Five blocks from the Vatican, on the bustling, tourist-packed street leading to St. Peter's Basilica, a Taiwanese flag flutters from the window of a third-story suite of offices that house Taipei's embassy to the Holy See.

These days, the staff inside are anxious. They know that one night they may have to lower that flag — red and blue with a white sun — for the last time.

As the Vatican and China move closer to a historic deal on the appointment of bishops, which would signal a warming of once-frigid relations, diplomats and scholars say Taiwan could lose the most from the deal.