Summary

Philippine President Rodrigo Duterte is back at it. Two weeks ago, he appeared to cede the South China Sea to Beijing, saying China was “already in possession” of the disputed waters and that the United States should probably butt out and conduct its ongoing military drills elsewhere. This came on the heels of the Philippines joining, for the first time, multinational exercises led by China in the South China Sea. On Nov. 20, Chinese President Xi Jinping came to Manila – the first state visit to the Philippines by a Chinese leader in 13 years – bearing gifts. Xi and Duterte inked 29 agreements, including deals for more than $5 billion in Chinese funding toward a bevy of rail, road and power infrastructure projects. Perhaps most important, they signed a memorandum of understanding on joint energy exploration in the hotly contested waters just off Philippine shores.

Duterte, of course, is famous for making – and often just as quickly retracting – grand, controversial pronouncements that tend not to have broad backing from the Philippine foreign policy and defense establishment. It’s part of his charm and appeal. Though his free-wheeling rhetoric should always be taken with a healthy heaping of salt, the latest developments nonetheless raise the question of whether Beijing’s efforts to cajole the Philippines into becoming a tributary state are working. If not, then Duterte may simply be doing what most leaders in his position would do: balancing between outside behemoths and playing them off each other to his country’s benefit.

This Deep Dive takes a fresh look at the state of play between the U.S. and China in the Philippines and at whether Beijing could pull Manila firmly into its camp. It reviews the strategic issues at stake, examines China’s gains (or lack thereof), and considers the strength and limitations of the country’s soft power in its periphery. Ultimately, it concludes that there’s less to China’s outreach to the Philippines than meets the eye – certainly not enough to solve Beijing’s core strategic problem.

The Key to the First Island Chain

For China, the issue centers around secure access to the Pacific. A series of small islands surrounds the South and East China seas, running from Japan to Indonesia. The islands are spaced in such a way that to get between them, Chinese ships must travel through chokepoints, narrow lanes highly vulnerable to interdiction by air or sea. If a major navy – say, that of the United States – were to use these chokepoints to impose a blockade against China, it would cripple the Chinese economy. China’s navy is making great strides, but it still lacks the capabilities to counter a U.S. blockade by force. Its only viable strategy, then, is to arrange with one of the nation-states along the first island chain to use its waters as a relatively secure passage and, ideally, to deny the U.S. military access to ports and bases there. Doing so would force the U.S. to engage China inside the hostile territorial waters of that country, a difficult task.

The Philippines could help. It would provide China an ideal egress from the South China Sea to the Pacific and a serviceable one from the East China Sea. It is also is perhaps the only state along the first island chain where a political agreement with China is possible. The Philippines has a historical bias both in favor of and against the United States, which, going back to 1898, needed the archipelagic country as little more than real estate. Its attitude toward the U.S. has swung from hostility to dependence and back again. As it happens, the Philippines is also the poorest country in the first island chain; its 7,641 constituent islands pose staggering infrastructure challenges that make it hard for Manila to turn down Chinese aid even if some strings are attached. If there’s one nation that could solve China’s strategic problem, it’s the Philippines.

China saw Duterte’s hearty embrace – he announced his country’s divorce with the U.S. during his maiden visit to Beijing after taking office in 2016 – as a real coup. And in the years since, it has made some tangible strategic gains. Duterte, for instance, has declined to press China on the Permanent Court of Arbitration’s landmark ruling that Chinese-claimed features (such as protruding reefs) in the South China Sea are not entitled to territorial waters under the U.N. Convention on the Law of the Seas. It’s unclear how Manila could have used the ruling to its advantage, given that Beijing rejected it outright. Still, by not drawing attention to the issue, the Philippines spared China some international scorn and pressure – while also undermining the so-called “rules-based order” that the U.S. and its allies champion, and that China interprets as an effort to contain it. (For domestic political reasons, the U.S. has never ratified UNCLOS but acts as its chief enforcer and has an interest in its universal acceptance as law.)

