between the Bush Administration and Taiwanese leader Chen, who had been carrying out so-called "transit diplomacy" with the United States through backward induction and decision theory.

The paper also demonstrates how the result of solving the game between the Bush Administration and Chen coincides with the final outcome of the situation, and may even reveal how both sides made their decisions based on differing utility payoffs. Since in modern politics no bilateral affair remains strictly between two parties — given globalization and the worldwide integration of political and economic systems — the paper also examines external factors that affect the payoff for both sides.

Historical Background

The United States severed its official relationship with Taiwan in 1978, following President Richard Nixon's landmark visit to the People's Republic of China (PRC) in 1972. Official relations with China were promptly established on January 1, 1979, with the announcement of the Joint Communiqué of 1979 on December 15, 1978, in which the US government reaffirmed the position it had taken in the Shanghai Communiqué of 1972. The 1979 Communiqué states: "The United States of America recognizes the Government of the People's Republic of China as the sole legal Government of China. Within this context, the people of the United States will maintain cultural, commercial, and other unofficial relations with the people of Taiwan."

To maintain these "cultural, commercial, and other unofficial relations" with Taiwan, the Taiwan Relations Act was enacted during the 96th Congress. Under this act, the United States established the American Institute in Taiwan as the functional equivalent of an embassy, while Taiwan was permitted to set up Cultural and Economic Offices in the United States as the functional equivalent of consulates.

The period between 1979 and 2000 was relatively uneventful, with only occasional tension between China and the US. China, the US, and Taiwan were broadly comfortable with the status quo — although Taiwan's then-leader, Lee, made several radical speeches that irritated China. Taiwan acted largely in accordance with US wishes and kept Washington reasonably satisfied. However, a sharp turn came after 2000 when Chen was elected leader of Taiwan and largely disregarded American preferences.

Several incidents angered Washington. Chen held a referendum during Taiwan's 2004 "presidential" election — an act that provoked China — despite protests from Washington. He also broke his own pledge by dismantling a symbolic government agency responsible for overseeing reunification with mainland China. After a series of such events, even Bush — who had given Taiwan an unprecedented level of military and diplomatic support since 2001 — decided to send Chen a message when Chen conducted his "transit diplomacy" en route to Paraguay in 2006. This practice involves intentionally routing flights carrying top Taiwanese leaders through major countries with which Taiwan has no official relations, designed both to show defiance toward Beijing and to demonstrate Taipei's sovereignty.

Player One (P1) is Bush, or the US administration, who must choose between making a sweet offer (a transit through the US mainland) or a sour offer (a transit off the US mainland) to Chen. Player Two (P2) is Chen — the player with types — who must decide whether to accept the offer. P1 derives its utility payoff in large part from its relationship with China. If Bush makes Chen a sweet offer, it will agitate China and invite protest, potentially causing adverse effects beyond the diplomatic sphere. However, Bush also does not want a sour offer to be rejected without his knowledge, as happened in 2006, since that would make his administration look foolish for being outmaneuvered by Taiwan.

The Game Tree and Player Preferences

Chen can be one of two types: tough or soft. A tough Chen will always reject a sour offer and leave the US in the dark — as occurred in 2006 — because a tough Chen's goal is to make the US look bad as a protest against the sour offer, regardless of the personal cost. A soft Chen will always accept a sour offer and take whatever he can get, believing that something is better than nothing and not wishing to embarrass himself. Regardless of type, both a tough and a soft Chen will readily accept a sweet offer of transit through the US mainland, since that is what Chen wanted in the first place. The preference ordering for each player is as follows:

Because Taiwan/Chen has types, the game begins with a move by nature: "tough Chen" occurs with probability P and "soft Chen" with probability (1–P). After nature's move, the US chooses either a sweet offer or a sour offer. If the US chooses the sour offer, Chen follows with a decision to accept or reject. If the US makes a sweet offer, Chen accepts and the game ends.

Assuming Chen is the tough type: because a tough Chen will reject the sour offer (achieving an expected utility of (1, 2) rather than (3, 1)), the US will prefer to make a sweet offer and obtain a utility payoff of (2, 3) rather than (1, 2). Assuming Chen is the soft type: because a soft Chen will accept the sour offer (achieving (3, 2) rather than (1, 1)), the US will prefer the sour offer to obtain (3, 2) rather than (2, 3).

To find the probability threshold for the US's decision, the expected utilities of the two options are set equal:

EU(sweet) = (P)(1) + (1–P)(3) = P + 3 – 3P = 3 – 2P

Solving the Probability Threshold

EU(sour) = (P)(2) + (1–P)(2) = 2P + 2 – 2P = 2

Setting EU(sweet) = EU(sour): 2 = 3 – 2P → 2P = 1 → P = 1/2

Conclusion

The formal game model yields a probability threshold of P = ½, at which point the Bush Administration would be indifferent between a sweet and a sour offer. What resolved this ambiguity was not internal calculation alone but the geopolitical fallout from 2006. The EU's denunciation of Chen's unannounced stop in Amsterdam and the UAE's susceptibility to Chinese diplomatic pressure together eliminated Chen's alternative transit routes, effectively converting a 50/50 bet into a confident prediction that Chen would accept whatever the US offered. The game-theoretic framework thus captures the structure of the interaction, while the contextual analysis explains why the equilibrium tipped in the direction it did.