Prospect China

South China Sea ruling unlikely to hurt strong Philippines-China trade ties, experts say

The specifics of whether China can lay claim to the heavily-contested waters of the South China Sea may have been resolved by The Hague's ruling in favor of the Philippines, but business and trade relations between the two countries could still cloud the issue.

In a bid to distance himself from the Philippines' previous administration, and avoid retaliation from Beijing for the ruling, the country's new president, Rodrigo Duterte, has indicated that he might be willing to make concessions on the South China Sea issue, explained Malcolm Cook, a senior fellow at the ISEAS-Yusof Ishak Institute.

According to the Philippine Statistics Authority, China was the Philippines' second largest trading partner and third largest export market in 2015.

Ian Chong Ja, a professor specializing in Chinese foreign policy at the National University of Singapore, said hostile behavior was to be expected of Beijing in the medium term, as it went through a period of adjustment and reform at home.

"Domestic leeway for Beijing to look soft on the world stage will be diminished…[and we can expect] similar reactions from China across the Pacific, whether it's the Diaoyu Islands, the management of Hong Kong and Taiwan [relations]," he said.

Chong said that in the long term, however, China still wanted to work with its neighbors.

This was reflected in a Chinese white paper published immediately after the ruling on July 13 by the Permanent Court of Arbitration tribunal, which Chong said which made "some room for negotiation" on issues relating to territorial sovereignty in the South China Sea.

NYU Law: China unlikely to withdraw from UNCLOS
NYU Law: China unlikely to withdraw from UNCLOS

This could explain why there has been consensus that existing economic initiatives involving Philippine-China co-operation were unlikely to be adversely affected by the ruling - with some of these initiatives potentially even offering new avenues of negotiation.

Philippine participation in the One Belt, One Road (OBOR) initiative, which aims to enhance infrastructural connectivity between China and sixty of its trading partners, was not expected to suffer, although Chong said the lack of clarity in the OBOR framework made it difficult to see how it could provide a concrete way to dampen tensions.

Likewise, Cook said China was unlikely to curtail its cooperation with the Philippines in the Asian Infrastructure Investment Bank (AIIB), an international developmental bank launched by the world's second-largest economy in competition to the U.S.-controlled World Bank.

"I doubt China will try to 'punish' the Philippines through the AIIB as this would seriously tarnish the AIIB and the goals China is pursuing through the AIIB," said Cook.

Don't expect an immediate impact from The Hague's ruling
Don't expect an immediate impact from The Hague's ruling

As to whether the angry response from China will push the Philippines into considering alternative trade arrangements, such as the Trans-Pacific Partnership (TPP), which neither the Phillipines nor China are currently party to, only time would tell, Cook said.

"I think the Philippines is unlikely to join the TPP due to agricultural sensitivities and the fact that many of the major local conglomerates may not want to face more competition," Cook said. "I don't think increased tensions with China over the South China Sea will change this."

Nevertheless, more uncertainty is expected in the short term. With the ruling stating that China's actions in the Philippines' exclusive economic zone were illegal, the Duterte administration will face greater international pressure to stand up to the Chinese on the world stage.

"[Going forward] the ruling has set up conditions for negotiation and lowered the stakes in the South China Sea," Chong explained. "whether actors use the space that has opened up is a different story."

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