Frozen

Introspective

Posted on April 27, 2014 08:14:00 PM

Business World

PHILIPPINE-CHINA relations sank to a new low a few weeks ago following the Philippines’filing of a memorial or pleading before a United Nations Convention on the Law of the Sea arbitral tribunal on March 30. The memorial was in connection with the arbitration case it initiated against China early last year over disputed areas in the South China Sea (West Philippine Sea) in which it sought to defend its rights under the 200-nautical mile exclusive economic zone of the UN Convention on the Law of the Sea (UNCLOS). China has repeatedly refused to participate in the international court case, claiming that its dispute with the Philippines is over territories or islands rather than dealing with maritime issues, thus falling outside the purview of UNCLOS.

While it has rejected external arbitration, China has nonetheless taken to arguing its legal case in the public arena, with a 1-1/2 page paid advertisement in a local paper. In it, China said that the Philippines “seriously damaged bilateral relations” by pushing for arbitration without its agreement while stating its commitment to resolving the disputes through bilateral negotiations. It added that it is within its rights under international law to refuse to take part in the arbitration and that “forcing arbitration will not change the fact that China has sovereignty over the Nansha Islands (Spratly Islands).”

The Philippines, in turn, claimed that after exhausting other avenues to settle the disputes, it was left with no other option but to file for arbitration and let international law clear up each country’s rights arising from the overlapping claims. The hope is that despite China’s current insistence in claiming everything within the nine-dash line, a decision from an impartial international tribunal that is favorable to the Philippines will persuade it to soften its stance, especially with the pressure of world opinion bearing down on it, and allow the Philippines to explore areas within its exclusive economic zone. In response to China’s statement, the President also explained that the Philippines is not out to challenge China but simply to defend its own interests through a peaceful and rules-based means that conforms with international law.

INTERNATIONAL SUPPORT

The Philippine government’s confidence is understandable as, legal arguments aside, the case has ignited latent nationalistic emotions. The country is also enjoying broad international backing, not least from the US given its pivot to Asia, and countries with similar disputes with China, including Japan and some members of the ASEAN (notably, Vietnam and Malaysia). Only the Philippines, however, has chosen to take this legal challenge. The government’s pleading also came within weeks of Russia’s annexation of Crimea, which would explain the US’s firmer statements recently, admonishing China to respect the Philippines’rights to use dispute resolution mechanisms under UNCLOS and telling China that it will stand by its allies in the region, referring as well to Japan.

To be sure, the Philippines’leaning on US support in its maritime disputes has drawn strong reactions from China. It has said that it opposes these attempts to draw a third party into the dispute. But it is precisely the belief in US support -- the two countries hold periodic war games, including some near the South China Sea -- that is propping up Philippine confidence to stand up to China. Lacking any credible military defense capability, the Philippines is currently locked in negotiations with the US on a defense treaty that it expects will be signed during the US President’s scheduled visit to the country this month.

DIPLOMATIC CHILL

Notwithstanding the apparent overwhelming desire among Filipinos for its government to see the case through, not a few local thinkers are dismayed that relations with a neighboring economic powerhouse have deteriorated to such an extent. Both sides are not shy to call each other names -- “troublemaker” Philippines to “bully” China -- and surveys indicate high mutual distrust between the two nations. By all accounts, the case has led to even icier diplomatic relations, especially between the nations’top leaders, with local administration officials acknowledging that “Beijing is not fond of the President.”

While the arrival of a new Chinese Ambassador, who just assumed office this week, can only be positive, his presence is not expected to lead to thawing relations. The Philippines sees China’s increasing and disproportionately strong presence in the disputed waters as a sign of aggression, most especially since the country does not even have minimum credible defense. This is evident in what has been described as a cat-and-mouse confrontation between the two sides recently, with smaller Philippine boats resorting to shallow waters to be able to slip past a China blockade and bring supplies to its servicemen in the Scarborough Shoal.

Many worry that amidst strained relations, any minor skirmish from future similar maneuvers, whether or not provoked by either side, can lead to mistakes that carry high political and economic costs, especially for the weaker Philippines. The fear is that such accidents may provide the hardliners in China the excuse they need to forcibly seize islands now in Philippine possession, without paying a high political price. Analysts agree that the US will not risk its own relations with China to defend the Philippines, especially under such conditions.

Cooler heads also believe that the Philippines needs to dial down the rhetoric, e.g., that the President’s comparison of China’s actions to Hitler’s occupation of Czechoslovakia in the period leading up to the Second World War seemed unnecessary. Rather, more calibrated and thought through pronouncements would enable the country to keep the moral high ground.

As it is, given China’s non-participation in the arbitration case, the Philippines realizes that even under the best case where the tribunal accepts jurisdiction and substantively rules in its favor, the ruling will be unenforceable and China will still have effective control of the disputed areas. Needless provocations would likely serve to harden China’s position, which may prove unhelpful in achieving the Philippines’desired outcome.

ECONOMIC COSTS

Economically, a prolonged diplomatic chill risks underperformance in mutually beneficial trade and travel ties, which have been growing rapidly over the years. Trade statistics show that Philippine-China exports and imports grew at a compounded annual growth rate (CAGR) of 17% between 1999-2013 compared with the 4% CAGR in trade between the Philippines and the rest of the world. Chinese tourists, which the World Tourism Organization tagged as the largest source market for outbound tourism in terms of expenditures since 2012, have only recently started to come to the Philippines and despite bilateral tensions grew 70% to over 420,000 visitors last year. There are also the several thousand OFWs in Hong Kong, which though an autonomous region is still part of China.

China demonstrated during the April 2012 standoff that at a minimum, it can bar Chinese tourists from coming to the Philippines and apply stricter phytosanitary standards on Philippine agricultural exports. Analysts estimate that about 30% of Philippine exports to China is intended for domestic demand, a share that may grow as China shifts towards a consumption-led economic growth strategy.

With a pending court case, one can also expect China to deploy its huge foreign exchange reserves and continue its charm offensive to win over other members of the ASEAN. This would not only isolate the Philippines in its continuing efforts to push for a binding Code of Conduct in the South China Sea among ASEAN members, but would also give the latter the edge in attracting fast growing Chinese outward investments ($84 billion in 2012 from less than $3 billion a decade ago, mostly in Asia). At present, there is very little by way of Chinese FDI in the Philippines, with its one large stake in the electricity transmission sector being eyed locally with deep suspicion. Naturally, it is now highly unlikely that the Philippines can undertake any oil and gas exploration in the West Philippine Sea.

AFTER 2016

Per estimates, it will take anywhere from two to four years for the tribunal to decide on the case, assuming it does not junk it immediately for lack of jurisdiction (i.e., take China’s position). Even if the decision comes before 2016, there is not much optimism among local China experts that bilateral relations will thaw under President Benigno Aquino. The hope now is that in the interim, more pragmatic minds on both sides of the disputed seas will be able to work on preserving and growing economic ties.

(This column was from a GlobalSource special report on April 11, written by Christine Tang and the columnist. Mr. Bernardo is a board member of the Institute for Development and Econometric Analysis and Philippine Advisor of GlobalSource Partners.)