Meanwhile, Duterte has also announced that his country wouldn’t participate directly in joint patrols with the U.S. in the South China Sea. The annual U.S.-Philippine Balikatan exercises have moved away from hot spots in the contested waters and shifted their focus from combat-readiness to things like counterterrorism, humanitarian aid and disaster relief. Perhaps most important, Manila has put the brakes on implementing the Enhanced Defense Cooperation Agreement, a 2014 deal giving U.S. forces rotational access to five Philippine bases. Construction on basic U.S. facilities finally began this spring after a more than two-year delay, but two bases, including the one closest to the Spratlys, may now be excluded from the agreement, and any hope of expanding its scope – a foregone conclusion under Duterte’s predecessor – has evaporated. Visits by Chinese warplanes and naval vessels in the Philippines have also increased, including a refueling stop by a Chinese military plane in Duterte’s hometown, Davao City, that apparently caught the Philippine Defense Department by surprise.

(click to enlarge)

These gestures aren’t nothing. The EDCA’s full implementation, in particular, would substantially bolster U.S. positions around China’s militarized man-made islands in the Spratly archipelago. But Beijing still doesn’t have a whole lot to show for its efforts beyond the rhetorical realm. Duterte’s moves so far fall short of what China needs to make headway on blasting a hole in the U.S. containment line and addressing its core strategic dilemma. The U.S.-Philippines mutual defense treaty remains intact, despite Duterte’s talk of withdrawal. The EDCA bases under construction will restore some of what Washington lost when the Philippine Senate voted to eject U.S. forces from Clark and Subic in 1991. The Balikatan exercises, though narrowed in scope, have expanded in size to include Japanese and Australian forces for the first time in recent years. Furthermore, the Marawi uprising in 2017 heightened the sense among Philippine defense circles that only the U.S. and its allies – not China – are prepared to provide critical security assistance in a crisis. Even Duterte has warmed somewhat to the U.S., or at least resigned himself to the fact that the Philippines needs its historical ally to be able to engage with China on something close to equal footing.

So the question is: Why isn’t China’s strategy moving the needle more? And can it pay greater dividends in the long run?

What’s in It for Manila?

To start, let’s look at just how much the Philippines is benefiting from warmer relations with China. In October 2016, during his maiden trip to Beijing, Duterte signed 27 deals worth some $24 billion in Chinese loans, grants and investment. China tailored the package to Duterte’s signature “Build, Build, Build” initiative, which features 75 infrastructure projects ranging from rail lines to bridges to flood control projects. China was expected to finance roughly half of these. For now, however, most of these pledges for funding remain just that. Philippine Economic Planning Secretary Ernesto Pernia admitted earlier in November that less than $170 million in Chinese funding had materialized so far – for an irrigation project north of Manila, plus two bridges in the capital.

It’s too early to conclude that Beijing is withholding the promised money because Duterte’s government isn’t conceding enough on strategic matters. Several projects are still in the early stages of planning, bidding and so forth. (Manila, after all, wasn’t built in a day.) Other projects have run into delays on the Philippine side. For example, local authorities canceled a $780 million island-building venture off the coast of Davao because of problems identified in a yearlong feasibility study. And in the restive Muslim Mindanao region, projects are on hold until a landmark peace agreement is implemented there. These sorts of complications have long bedeviled outside investors in the Philippines. China is just the latest to the game. Canceling deals to punish Manila, moreover, would hurt Beijing, too. Xi’s need to keep Chinese firms busy and profitable as domestic growth slows is as much a reason for China’s economic statecraft as its strategic motivations.

That doesn’t mean China hasn’t played a role in the projects’ sluggish progress, though. The Philippine budget secretary said last week that many projects were waiting for Beijing to approve them or to nominate a Chinese contractor to handle them – and expressed hope that Xi would pressure the bureaucracy to pick up the pace. The Philippines’ economic planning secretary, likewise, noted that China’s pledges to other countries, including Japan, didn’t take nearly as long to turn into actual projects. Beijing has an unparalleled ability to decide, at the risk of antagonizing Chinese firms, whether and when projects – even those of private Chinese firms – move forward. It’s a power the Chinese government hasn’t been afraid to weaponize to serve its strategic aims.

It’s Nice to Be Needed

Yet even if China had already followed through with everything it pledged – including projects that promise scant profits in the short term – it would probably need to go a lot further to create wholesale dependency in the Philippines. In other words, to compel Manila to overlook the major security and sovereignty concerns China poses for the sake of economic benefits, Beijing would need to be able to bring the Philippines’ economy to its knees if the government didn’t comply with its wishes.

