President Oscar Arias announced Wednesday that Costa Rica has broken diplomatic ties with Taiwan after nearly 60 years and established relations with China.
Arias said Costa Rica needed to strengthen ties with China to attract foreign investment.
Since splitting amid civil war in 1949, Taiwan and China have fought to win the diplomatic allegiance of countries around the world. China refuses to have diplomatic ties with nations that recognize Taiwan.
"Taiwan has been very generous and I thank it for the solidarity and co-operation it has shown for nearly 60 years, but I have taken this decision thinking of all the Costa Ricans," Arias said at a news conference.
"We are looking to strengthen the commercial ties and attract investment," he said "China is the most successful emerging economy in the world and soon it will be the second strongest economy in the world after the United States."
Taiwan has been concerned about a deterioration of its relations with Costa Rica since May 14, when the Latin American country voted at an international health conference against holding a discussion on proposed Taiwanese membership in the World Health Organization.
On May 25, Foreign Minister James Huang met with officials from Costa Rica and four other Latin American countries in Belize City in an effort to shore up Taiwan's diplomatic standing in the region.
Taiwan fears that if Costa Rica shifts its recognition to Beijing, other Latin American nations such as Nicaragua and Panama could soon follow suit.
That would leave the democratic island of 23 million people counting on countries like Palau and St. Lucia to bolster its claims of international legitimacy.