Since the Philippines elected President Rodrigo Duterte in 2016, the country’s foreign policy seems to have become more uncertain. President Duterte’s mercurial personality and antagonistic tirades against the country’s traditional Western allies, including the United States (US) and the European Union (EU), and his statements of building closer ties with China and Russia, had changed the political and diplomatic tone of the Philippines overall. Certainly, the political relationship between the Philippines and the West has been changed by Duterte’s strong remarks against the US and EU. Has this change spilled over to the economy? The paper presents an international political economy framework in examining the impact of Duterte’s foreign policy pivot to the country’s foreign economic relations, focusing on trade and investment. The paper argues that Duterte’s foreign policy shift is mainly shaped by Duterte’s “politics of survival”. Not firmly anchored in any idea, norms, or interest that can clearly benefit the country, Duterte is unable to provide coherent guidance and leadership on the foreign policy pivot, particularly on the economy. Duterte’s lack of guidance provided the technocrats with the policy space to continue the policies from the previous administration and not to divert radically from previous economic policies. The stability of the economic institutions provided a refuge in the period of uncertainty. As a result, the foreign economic relations of the Philippines has not radically shifted. The trade and investment situation of the Philippines remained stable, and economic relations with traditional partners are maintained.
In October 2016, during his state visit in China, President Rodrigo Roa Duterte announced in a speech his “separation of foreign policy from the US …”, his desire to strengthen bilateral relations with China and Russia, and “to follow the ideological path” of the two countries.1 Since this very public announcement of his foreign policy preference, President Duterte forged a new path in foreign policy of the Philippines.
From the time the Philippines elected Duterte in 2016, the country’s foreign policy seem to have become more uncertain. His mercurial personality and antagonistic tirades against the country’s traditional Western allies, including the US and EU, and his statements of building closer ties with China and Russia, had changed the political and diplomatic tone of the Philippines overall. Certainly, the political relationship between the Philippines and the West has been changed by Duterte’s strong remarks against the US and EU. Has this change spilled over to the economy?
One of the most challenging research in the social sciences has to do with analyzing the economic consequence of a political decision. Measuring the interactive effects of politics and economics is complicated, although many exciting cutting edge research has been done along this line. A popular approach entails using complex economic models that focus on transmission channels of the policy decisions to the economy to explain the outcomes. Another approach is more theoretical, by examining the political dynamics of the policy decision itself, and analyzing the consequence of the policy shift in the economy. A theoretical approach in answering an empirical question is one of the themes of research in International Political Economy (IPE) (Frieden and Martin 2003).
Using an IPE approach, this research examines the economic consequence of a foreign policy decision by looking at the politics behind Duterte’s policy pivot, and its impact on the foreign economic relations of the Philippines, focusing on foreign trade and investment. IPE research has paid a lot of attention to international trade because this is where the tension between state and market has been most explicit, historically, as shown by patterns of international trade during the Cold War and the post-Cold War period. Political actions had clearly affected international trade, and subsequently, the domestic economy, and business decisions of entrepreneurs.
President Duterte’s foreign policy pivot to China has tremendous consequences for the Philippines, given the Philippines’ deep security and economic ties to the US, and given the uncertainty of an alliance with a rising, non-democratic power such as China. The policy pivot has resulted in tensions in the security alliance between the US and the Philippines. The paper examines whether the tension has affected trade and investment ties as well.
In view of this, two sub-questions will be answered to analyze the foreign policy shift and its impact: 1) Why did Duterte pivot to China? 2) What is the impact of the pivot in the Philippine foreign economic relations? Other than the impact on trade patterns, the impact on investments is also included to examine if similar patterns occur in FDI. In the present globalized age, the economies are deeply interconnected and trade and investments had even become more sensitive to foreign policy shifts and geopolitical stress.
Following this introduction, the paper is organized as follows. Section 2 briefly discusses the Philippine foreign policy, to put into context the foreign policy shift of President Duterte. Section 3 reviews the relevant literature on IPE and foreign policy. Section 4 discusses the analytical framework. Section 5 applies the framework in the Philippine case, using the foreign policy preference of Duterte, the institutions, and the politics involved in his policy shift. Sections 2, 3, 4 and 5 aim to respond to the first sub-question as to why President Duterte pivoted to China. Section 6 examines the impact of Duterte’s policy in trade and investment patterns. This section assesses the impact of the policy pivot in the foreign economic relations using trade and investment data, and responds to the second sub-question. Section 7 culls the main findings of the paper and presents the conclusion.