The Philippine economy just doesn’t depend that much on China. Although China was the Philippines’ top trade partner in the first half of 2018, at $14.1 billion in total trade, their economic relationship has been rather lopsided. The Philippines exported just $4.1 billion to China in the first half of the year, substantially less than it sent to its next two biggest trade partners, Japan ($4.7 billion) and the U.S. ($4.9 billion). The Philippines needs to sustain trade surpluses with its richer neighbors if it wants to develop its low-wage manufacturing and agricultural export sectors. China, in many ways, is still a competitor.

In terms of investment, China’s role in the Philippines is even smaller, despite rapid growth in recent years. Approved foreign investment from China made up just 2.2 percent of the Philippines’ total for the first half of the year, according to Manila’s figures, even after growing by more than 50 percent over the course of 2016. Compare this to a more than 8 percent from the U.S., Singapore, Taiwan and the Netherlands – and a whopping 20.3 percent from Japan. In 2016, Duterte’s first year in office, the $27 million China invested in the Philippines paled in comparison with the $490 million Japan offered and $160 million the United States doled out.

(click to enlarge)

It’s true that China has been more willing than most to build commercially dubious infrastructure projects in the Philippines. And those are the kinds of risks the Philippines needs its foreign partners to take to overcome its geography, tap into its massive labor pool and reap major development gains over the long term. But other countries have been of greater help in this endeavor for longer. The most important among these partners, Japan, has donated or invested some $35 billion in Philippine infrastructure since the 2000s – compared with China’s $5 billion. Indeed, just a month after Duterte made his much-ballyhooed deal-signing spree in Beijing, he came back from Tokyo with a similar haul.

(click to enlarge)

Manila has little interest in falling to a Chinese “debt trap” by accepting investment on predatory terms. Nor is it keen to become overly dependent on exports to the Chinese market. The risks of doing so became clear from 2012-2016, when Beijing effectively banned bananas imported from the Philippines in response to an attempt by the Philippine navy to eject Chinese fishermen from the hotly disputed Scarborough Shoal. Like most Southeast Asian countries, the Philippines wants enough balance in its economic ties to be able to deal with China on its own terms. China is far from having it over a barrel, and Manila has enough other economic partners to avoid becoming beholden to Beijing.

China’s Power Play

China still has some leverage over the Philippines, mainly in natural gas exploration and production. The Philippines currently produces all the natural gas it consumes, on average between 115,000 and 135,000 million standard cubic feet (3.3 billion-3.8 billion cubic meters) each year. For the country to keep developing, domestic natural gas consumption will have to more than double by 2030, according to government projections. The Philippines, however, has no import terminals or pipelines connecting it to outside suppliers. What’s more, production at its main source of natural gas, the Malampaya field off the coast of Palawan, is expected to fall by two-thirds in the next six years and to run out within the next decade. The Philippines has other promising plays, namely a field in the area known as Reed Bank believed to be three times the size of Malampaya.

(click to enlarge)

The problem for Manila is that Reed Bank is just northwest of the Spratlys, in waters under China’s expansive territorial claims. Though the Permanent Court of Arbitration ruling confirmed that the area is comfortably within the Philippines’ exclusive economic zone, Beijing has consistently thwarted Manila’s attempts to enter joint exploration and production agreements with foreign firms from other outside countries. Duterte, in fact, claims that Xi threatened war if Manila tried to develop the field unilaterally. That’s what makes the vaguely worded memorandum on joint exploration that Xi and Duterte signed last weekend so intriguing. The preliminary agreement would be a promising step for the Philippines, except there’s a catch. Unless Beijing is willing to concede that the waters around Reed Bank belong to the Philippines, Manila may not be able to agree to a joint exploration deal without ceding its own claims or running afoul of its constitution – and perhaps creating a domestic political crisis. Controversy surrounding a 2003 joint exploration deal with the China National Offshore Oil Corp. nearly sank former Philippine President Gloria Macapagal Arroyo’s administration, and the deal fell apart by 2008.

To avoid having to choose between gas shortages and political uproar, the Philippine government is working to build several liquefied natural gas import terminals, possibly with Japanese or Chinese firms. But these projects are still up in the air, and, in the meantime, Manila needs to find a way to start production at Reed Bank. For China, the issue isn’t so much about access to oil and gas as it is about making South China Sea claimant states realize that complying with Beijing is their best option. If Manila can’t find a convoluted legal solution that skirts the sovereignty issues and bypasses a political crisis, then China can stand pat until it caves.

