'The confrontation has highlighted the Philippines’ growing economic links to China ... as well as the vulnerability of those links.'
The standoff between Manila and Beijing over the Scarborough Shoal, which began on April 8 when the Philippines sent its Navy to confront Chinese vessels fishing in the area, has begun to have economic consequences well beyond China’s recently imposed import restrictions on bananas, which account for more than 30 percent of Philippine banana exports.
In the famed, if not hackneyed, Chinese phrase about killing chickens to scare monkeys, what is going on in the Philippines probably should catch the attention of the other eight nations that border the South China Sea, over which China claims almost total hegemony.
The banana dispute actually began in March, when Chinese importers complained the fruits were infested by pests and therefore unsalable in Chinese markets. The Chinese now require full inspections on all shipments and are not relying on clearances issued by Philippine quarantine authorities. They have also begun inspections of papayas, mangoes, coconuts and pineapples, sending Philippine authorities scrambling for markets in the Middle East and other regions.
On May 13, Sergio Ortiz-Luis Jr., head of the Philippine Exporters Confederation, said in a radio broadcast that China had “saved” Philippine exporters during the global credit crisis when exports to traditional markets dried up and had since become one of the Philippines’ fastest growing export markets.
But since the banana spat began, Filipino businessmen complain they have lost 1 billion Philippine pesos ($23.1 million). Mindanao, a major source of banana exports, has been particularly hard-hit.
Exporters are now blaming the government for its handling of the Scarborough Shoal standoff, which began a full month after Chinese authorities barred the bananas and has morphed into a real confrontation with the arrival of Chinese maritime surveillance forces vessels.
However, Philippine authorities have refused to blame the Chinese in the dispute, instead saying exporters need to clean up their acts.
A fishing ban implemented by both sides has defused the situation somewhat. Chinese authorities, however, have followed up the banana inspections by impounding Philippine papayas in Shanghai after discovering mealybugs in 43 crates of the fruit.
Philippine authorities have reacted by tightening local inspections while the fruit is still on their soil. Agriculture Secretary Proceso Alcala told reporters he was seeking “100 percent inspections” now that Chinese authorities had turned their scrutiny on Philippine fruit exports.
The confrontation has highlighted the Philippines’growing economic links to China, which is now Manila’s third-largest trading partner behind Japan ($15.4 billion) and the United States ($13.63 billion), as well as the vulnerability of those links. In March, China accounted for 14.9 percent of Philippine exports, with $642 million in shipments, up 27.8 percent from the same month in 2011. There have been expectations that China will become the country’s top trading partner by 2013.
China shocked Asia in 2010 by using trade as a weapon in its bid to force policy changes in countries with which it had international disputes.
For example, China blocked shipments of rare earth minerals to Japan that were crucial to a wide range of manufactured products, apparently in retaliation for Japan’s detention of a Chinese fishing captain after an incident near the Diaoyu Islands, which both countries claim and which have been the scene of sporadic confrontations in recent years. (The Japanese claim the islands as the Senkakus.)
Later, the Chinese slowed rare earth shipments to the United States and countries in Europe, claiming they were trying to clean up the rare earth mining industry, which has caused disastrous pollution in many areas where the minerals are mined. The embargo, if that is what it was, was viewed by analysts as the latest indication that China was willing to use economic clout to get its way in policy disputes.
The bigger point is that if China decides to get tough on the Philippines, it is obviously that the Philippines will come out as the loser. In recent years, the Philippine economy has made major upward strides, particularly because of inward remittances from overseas workers, at $20 billion a year, and business process outsourcing, now at $13 billion.
The Philippines, like other Southeast Asian countries, has lately begun to benefit from the exodus of low-end Chinese manufacturing as labor costs have grown, particularly in semiconductor components, computer parts and construction materials such as metals, cement, bricks and tiles. In addition to bananas, China imports pineapples, coconuts and seeds. China also imports billions of dollars in mining minerals from the Philippines.
In 2009 and 2010, according to the latest United Nations Conference on Trade and Development report about trade dependency, China topped all leading destination markets for Philippine commodity exports, followed by Japan, the United States and Singapore.
Trade in the region now amounts to $5 trillion. With Vietnam, the Philippines, and China in particular continuing to squabble over vast potential oil and gas reserves, China, as with the confrontation over the Scarborough Shoal, has backed up its territorial claims with gunboats, thus turning the littoral nations more and more toward the United States.
It remains to be seen if China’s attention to bananas might grow to include Indonesian coal, Malaysian timber and other exports like palm oil if the other nations bordering the South China Sea become too obstreperous.