Thayer Consultancy Background Briefing:

ABN # 65 648 097 123

The Philippines and Impact of
the South China Sea Dispute
Carlyle A. Thayer
October 16, 2018

Q1. How does the South China Sea dispute affect the Philippines in terms of its
external political-diplomatic-defence relations?
ANSWER: When President Rodrigo Duterte came into office he sought to improve
relations with China. This included setting aside the Award by the Arbitral Tribunal
that heard the claims brought by the Aquino government against China. This set the
stage for an improvement in bilateral relations between Manila and Beijing witnessed
by Duterte’s visit to Beijing in October 2016.
However, two years later it became clear that China’s pledge of US $24 billion in
investment to fund Duterte’s “Build, Build, Build” program had not materialized. US
$15 billion of the US $24 billion, agreed between private businesses, were cancelled
or modified. Of the twenty-seven agreements reached during Duterte’s 2016 visit only
one loan for US $73 million to fund an irrigation project had commenced.
The decision by Duterte to set aside the Arbitral Tribunal Award led China to press
ASEAN and its members to move forward on consultations on a Code of Conduct in
the South China Sea (COC). The consultations then became negotiations among China
and ASEAN’s ten members. China and ASEAN members drew up a Framework COC
and then reached agreement on a Single Draft South China Sea Code of Conduct
Negotiating Text.
Duterte’s actions left Vietnam exposed as the new front line state. Duterte’s actions
also undermined the United Nations Convention on the Law of the Sea (UNCLOS)
particularly its dispute settlement mechanism in Annex VII. UNCLOS makes no
provision for enforcement and thus China was permitted to defy the Arbitral Tribunal
whose decisions are final, not subject to appeal, and must be carried out immediately
according to UNCLOS.
Despite Duterte’s efforts to show goodwill toward China, Beijing has not exercised
self-restraint. China continues to station both Coast Guard vessels and People’s
Liberation Army Navy warships in the South China Sea. China also continues to warn
off foreign military aircraft and vessels from the Spratlys, including those of the
Philippines. This has given rise to concern by Philippine military officers and led
occasionally to critical remarks by President Duterte.
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In April 2018, the Philippines and Vietnam requested that the following words (in
italics) be inserted in the Zero Draft of Chairman’s Statement for 32nd ASEAN Summit
to be held on 28th April, “We articulated ASEAN’s commitment to full respect for legal
and diplomatic processes. In this regard, we welcomed the issuance of the 12 July
award by the Arbitral Tribunal constituted under Annex VII to the UNCLOS.” The
intervention by the Philippines was notable because it signaled some pushback by
Philippines at Chinese behaviour. Due to a lack of consensus this amendment to the
Zero Draft was not adopted.
In 2018, China continued to consolidate the infrastructure on its seven artificial islands
and progressively militarize these features; it deployed electronic jamming equipment
and installed surface to air and anti-ship missiles.
Q2. How does the South China Sea dispute affect the Philippines in terms of economic
development and trade?
ANSWER: So far territorial and jurisdictional disputes in the South China Sea have not
had an impact on trade or economic development n the Philippines. Since Duterte
came to office he has undertaken no actions in the Spratlys that would trigger Chinese
economic sanctions such as occurred under Aquino when China suspended the import
of bananas and curtailed tourism.
China has not interfered with the passage of commercial ships transiting the South
China Sea.
Q3. What is the strategic response of the Philippine government with regard to the
South China Sea dispute and issues of sovereignty and territorial integrity?
ANSWER: The Duterte government came into office with a highly critical view of the
United States and its policies. This has muted with the election of Donald Trump as
U.S. president, and more so after U.S. support to lift the seige of Marawi. The annual
Balikatan exercises initially were trimmed to so as not to give offense to China. But in
September 2018 some of these serial exercises were restored to the program.
The Philippines has continued with the armed forces modernization program initiated
by the Aquino government. The Philippines has diversified its procurement of ships
and aircraft and acquired its first anti-ship missiles. The Philippines has taken tentative
steps to improve the infrastructure on Pag-asa, such as the air field.
The Philippine government has adopted a policy of not undertaking any major military
actions that would be viewed as provocative by China. The Philippines continues to
carry our aerial reconnaissance of the Spratlys that draws Chinese verbal warnings.
Nonetheless, Duterte continues his attempt to hedge and bandwagon with China
simultaneously. The Philippines and China are about to conduct joint military exercises
and are discussing an agreement on joint development of hydrocarbon resources.
Q4. Does the South China Sea dispute have any impact on the political economy of the
Philippines?

ANSWER: At the moment, disputes in the South China Sea have not have any
discernable impact on the Philippines’ economy. However, the Philippines’ economy
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could be affected by a U.S.-China trade war that would impact on global economic
growth particularly emerging economies. And the Philippines’ economy could be
impacted if tensions rose in the South China Sea due to naval confrontations between
China and the United States.
An overview of the Philippines’ economy indicates that the fundamental are in place
for continued growth. The current problems that the Philippines’ economy faces such
as rising inflation, external debt, slowing of exports, the weakness of the peso, over
regulation in the agricultural sector are due to macro-economic structural weakness.

Suggested citation: Carlyle A. Thayer, “The Philippines and Impact of the South China
Sea Dispute,” Thayer Consultancy Background Brief, October 16, 2018. All background
briefs are posted on Scribd.com (search for Thayer). To remove yourself from the
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Thayer Consultancy provides political analysis of current regional security issues and
other research support to selected clients. Thayer Consultancy was officially
registered as a small business in Australia in 2002.