The paper presents a comprehensive framework in analyzing the impact of the foreign policy shift of President Duterte. The main findings showed that Duterte’s foreign policy pivot is primarily shaped by political factors, particularly by Duterte’s behavior, “politics of survival”, and opportunities provided by the external environment. Not firmly anchored in ideas or norms and/or factors that would clearly benefit the Philippines, Duterte has been unable to provide coherent guidance and leadership on the foreign policy pivot, particularly on the economy. Duterte’s lack of guidance provided the technocrats with the policy space to continue the policies from the previous administration and not to divert radically from previous economic policies. The stability of the economic institutions provided a refuge in the period of uncertainty. As a result, the foreign economic relations of the Philippines has not radically shifted. The trade and investment situation of the Philippines remained stable, and economic relations with traditional partners are maintained.
As pointed out, the research uses a theoretical approach in examining the foreign policy shift and its impact, hence the analysis is limited. The impact on foreign economic relations is gauged from the trade and investment data from 2016–2019. The data examines the impact of the foreign policy pivot up to 2019 only, or up to mid-term of Duterte’s presidency.
2 Philippine Foreign Policy and Preferences of Political Leaders
In the Philippines, like in many countries, foreign policy is largely considered an Executive function, and foreign policy decisions are dominated by the President (Baviera 2011). That makes foreign policy quite malleable, especially in a country with a reputation for having a weak bureaucracy as well as weak political parties. Foreign policy could change in tone and theme depending on the preferences of the President.
In the post-EDSA years, President Fidel Ramos advanced an ASEAN-centered diplomacy in the aftermath of the withdrawal of the US Bases in 1991. Be that as it may, Ramos maintained close diplomatic and political ties with the US, while building strong diplomatic relations with the East Asian community. Meanwhile, President Gloria Macapagal-Arroyo was said to have successfully “balanced Philippine foreign relations between the US, as the oldest ally of the Philippines, and China, a rising power” (Baviera 2011, 9–10). Towards the latter part of her term, Arroyo tilted the foreign policy in favor of China. Coinciding with ASEAN’s embrace of China’s economic diplomacy with the signing of the ASEAN-China Free Trade Agreement in 2002, the Philippine bilateral relations with China also improved. Subsequently, the Chinese government prominently figured in financing key projects and infrastructures projects under Arroyo, including the notorious NBN-ZTE contract. For the most part during the terms of Ramos and Arroyo, the Philippine foreign policy with the US and China had been characterized by economic pragmatism and strategic hedging.
The aggressive actions of Beijing in the South China Sea revived the strong ties with the US under President Benigno Aquino III. The Philippine-US relations reached its zenith in the post-EDSA years under Aquino III. He restored alliance with the US, which provided the much-needed support for the Philippines to assert its position in the South China Sea territorial dispute. Under Aquino, the Philippines engaged in what can be considered as balancing strategy with the US to counter the China threat. The balancing strategy was capped by the signing of the Enhanced Defense Cooperation Agreement (EDCA), which provides the US and the Philippines the mandate for joint military exercises and closer cooperation (De Castro 2018).
Departing from his predecessor, Duterte took an entirely different path from Aquino. He explicitly stated in his speech in October 2016 that he has “separated” from the US and will be “dependent” on China. Pro-Duterte analysts and allies point out that the statements were merely an assertion of independent foreign policy. Duterte’s pro-China position and anti-West sentiments were reiterated in many other speeches, and later followed by diplomatic actions, such as seeking closer ties with Russia,2 a state which is openly hostile to the US and the EU (Stent 2020; Cohen and Radin 2019). It is evident, based on Duterte’s repeated pronouncements that he wants to reduce dependence with the US and move closer to China.
Duterte’s foreign policy preference has significant consequences on Philippine politics and economy. To better understand the connection between foreign policy and the economy, the next section reviews the literature regarding foreign policy and its economic impact.
3 Foreign Policy and the International Economy: An International Political Economy Perspective
3.1 International Political Economy
International Political Economy (IPE) examines the linkage between the state and the international economy and is a relatively young discipline in political science. Formal IPE courses are not taught until the 1980s (Frieden and Martin 2003), although multi-disciplinary analysis on the relationship between the state and the market had existed before 1980 (Katzenstein 1978). IPE mainly problematizes the domestic political economy of foreign economic policy by analyzing the interaction of actors, both state and non-state, institutions, and the political dynamics. The core idea here is to understand the connection of the domestic with the international environment by unpacking the factors behind the policies, and vice versa. In doing so, an IPE framework looks into the interaction and political dynamics between and among the various factors that affect foreign policy decisions and their outcomes, such as interests, institutions, and information (Frieden and Martin 2003). IPE contends that understanding the interest of the ruling actor or actors are the key to understanding the foreign policy decisions. How the interests are translated into policies and outcomes depend on the institutions, the political dynamics, and the feedback, information or ‘policy signal’ they transmit to the external environment.
3.2 Actors, Institutions and Politics in Foreign Policy
Contemporary foreign policy analysis uses a more eclectic, multi-disciplinary approach. It recognizes the important role of interests of actors in understanding the policy and its outcomes. Preferences of ruling actors and their behavior are deemed important and have a strong impact on the state’s foreign policy (Frieden 1999).
