Phl-China relations: Doing business as usual in unusual times

(Mr. Romulo was a speaker at the Manila Times Forum. We are reprinting his speech) (1st of 3 parts)

Those of you will recall that I have been writing about the South China Sea/West Philippine Sea issue since it flared up in 2012. No issue challenges the nation more on a continuous basis. It is always a constant presence in the news headlines. It yields ground to the occasional political scandals or natural disaster but always resurfaces.  Oftentimes it manifests itself in other areas of our bilateral relations with China, but more particularly our economic exchanges.

Our Department of Foreign Affairs has been asserting that an agreement in 2011 between President Benigno Aquino and then President Hu Jintao is what guides Manila’s relations with Beijing.

“Both countries should not let the territorial dispute affect the overall relationship.  So on the part of the Philippines, we are willing to extract and isolate our territorial dispute and deal with this separately, but at the same time we try to promote and strengthen the other areas of our cooperation with China,” said the DFA. Finance Secretary Purisima said as much during the World Economic Forum held in Manila last May as has DTI Secretary Gregorio Domingo – I suspect both in hope rather than in fact.

Based on what has happened over the last couple of years, the operative part of that statement has not been “both countries should” as fervently wished for, but the phrase “on the part of the Philippines.” Take for example, the China’s recent decision to ban tourist travel to the Philippines, citing the need to protect its citizens following a couple of incidents involving the kidnapping of Chinese nationals and a failed and ultimately comical plot to bomb the Chinese Embassy. But the safety of Chinese nationals is a perennial problem and has not drawn that harsh a reaction in the past. I for one believe that it is no concidence that the travel advisory came on the heels of the President’s visit to Europe to drum up support for our position in the dispute. Last week the 11th China-Asean Exposition, a huge trade show opened in Nanning, China, focusing on promoting ties between Asean and their largest trading partner, China. However, for the second year in a row, President Aquino is not joining his Aseancounterparts, following another tense year in the South China Sea. Not all Asean members are able to have their leaders participate but last year the Philippines was the “country of honor” and as was the norm, the President was to act as “host”. However, at the last minute, in a pointed display of pique, the President was – depending on whose version – either disinvited or was not invited in the first place. In another telling show of irritation, another major event in Philippine-China economic relations, the annual joint trade and investment committee meeting which has been going on since 1977, while not formally suspended, has not been convened for the last two years.

Status of today’s relationship

Clearly China is unwilling to separate territorial dispute – or more specifically the filing of an arbitration case with the UN Permanent Arbitration Tribunal – from other aspects of our bilateral relations. On the ground, business to business dealings will be as normal as possibly can – as several of your speakers with such daily exposure to China will attest to. Imports and exports volumes may indeed expand – but a closer look at the composition of that trade shows that much of that momentum is generated by the global value chain – intermediate inputs from various countries assembled into final product in one country. More than half of our exports to China is made up of electronic components where trade is governed by multinationals. Where the Chinese government has a say – such as in the imports of bananas – it will have no hesitation to place sanctions when it sees an excuse to do so, never mind if it is flimsy. As far as Philippine imports from China are concerned, the authorities will not place any barrier on their businessmen making a buck and so its pace will be determined by demand from the Philippines. But even in the best of times, the Philippines still lagged behind its Asean partners in the volume of two-way trade ranking last among the Asean-5 with only a third of Malaysia’s total trade with China.

In terms of investments, in 2013 the Philippines only captured less than two percent of Chinese investments in Asean, the second lowest after Brunei. Indeed, the last major investment by a Chinese company in the Philippines was the $1.6 billion stake by the State Grid of China in the National Grid Corporation of the Philippines which won the bid to operate power distribution in the country in 2007. Since then there has been sporadic participation by Chinese firms in various infrastructure projects though not of the same magnitude. Interest in investments have from time to time surfaced, but so far nothing of siginifcant scale has been realized.  On tourism, we may boast of the growth of Chinese tourists from virtually zero 10 years ago to more than 400,000 in 2013. But this pales in comparison to the two to three million average of Chinese tourists to Malaysia and Thailand. Now they are down to a trickle. On scientific and technical cooperation and on agricultural technology transfer arrangements, new projects have virtually ceased.

The poor performance of Philippine economic relations with China relative to our Asean neighbors in the past can be attributed to a combination of hesitancy in trusting our economic future in China and our own anemic economic growth. But it does point out the huge potential for us. Unfortunately, now that we are in a position to take advantage of China’s potential, our diplomatic relations are at a historic low.  Achieving the level of engagement of the other ASEAN economies with China will just have to wait until another day.

We can expect that until relations return to normalcy, that from time to time China will impose sanctions on trade and on tourism. Anything that is government driven or supported – like concessional loans, major investment decisions or technology transfer projects in agriculture and the sciences – will be placed on hold or at least significantly scaled back. While careful not to harm people-to-people relations and allow Chinese business to go where they can make profits, they take the cue from government and will also be constrained from being more aggressive in investing in the Philippines. To be continued…