Political Interest Versus National Interest

At the same time, China is trying to magnify its influence in the Philippines by tailoring its investments to Duterte’s political needs. Money is power in the Philippines. A good many political movers and shakers in the country stand to get fabulously rich by cooperating with China (like the billionaire who bankrolled Duterte’s presidential campaign and who recently took a large stake in a Philippine firm that holds energy exploration rights in the South China Sea.) Keep enough of them happy with a cut of the Chinese windfall – and satisfy enough provincial barons with infrastructure projects – the thinking goes, and Duterte will be better able to keep the Philippines’ numerous China hawks at bay.

How much this kind of influence matters on a geopolitical scale is really a question of how much individual leaders can deviate from their countries’ strategic interests in pursuit of their own. The answer differs from country to country and hinges on a zillion variables. But it comes down primarily to two factors: how tight a particular leader’s grip on power is – in terms not only of public support but also of control over national institutions – and how much a country stands to lose when the leader diverges from its interests.

No matter how much sway China has with Duterte’s government, the fact remains that political power is invariably transitory. Not even seemingly untouchable strongmen with China’s backing are immune to this rule, as events in Malaysia, the Maldives and Sri Lanka have recently proved. (Indeed, coziness with China was considered part of the problem in each of these cases.) When local politics get wrapped up in broader geopolitical competition, other outside powers with a stake in the game tend to want to tip the scales in their favor. (See: India and China in Sri Lanka.) All things considered, the Philippines is hardly the best place to pin a geopolitical strategy to the fate of any particular leader. Philippine presidents serve, at most, a single six-year term. And though the country’s reputation for military coups is overstated, the defense establishment – which is overwhelmingly pro-American – is still a critical pillar of power.

As for what the Philippines has to lose if Duterte decides to go after his own goals at the expense of the country’s, the stakes are plenty high. It’s one thing for Cambodian Prime Minister Hun Sen to throw in his lot with Beijing. His country faces no direct threats from China, and Chinese aid and investment have more or less enabled him to obliterate the opposition. It’s another thing for Duterte to embrace China when Chinese ships stationed at militarized islands within spitting distance of Philippine shores are blocking Philippine fishermen from their local waters and keeping the Philippine public from accessing its natural gas. Duterte’s outreach to China is always going to be fraught with political risk. But he’s doing it anyway.

What this tells us is that it would be presumptuous to say Duterte is deviating from the national interest at all, whatever the prevailing opinion in Philippine military circles may be. Likewise, it’s wrong to assume that the U.S. is the Philippines’ only strategic option. The U.S. has made clear that it’s unwilling to risk a war with China to defend Philippine fisherman and energy companies or to firmly side with the Philippines in territorial disputes – much less do anything to enforce its claims. Washington won’t even confirm whether its Mutual Defense Treaty with Manila applies to the South China Sea, as it did for Japan in the East China Sea. Beijing may be overtly bullying Manila on the South China Sea, but the Philippines doesn’t exactly have much room to push back.

Duterte can reasonably make the case that he’s merely playing a bad hand the best way possible: by defusing the dispute as much as he can while exacting some material benefit from China (and Japan) and putting the onus on the U.S. to prove that Manila isn’t the treaty ally of a paper tiger. That means the Philippines’ rapprochement with China won’t be short-lived. Beijing will have ample opportunity to nibble around the edges of the U.S. position along a critical stretch of the first island chain. Absent a major shift in the balance of power in the Western Pacific, however, that doesn’t mean Manila can be bought.

Phillip Orchard
Phillip Orchard is an analyst at Geopolitical Futures. Prior to joining the company, Mr. Orchard spent nearly six years at Stratfor, working as an editor and writing about East Asian geopolitics. He’s spent more than six years abroad, primarily in Southeast Asia and Latin America, where he’s had formative, immersive experiences with the problems arising from mass political upheaval, civil conflict and human migration. Mr. Orchard holds a master’s degree in Security, Law and Diplomacy from the Lyndon B. Johnson School of Public Affairs, where he focused on energy and national security, Chinese foreign policy, intelligence analysis, and institutional pathologies. He also earned a bachelor’s degree in journalism from the University of Texas. He speaks Spanish and some Thai and Lao.