Philippines U.S. “goodbye” can fix China FDI gap

October 21, 2016

(The author is a columnist for Reuters Breakingviews. The opinions expressed are her own.)

Rodrigo Duterte is following the money. The Philippine president’s boasts of ditching America for China play well in Beijing. Hard cash appears a major motivation for the foreign policy gamble; funds from the People’s Republic will help Duterte deliver on big promises.

His hard-line rhetorical rejection of a long-time ally will likely be nuanced in practice. The Philippines is yet to cancel military exercises with the U.S. or close bases. Duterte’s trade minister clarified the country is pivoting towards China, not cutting all ties with the United States.

A warmer relationship would allow the Southeast Asian nation to capitalise on the full economic support available from Beijing. Geopolitical tensions over disputed territory in the South China Sea, which have now been put aside, were a major obstacle.

Take trade. Japan has been the top partner for the Philippines in the last few years. China holds the top spot for most other countries in the region. Strengthening trade is less of an incentive for the Philippines at a time when China’s demand for imports in general remains so weak, however.

The bigger prize is foreign direct investment. Average annual inflows into the Philippines have amounted to just 1.4 percent of GDP since 2000, according to Nomura. That is more than half levels found in Cambodia, Thailand, and Vietnam. Most of the Philippines FDI comes from Japan and the United States, while China and Hong Kong accounted for just 1.4 percent of the total in 2015. That shows there is plenty of room to ramp up.

Chinese capital could help Duterte fund his plan to boost infrastructure spending to 7 percent of GDP, up from around 5 percent during the Aquino administration. That could in turn boost the tourism industry, still small relative to the size of the economy compared to, say, Thailand.

Of course, courting Chinese cash is risky. That is especially true if infrastructure built by Chinese firms proves shoddy, a common complaint. In places like Myanmar, Beijing’s economic influence is now seen as too dominant.

But if Duterte keeps U.S. relations cordial, and ensures Chinese capital is deployed sensibly, the Philippines pivot to China may not turn out to be so controversial.

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