Philippines feels the economic cost of standing up to China

The South China Sea dispute between China and the Philippines is beginning to take its toll on the Philippine economy, which is heavily dependent on Chinese demand for its exports.

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The South China Sea territorial dispute between China and the Philippines is beginning to take a toll on the Philippine economy, which is dependent on a steady Chinese demand for its products.

The two countries have been locked in a tense standoff since April 10, when a Philippine naval ship attempted to arrest Chinese fishermen working off what is known internationally as the Scarborough Shoal. The Philippines claims the territory is within its exclusive economic zone, but China claims sovereignty over it, and Chinese ships blocked the arrest, ordering the Philippine ship to leave.

Beijing calls the cluster of land, which is more than 500 miles from China and about 150 miles from the Philippines, Huangyan Island. Manila calls it Panatag. 

China Daily reports that China is the Philippines' third largest trade partner and that the Philippines is China's six largest in the Association of Southeast Asian Nations (ASEAN). The two countries agreed to expand their trade to $60 billion by 2016, up from $30 billion in 2011, making China the biggest export market for the Philippines and leaving the island nation economically vulnerable in this dispute.

In what the Philippines calls an attempt to pressure Manila to give in, China has refused to allow 150 containers of bananas to enter its markets, saying that the bananas are "crawling with insects," The Manila Bulletin reports. Many of the bananas have already been destroyed, costing Filipino exporters $760,000 so far.

The Philippines rejects the claims that the bananas are infested, saying the insect China has cited as the problem attacks coconuts. President Benigno Aquino also invited a Chinese trade delegation to the country to inspect the bananas prior to export.  He said that the Philippines would begin exploring alternative markets for its bananas so that it would not be "tied to just one country, where problems could immediately affect our banana industry," according to the Manila Bulletin.

Zhao Jianglin, an economic expert at the China Academy of Social Sciences' Institute of Asia-Pacific Studies, implied to China Daily that China would use economic measures, such as ratcheting up regulations on bananas, to punish the Philippines for not conceding the Scarborough Shoal.

"The notice is a warning to the Philippines. The move of enhancing fruit quality inspections, which is convenient and easy to operate, intends to test the reaction of the Philippines before economic sanctions are introduced. Lengthy inspections or customs declarations will result in the fruit rotting and cause losses for exporters," Mr. Zhao said.

Risks for China

China's strategy also carries with it some risks: China had $251 million in non-financial foreign investments in the Philippines at the end of 2011, much of it in the form of construction projects, and contracted projects are worth an additional $7.9 billion, according to China Daily.

The number of Chinese tourists coming to the Philippines has also plummeted, prompting one of China's three major airlines to cut its daily service to Manila from two flights a day to one. China Southern Airlines told Xinhua that package tours to the Philippines have been canceled in large numbers, particularly since the National Tourism Administration issued "travel safety advice" and the Chinese embassy in the Philippines reported large-scale anti-China demonstrations in response to the dispute over Scarborough Shoal. Most of the Chinese tour groups in the country will leave by tomorrow.

Channel NewsAsia reports that China is the Philippines fourth largest source of tourists and its fastest growing. In the first quarter of 2012, Chinese tourism grew by 77 percent.

The Philippine newspaper Inquirer reports that resorts and hotels on Boracay Island, one of the country's major tourist destinations, said as many as 65 rooms have been cancelled since May 11 – 15 to 20 percent of the tourist arrivals scheduled since then.

As The New York Times notes, the Philippines, with its inferior military and economic dependency on China, is the weaker party in the dispute, and cannot do much to retaliate to Chinese economic aggression.

Both in terms of trade and militarily, China has the upper hand in this dispute, with dozens of warships and other vessels now at the shoal, said Scott W. Harold, an associate political scientist at the RAND Corporation.

A lone Philippine Navy ship that had been at the shoal has returned to base for needed repairs, said Mr. Harold. “I don’t think this is going much further for now,” he said by telephone.

“Beijing has an undeniably superior power position and physical control of Scarborough Shoal at present, so they have nothing to gain from using force, and the Philippines is so weak militarily that I think they will be very cautious,” he said.