Philippines unlikely to expand trade away from ‘factory of the world’

By Kyle Aristophere T. Atienza, Reporter
and Norman P. Aquino, Special Reports Editor

MARIA LOUELLA MARQUEZ, 57, enjoys shopping for everything made in China.

“It’s convenient and you can find almost everything there,” the housewife from Las Piñas City said in an interview, referring to online shopping platform Lazada. “Everything is cheaper and the quality of products has improved a lot over time.”

Ms. Marquez buys trinkets, mobile phone stands and cases, portable electric fans and many more from online sellers mostly based in Shenzhen.

Both Lazada and rival Shopee have numerous Chinese suppliers who are also on Aliexpress, an online retail service based in China and owned by the Alibaba Group.

The Philippines is unlikely to diversify trade away from China despite its biggest trade partner’s increasing assertiveness in the South China Sea, trade and security experts said.

“We are at a disadvantage since we import more from China than we export,” Joseph P. Purugganan, convenor of Trade Justice Pilipinas, said in an e-mail. “We continue to have a trade deficit with China.”

“It’s difficult to leverage an economic strategy when we’re at an economic disadvantage because of this,” he added, noting that the Philippines’ trade deficit with China amounted to $15.25 billion at the end of 2021.

The Chinese economy thrives as a manufacturing powerhouse and the nation’s products seem to be everywhere. The majority of tags, labels, and stickers on a variety of goods proclaim they are “Made in China.”

While the Philippines imports smartphones from other countries such as India, Indonesia and Vietnam, majority or more than 70% of its smartphones come from China, Angela Jenny V. Medez, senior market analyst at IDC Philippines, said in an e-mail. “Almost all of the Chinese vendor shipments in the Philippines are manufactured in China and imported into the country.”

Relations between the Philippines and China, which span several centuries, have been predominantly warm and cordial, according to the Philippines Foreign Service Institute.

“But in recent years, both countries have experienced fiery issues that have resulted in their cooling off, hitting a low point since the establishment of their diplomatic relations in June 1975.”

Mr. Purugganan said diversifying Philippine exports continues to be a problem not just with China but with all Philippine trading partners.

The Philippines export basket is still dominated by semiconductors, agriculture products and minerals “with the same limited number of companies targeting the same markets.” 

Philippine exports to China hit $10.97 billion last year, while imports were $28.2 billion, according to the local statistics agency.

The Philippines had secured several trade deals during President Ferdinand R. Marcos, Jr.’s visit to China in January, including a deal to make Beijing a major market for Philippine durian. Aside from durian, cherry and banana are also among the top three fruits exported by the Philippines to China, accounting for 14% and 7%, respectively, of total export value in 2021.

The Marcos administration also expects more Chinese tourists to visit the Philippines after China relaxed a number of coronavirus restrictions amid domestic outrage.

Last month, the Philippine Senate ratified the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement, covering nearly a third of the global population and about 30% of its global gross domestic product.

The agreement involves the Association of Southeast Asian Nations (ASEAN) and partners China, Japan, South Korea, Australia and New Zealand.

The trade deal that took effect in 2022 is heavily supported by China, whose trade with member countries accounted for 30.4% of its total foreign trade value, according to a May 2022 analysis by China Briefing.

“It’s also difficult to diversify our trade away from China when the government has in fact entered into various agreements including RCEP and investment deals with Beijing,” Mr. Purugganan said.

“Our entry into RCEP makes this more difficult as we made additional concessions under the trade deal,” he said. “Studies show that our imports from China will increase as a result of these concessions.”

China’s exports are very competitive compared with other counties, George N. Manzano, an economist at the University of Asia and the Pacific, said in an e-mail. China is also a robust market for Philippine exports.

In 2021, China accounted for 57% of Philippine exports of copper, 71% of ores, 65% of mineral fuels, 30% of fish and crustacean and 13% of electrical machineries.

In terms of imports, China supplied 40% of Philippine imports of iron and steel. It also supplied 64% of Philippine imports of articles of iron and steel, almost 80% of edible fruits and nuts, 34% of fertilizers and 23% of plastics, Mr. Manzano said.

The disruption of supply chains is among the consequences of significantly minimizing trade with China, the economist said, noting that the local electronics sector and other Philippine industries rely heavily on Chinese imports for their raw materials and intermediate products.

“As China recovers from coronavirus restrictions, its import demand will again increase, benefiting the world’s exporters, the Philippines included,” he said.

But there is a case for greater diversification away from China and toward other countries considering the Philippine’s economic security, Mr. Manzano said.

“In the event of conflict, it is in the interest of the Philippines not to be hostage to too much trade dependence on China,” he added.

“Multinational corporations already take notice of this, when they embark on a China plus one strategy,” he said. “The lessons from the COVID-19 (coronavirus disease 2019) pandemic call for more careful outsourcing and just in time inventory decisions.”

Tensions in the South China Sea have worsened amid China’s increasing assertiveness, prompting the US, which competes with Beijing in trade, and its western allies to boost their presence in the region.

The Indo-Pacific region has also been beset by tensions between China and self-ruled Taiwan.

‘PURE MARKET FORCES’
Last month, the Philippines gave the US access to four more military bases under their 2014 Enhanced Defense Cooperation Agreement, a move that has angered China.

“China is a large country and it can source its needed resources from many countries,” Mr. Manzano said. “I don’t think we can use trade policy as effectively as other large countries do.” But the Philippines could use its trade policy “to limit fallout if ever conflicts arise, as a defensive move,” he added.

Finding a replacement market for China is possible through free trade deals including RCEP, he pointed out. “But it will take time.”

The Philippines will have a hard time expanding exports away from mainland China to the US, Japan and Singapore — some of its major trading partners — “with no political or diplomatic concessions,” Kwei-Bo Huang, director of the Center for Global and Regional Risk Assessment at the National ChengChi University in Taipei, said in an e-mail.

“Also, the Philippines must be aware of the likely competition from some ASEAN members that have higher product homogeneity — an important factor limiting the Philippines’ strategic choice in this game,” he added.

Mr. Huang noted that if the Philippines wants to diversify its trade away from China, it should find substitutes with the same or better quality from ASEAN, which already accounted for as much as 30% of its imports, or from Japan or the US, if the price is not a big issue. It should also determine whether it could sustain economic growth without strong trade ties with China.

“The Philippines should be cautious about the possibility that mainland China could use political and diplomatic measures to inconvenience it not only on the territorial issue but also in the Philippines’ desire for foreign capital,” he added.

Aside from the South China Sea dispute, the region has also had to deal with increasing tensions because of the issue of Taiwan, which China claims as its territory.

Some experts think the US and its western allies would impose economic sanctions on China once it invades the island.

Mr. Huang said it’s more difficult to impose sanctions on mainland China than on Russia, which the West has sanctioned for invading Ukraine, “given an obviously higher level of interdependence between mainland China and the West.”

In case the West imposes sanctions on China over Taiwan, the Philippines might show little support for it, he said.

Mr. Manzano said the Philippines’ security issues “definitely require a diversification roadmap because if you leave it to pure market forces, the natural source of import and export destinations for many sectors would be China.”

“This may mean providing incentives for sourcing imports and directing exports to other markets apart from China.”

The private sector, which bears the commercial risks when there are conflicts, should work closely with the government. “Trade costs can potentially increase and this possibility has to be incorporated in the strategy.”

Ms. Marquez, mentioned at the outset, is aware of the Philippine-China rift. But she couldn’t care less. “I just want to be able to get things that I need quick and easy. Hopefully, Lazada isn’t going away anytime soon.”