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GTR Asia 2018 distilled in six points

Last week in Beijing, the Philippines’ President Rodrigo Duterte announced a “separation” from the US and called for a new commercial alliance with China.

“America had lost,” he told a roomful of businesspeople, before telling them that he would “realign myself in your ideological flow”.

Amid the fallout and fears over US investments in the Philippines, Duterte attempted to clarify things, saying that he was pushing for a separation of foreign policy, rather than an economic standoff.

For the US however, the message was clear: Washington DC can no longer count on the unyielding support of the Philippines, one of its closest allies in Southeast Asia.

Duterte’s pivot to China is a severe blow for the US in the region. The latest provocation comes after Duterte previously referred to US President Barack Obama as a “son of a whore”.

The comments have not gone unnoticed in the US. “The growing uncertainty about this and other issues is bad for business. This is a very competitive region,” said Daniel Russel, the US’ most senior diplomat in Asia, adding that killings related to Duterte’s crackdown on drug trafficking was “bad for business”.

Analysts are divided, however, on whether Duterte’s shift in alliance will be good or bad for his domestic economy.

As well as vowing to crackdown on drugs and crime in general, he was elected on the promise of improving the Philippines’ crumbling and neglected infrastructure and improving employment levels.

In this respect, the trip to China will likely prove to be a winner with voters. On the back of the trip, the trade minister Ramon Lopez announced that China will pump US$15bn into Filipino infrastructure projects, probably in the form of low-interest loans.

These will include the Subic-Clark railway project, the Bonifacio Global City-Ninoy Aquino International Airport, a number of biomass projects on the Negros Islands and a host of telecoms projects designed to boost the country’s network capacity and quality.

The Philippines is the latest in a long line of Asian countries to receive huge spending pledges from China, which is hoping to shore up economic and political power in the region.

“These [investments] are huge drivers of some of the rhetoric [from Duterte]. Most of the region is slowing and the US is pretty stagnant. They’re not going to get that level of investment from the US,” Tony Nash, founder of analytics firm Complete Intelligence, tells GTR.

He compares China’s expenditure to the US’ post World War II, which allowed it to boost a global trading hegemony.

“A few weeks ago they [China] announced several billion dollars of investments in Bangladesh, which tells you it is starting to look at Bangladesh as a location for low-cost manufacturing. In a trade and investment context, China’s investments make a lot of sense. Compared to the US post-WWII, it’s a very similar approach to building hard and soft infrastructure,” Nash says.

The trade dynamic

The US will simply not compete with China on government lending, although its corporations continue to invest and employ strongly in the Philippines. In pure trade terms, however, Duterte has taken a risk.

Exports to China account for just 3% of Filipino GDP. The US imports 50% more Filipino goods than China, with plenty of US companies producing goods for the domestic market in the Philippines. Gareth Leather says that the Philippines’ economy is not geared towards producing for the Chinese market.

He says: “The main reason the Philippines exports so little to China is that it does not produce the kinds of products that China buys. The Philippines produces no oil of its own and sells few other commodities. Neither does it produce any of the high-tech components that China currently imports from countries such as Taiwan and Korea.”

Duterte could be biting the hand that feeds him, but a closer look at the trade data suggests that his pivot to China might not be a complete disaster. Yes, China takes a low share of Filipino exports, but this is changing. In the first half of 2016, China-Filipino trade grew by 23%, compared with 6% growth in trade with the US.

Including imports from China, bilateral trade between the Philippines and China is actually US$2bn greater than total trade with the US.

“The US is a slow-growth economic partner and China is a fast-growth one,” Nash says. “Duterte has all these young people who are well-skilled, with very good work culture, who need to find work. He has to find economic partners who he can work with and grow. If his trade relationship with the US only growing at 6% or less, he needs to find partners who can help put those people to work.”

Also now thrust into the spotlight is the Philippines’ participation in multilateral initiatives sponsored by the US and China. While the TPP is unlikely to be passed any time soon, it may be revisited further down the line, with the Philippines long-mooted as a future member.

Deborah Elms, executive director at the Asian Trade Centre, tells GTR that chances of a future Filipino membership now appear to be dead.

“This is a shame because the Philippines was on track to do so,” she says. “But politically, it is a non-starter in the US at the moment. [It] could change as they still don’t have TPP round one approved, of course.”

At the same time, Duterte’s government is looking to the China-sponsored Asian Infrastructure Investment Bank (AIIB) to support its US$150bn infrastructure drive.

Finance secretary Carlos Dominguez has described the AIIB as the department’s “number one priority”, as it looks to use its status as a founder member to borrow heavily from the nascent development bank.

Duterte has been branded the “Asian Trump” by some media outlets in the west. The implication is that he is reactionary and volatile. Those well-versed with Filipino politics, however, concede that whatever your personal views on Duterte may be, he is a skilled politician.

Dr Reuben Mondejar, an expert on Filipino economics and politics at City University, Hong Kong, believes that Duterte is an experienced and canny operator and that the only valid comparison with Donald Trump is his appeal to disenfranchised voters.

“Donald Trump is only a politician for 10 months, Duterte has been a politician for three decades!” he told GTR in a recent interview.

Mondejar’s views are shared by Tony Nash, who says that “just because he says nationalist things, doesn’t mean he’s a stupid politician”.

He compares him to nationalist leaders Shinzo Abe in Japan and Jokowi in Indonesia: “They recognise that their first priority is to their people. There are risks to his rhetoric on the US, but from his perspective it’s a negotiation: he makes a statement that he’s turning away from the US, and it gets the US’ attention. They are going to come to the table with direct investment and economic opportunities.”

For some, Duterte’s stance is a product of the US government’s neglect of its partners in Asia, which has not been improved by a largely unsuccessful pivot to the continent. For now at least, the balance of regional power is resting with one of the region’s most controversial figures.