China, Philippines cautiously flip trade dip as ‘hot economics, cold politics’ define relations

Despite an ongoing dispute in the South China Sea, economic relations between China and the Philippines have remained “business as usual”, but risks are also rising, according to experts.

For years, China has been the Philippines’ top trade partner and top import supplier. And in the first half of 2023, China surpassed the United States and Japan to become the Philippines’ biggest export market, data from the Philippine Statistics Authority shows.

“The phrase ‘hot economics, cold politics’ accurately defines the relations between the Philippines and China, as both countries have strong economic ties despite having political problems or differences,” said Severo C. Madrona Jnr, a professorial lecturer with the Department of History of Ateneo de Manila University.

“Even when political ties are difficult, collaboration can occasionally result from pragmatic business goals, because the dynamics of the two fields are not necessarily directly related,” he said.

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Electronic parts and components, industrial products such as iron and steel, machinery and minerals are the biggest areas of bilateral trade, China’s customs data shows.

But in the first seven months of 2023, China’s total trade value with the Philippines still shrank by 14 per cent compared with a year earlier, as Chinese exports dropped by 11.2 per cent and imports fell by 21.3 per cent – along with falling commodity prices and weak global demand for electronic products, the official data indicates.

As a result, the share of trade with the Philippines in the overall value between China and the Association of Southeast Asian Nations fell to 13.96 per cent in the same period, down from 15.85 per cent a year earlier.

For the island nation, although bilateral relations with China have been undergoing a reset under President Ferdinand Marcos Jnr – who fosters closer ties with Washington, in contrast with his predecessor, Rodrigo Duterte – its economic ties with China seemed to have been enhanced in the past few months.

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In January, during a three-day visit to Beijing, Marcos Jnr signed 14 deals with President Xi Jinping, from infrastructure investments to fresh durian imports.

China, whose export sector has been under pressure due to weak demand and de-risking efforts from the West in the past few months, has also been pivoting to enhance its trade relations with emerging economies via Beijing’s Belt and Road Initiative. The trade scheme links economies into a China-centred trading network, which includes the Philippines.

It has been largely “business as usual” in terms of economic relations between the two countries, said Andrea Chloe Wong, a former senior researcher at the Foreign Service Institute Philippines.

“For the Philippines, having cordial and active commercial ties that encourage business investments to the country, insulated from politics, is what Marcos hopes for,” said Wong, who holds a PhD in political science from the University of Canterbury in New Zealand.

But Manila is also wary of Beijing’s use of trade as a measure of punishment if China becomes a more dominant economic partner, she added.

At the height of the bilateral tensions between the two countries during the Scarborough Shoal stand-off in 2012, Beijing imposed tighter controls and restricted imports of bananas from the Philippines, alleging that they had mealybugs.

“The banana export ban … could be repeated if tensions erupt again in the South China Sea,” Wong said.

On Sunday, the Philippines condemned the China coastguard for allegedly firing a water cannon at its vessels near the disputed Spratly Islands, describing the actions as “illegal” and “dangerous”. Beijing, in turn, has urged Manila to remove an “illegally” grounded warship from a reef of the island.

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Some Philippine legislators have recently heaped pressure on the Marcos administration to shun Chinese companies and products, in retaliation for Beijing’s actions in the maritime dispute.

Aaron Rabena, a research fellow at the Asia-Pacific Pathways to Progress Foundation in Metro Manila, said that though risks in bilateral economic relations are rising, the boycotts of Chinese products are unlikely to materialise, as it is hard to replace China as an “alternative large market”.

More realistically, lawmakers might impose greater scrutiny on overall bilateral economic relations as a formal form of retaliation, he said.

Carl Thayer, a Southeast Asia-specialised emeritus professor at the University of New South Wales in Australia, said calls in the Philippines for a boycott of Chinese goods are “self-defeating”.

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On the other hand, China could retaliate now, or in response to a boycott, by cutting off group tours to the Philippines or imports of Philippine bananas.

“At the moment, I don’t think there’s any danger of it going that far.”

Eduardo Araral, an associate professor of public policy at the National University of Singapore, said that China, if pushed, could use economic means to retaliate, but only gradually.

“I wouldn’t call it a full-court press. I would call it an acupuncture approach – they would put in a needle, and if that doesn’t work, they’ll put in another one.”

South China Morning Post