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The power of China's trade

Image Credit: Bernard Spragg. NZ (Creative Commons: Flickr)

Trade is undoubtedly an arm of China’s foreign policy. China was the third most significant export destination for the Philippines in 2015. Even during the height of the South China Sea conflict in 2012 economic relations between China and the Philippines continued to improve. Indeed, President Rodrigo Duterte’s declaration that the Philippines ‘cannot stop China’ from constructing an environmental monitoring station in the Scarborough Shoal is true. The Philippines is clearly no match for China’s military.

Conventional wisdom suggests that war and political conflict would hinder prospects for bilateral ties. As well, economic interdependence theorists during the 1990s sought to prove that economic relations could reduce the likelihood of political conflict and war. Even so, Sino-Philippine relations are characterised by positive trade relations in spite of the conflict in the South China Sea. How can economic activity continue despite war and conflict?

There are other factors that have precluded President Duterte from taking military actions against China. The fact is that the Philippines have been absorbed into China’s strategic sphere of influence because of China’s extension of trade benefits. While having being faced by economic reprisal from China merely five years ago, the Philippines has come to embrace the economic potential of China’s rise. The Philippines is set to export agricultural products valued up to $1 billion as part of the Joint Commission on Economic and Trade Cooperation. This provides greater assurance to fruit growers but also producers of fish and poultry.

China uses trade as a political instrument to bring smaller countries to the negotiating table. It should come as no surprise that China and the Philippines recommenced the Joint Commission on Economic and Trade Cooperation in early March. President Duterte landed a $24 billion agreement which guarantees the Philippines a series of investment and finance opportunities. Since the agreement was reached China has removed a series of import restrictions on the Philippines, particularly in the area of agriculture. Simultaneously, the Philippine’s inner desire to claim the ‘West Philippine Sea’ has been muted. The Philippines remained almost silent over China’s instalment of anti-aircraft and anti-missile capabilities in the South China Sea late last year. Instead of rebuking China’s assertive behaviour in the South China Sea, the Philippines merely sent a letter of disapproval to Beijing.

The influence of trade was also a feature of Sino-Philippine relations during President Aquino’s political tenure. The two countries issued a joint statement in 2011 stating their commitment to extending two-way trade to $60 billion by 2016. The awesome benefits of economic exchange have been a key component of political decision-making for the Philippines. China has operated on the assumption that it could weaken the Philippines through political signalling. The Philippines export products range from automatic data processing equipment to fruit, including bananas, pineapples and coconuts. The high level of product diversification, coupled with its status as the Philippine’s third most significant trading partner, has provided China with a range of policy tools.

For example, China rejected the import of Philippine bananas on phytosanitary grounds in 2012 – a sign that cautioned the Philippines not to retaliate in the South China Sea over the Scarborough Shoal. The threat of loosing 200,000 employees in the bananas industry was emphasised by domestic actors, such as the Filipino Bananas Growers and Exporters.

The Sino-Philippine trade relationship generates domestic actor considerations for the Philippine political elite. The Chinese community in the Philippines is often an overseen feature of Sino-Philippine relations. This community comprises around 1.2 percent of the population in the Philippines. Understanding the contribution of the Chinese community in the Philippines former President Aquino acknowledged them as industry game changers in 2015. As well, he also stated that Chinese-Filipino businessmen had a significant position to play at the level of bilateral state politics. Some of the wealthiest individuals in the Philippines are of Chinese descent and are recognised for economic survival skills due to their political connections in the Filipino government. For instance, the Filipino-Chinese CEO of Philippine Airlines, Lucio Tan, financially supported Senator Trillanes’ departure to China. This measure was taken to ensure the interests of Filipino businessmen were maintained despite the South China Sea conflict. While political conflict remains, all out war isn’t an option. Economics must win.

As such, rather than taking a hard stance on China’s creeping moves into the South China Sea, the Philippines prioritised economic objectives over territorial control grasp. Since the $24-billion economic agreement was reached, the Philippines benefited from a $100 million fruit export contract. In this way, China has sought to signal that political cooperation is key to the Philippines’ economic longevity. The Philippines understands that engaging China in the South China Sea, either through harsh political statements or conflict, can trigger economic blows. To that end, trade restrictions are China’s ‘diplomatic sticks’ that can be used to hurt the Philippines’ economic development.

Trade doesn’t simply bind countries economically. Sino-Philippine relations in times of heated political conflict shows that trade hold implications for future bilateral relations in the Asia-Pacific.

Nikola Popovic holds a Master of International Relations from the University of Sydney. Nikola has previously worked for the State and Federal governments as a researcher.

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