China’s Compromise of Duterte, the Selling of Philippine Sovereignty, and Risk to Western Market Share in Southeast Asia

Journal of Political Risk, Vol. 6, No. 2, February 2018

Presidents Rodrigo Duterte (L) and Xi Jinping (R) sit side-by-side at the FIBA opening ceremony. Source: Presidential Communications.

Anders Corr, Ph.D.

Publisher of the Journal of Political Risk

In his visit to China in October 2016, President Duterte of the Philippines broke with the United States and all but pledged allegiance to China. In February 2018, he joked that China could make the Philippines into a Chinese province, “like Fujian.” This joke was made at an event for the Chinese Filipino Business Club Incorporated (CFBCI), members of which stand to benefit from closer China-Philippine ties. Ambassador from China to the Philippines Zhao Jianhua (趙鑒華) reportedly smiled at Duterte’s jokes. Duterte again brought up an unfounded fear of war with China, which serves to justify his negotiations with the country. Duterte’s actions are destabilizing the Philippines and regional stability, and could threaten the regional market share of western companies.

Duterte’s departure from the close Philippine alliance with the United States since its independence in 1946 is likely due to private and public financial incentives dangled by China for Philippine elites close to Duterte, and for the Philippine Treasury. Public incentives are focused on billion-dollar Chinese infrastructure loans which if accepted, might never leave China. Rather, they would go to Chinese companies that build infrastructure in the Philippines with largely Chinese labor and materials. The trickle-down economic effects in the Philippines, therefore, would be negligible or even negative if the per-project cost-benefit analyses are not done properly, or their conclusions ignored. The loan repayments to China, with opaque interest rates and repayment schedules, would regardless be entirely for future generations of Filipinos to pay. Duterte is also fond of referring to two bridges that China has promised to build free of charge in the Philippines — a promise not yet kept.

China’s ostensible largesse as a creditor to the Philippines will require the demonstration of new sources of Philippine income, whether from higher Philippine taxes or greater extraction of Philippine natural resources. While there have been few major Chinese infrastructure loan disbursements (the hundreds of billions of dollars discussed last year by China are nowhere to be found in the Philippines), there are talks about joint development of the South China Sea oil fields within the Philippine exclusive economic zone (EEZ). Given the 2016 Permanent Court of Arbitration (PCA) decision confirming Philippines’ exclusive rights to its EEZ, any concession by the Philippines to China in its EEZ, for example through joint development through opaque or non-globally competitive concessions, will involve a loss of Philippine sovereignty and revenue to China that ought to be exclusively that of the Philippines.

Given the large amount of oil and gas in the South China Sea, up to $60 trillion if one prices China’s maximum estimates of 345 billion barrels of oil at $100 per barrel, plus the value of China’s maximum estimate of 72 trillion cubic meters of natural gas, the financial loss to the Philippines of joint development with China could be massive. Certainly, it will not be worth even the hundreds of billions of dollars that China has offered in loans — not grants — to the Philippines.

Why would the Philippines agree to such a bad deal with China? First, Duterte and his closest advisors and friends are likely eager to get oil flowing quickly in order to profit from such flows. They may also profit from infrastructure spending through finders fees paid by Chinese interests to Philippine businessmen who facilitate loans and infrastructure deals. If they wait, another President could be elected, and the deals will not go to Duterte and his associates. Second, Duterte cannot extract the resources without China at this point, because he has burned bridges with the United States that were already weak after the Philippines evicted the United States from its Subic and Clark military bases in 1991. That was a disastrous move for the Philippines, because China immediately followed up in 1995 with its occupation of Mischief Reef, and in 2012 with its occupation of Scarborough Shoal, not to mention its many other incursions in the Philippine EEZ. Philippine political capital with the United States is at its lowest in decades. To get the U.S. to support the Philippines against China’s incursions will require proof of Philippine loyalty that seems very far from Duterte’s current alliance with China.

By entering into close deals with China, and at odds with the interests of his own voters, Duterte is creating the conditions for long-term political instability in the Philippines. His actions have inspired increasing resistance among the Philippine population. Many openly use strong language to refer to his China agreements and statements, including accusations of treason, on social media. On February 24 and 25, pro-Aquino and anti-Duterte Philippine citizens will protest and display yellow to commemorate the anniversary of the 1986 People Power revolution. These protests include Catholic, student, and patriotic factions, and will address issues such as the South China Sea, Duterte’s alliance with China, the ongoing drug war, and the declaration of martial law in Mindanao, an island in the southern Philippines that includes Muslim separatist tendencies. Protesters from both pro- and anti-Duterte camps will be out in force, which could increase destabilizing trends in the country.

For the sake of the Philippines, including its increasingly marginalized Western-allied business community, one would hope that the Philippine government returns to its close alliance with the U.S. If it persists in its pursuance of China, likened to a “rich girl” by Duterte, the Philippines will likely not only destabilize itself, but all of Southeast Asia. The U.S.-Philippines alliance, along with a relatively independent stance by Vietnam, has until now slowed China’s expansion. If the Philippines does not quickly return to an alliance with the U.S. and other quad powers (including Japan, Australia, and India), then China may use the Philippines to soften Vietnam’s foreign policy in a pro-China direction. Without the Philippines and Vietnam continuing to oppose Chinese expansion in the South China Sea, that strategic space and highly lucrative resource may indeed become a Chinese lake with occasional U.S. freedom of navigation transits.

It seems that voter revolts and other social movements in the Philippines are one of its greatest hopes of not becoming a province of China, not just in jest, but in reality. Western business interests should hope for their success, or steadily lose market share to China throughout Southeast Asia.

Anders Corr is the publisher of the Journal of Political Risk, and editor of Great Powers, Grand Strategies: the New Game in the South China Sea (U.S. Naval Institute Press, 2018). JPR Status: opinion.