President Carter granted Chian formal diplomatic recognition on January 1, 1979. To do so required the severing of diplomatic ties and withdrawal of recognition of non-communist Taiwan (also known as the Republic of China). Moreover, Carter unilaterally revoked the 1955 Mutual Defense Treaty with the Republic of China, effective January 1, 1980. Carter's treaty abrogation was challenged in the federal courts by conservative Republicans. In the federal district court his opponent's won. However, in an appeals court the government's position that Carter had the power to abrogate the treaty without Senate consent prevailed. The Supreme Court then threw the entire case out without rendering any decision (on a technicality involving the standing to sue of Republican Senator Barry Goldwater), thus leaving the constitutional victory with the president by default.
To substitute for diplomatic relations with Taiwan, Congress passed the Taiwan Relations Act. It provided for the creation of an American Institute on Taiwan, which bought the old American embassy. Institute staffers consisted of newly retired American foreign service officers experienced in Far Eastern Affairs. Taiwan established a corresponding institute in Washington, D.C., staffed with its retired diplomats. Thus each side continued with quasi-diplomatic relations, even though the pretense was that they had cut off the relationship. The U.S. continued to supply arms to Taiwan to defend itself from the mainland, a step that kept some friction in U.S.-Chinese relations.