Hudson (2007, 38) argued that certain conditions and situations can have an impact on the foreign policy shift orchestrated by the political leader. Regime types, knowledge and character of leaders, specific situations such as crisis, real or perceived, can have an impact on the policy shift. Put simply, not only the leaders, but also the institutions and politics are important to implement a foreign policy shift.
3.3 How Does Foreign Policy Affect the Economy?
After the end of the cold war, liberalism has become a dominant school of thought in explaining economic patterns. Liberalism argues that most countries desire cooperation and absolute gains for every party involved in international relations. Liberalism tends to diminish the importance of the state’s domestic structure as explanation of foreign policy shift, and instead highlights the important role of international institutions and market signals in shaping the ruling actors’ preferences and the economic outcomes (Frieden and Lake 2003).
However, there are evidence that foreign trade does not just depend on market signals and international institutions. Empirical studies have shown that political factors can have strong impact on the country’s economy. Several studies have shown the strong links of politics with the international economy. (Gowa 1994; Keshk et al 2004; Davis et al 2014)
A recent example of the deep linkage between politics, foreign policy, and the economy is the US-China trade war. Trump’s ‘Make America Great Again’ campaign slogan in the 2016 US Presidential election promised to bring back jobs to the Americans – jobs that disappeared due to increasing openness and globalization. The “rust belt” states (Ohio, Michigan, Iowa, and Pennsylvania), long suffering from high unemployment due to de-industrialization, catapulted Trump to Presidency. Trump must keep his rust belt supporters to win a reelection in November 2020, and so he started a trade offensive, now known as the US-China Trade War. On July 6, 2018, US placed 25% of duties on $34 billion imports from China. China retaliates by imposing 25% tariff on 545 ‘Made in USA’ goods, also worth $34 billion. Attempts to settle a deal had broken down, and so far, the US-China trade war is showing signs of escalation, particularly that Trump is trying to get reelected for a second term as President. The trade war – the result of Trump’s politics translated into foreign economic policy – had so far cost the global economy $600 Billion, slowed down global trade, and had affected countries that are part of the global value chain.3
4 International Political Economy (IPE) Framework in Analyzing Foreign Policy and Its Economic Impact4
Based on the above discussion, an analytical framework is developed by the author to explain the foreign policy shift and its impact on the economy. Considering the factors identified in Section 3, the framework here analyzes the linkage of the domestic structure and the political dynamics in the foreign policy, and consequently, the impact of the foreign policy pivot in the foreign economic relations.
Katzenstein (1978) defines the domestic structure as the state, society, and the policy networks that connect them. The factors within the domestic structure are expanded in this framework. Instead of networks, institutions will be used to cover both formal and informal structures. Within the state, the ruling actors have powerful roles in policy making. In many countries, the political leader and his/her policy preference is an important determinant of the foreign policy. The impact of the ruling political actor’s policy preference, however, depends on the institutions that enable or constrain his/her policies. How the policy preference of the political leader takes shape, and the success and failure of the policy, depends on the strength and weakness of institutions. Institutions and institutional conditions play an important role in shaping the policy preferences of actors and determining policy outcomes.
As well as the domestic structure, politics have a huge role in foreign policy (Gourevitch 1978). The political dynamics between and among actors, the ability of the leader to gather support for the policy, and his/her behavior, can affect policy outcomes. In sum, it is argued here that the leader’s policy preference, institutions, and politics have critical impact in the policy and its outcomes, and will be treated here as independent variables.
The external conditions can also have an impact on policy outcomes. However, the external factors would have to go through the domestic environment to influence policies (Gourevitch 1978). External factors influence policymaking by shaping the interest of the actors, influencing institutions, or by creating the opportunity for the actors to pursue their goals.
Once a new foreign policy is introduced, it sends a “signal” to the domestic and external environment. A foreign policy pivot produces reaction or feedback from the external or international environment. This can affect foreign relations, and consequently, may induce changes in political and economic relations. The new foreign policy and its outcome, specifically the patterns of trade and investment after the foreign policy shift, are the dependent variables in this paper.
As shown in Figure 1, the feedback loop points back to the domestic environment. It indicates that the external environment has to be linked or bound to the domestic factors to influence the domestic policies. Implementation of a new foreign policy can transmit ‘signal’/information and create new realities for the economic partner/s that can lead to changes in the foreign economic relations. The policy shift can result in new trade and investment patterns.
5 Applying the Framework: Duterte’s Foreign Policy Preference, Politics and Institutions
In this section, the independent variables discussed in the above framework are applied to examine Duterte’s foreign policy preference, the domestic political dynamics and the institutions. Since the paper focuses on the economic impact of the policy shift, the discussion on institutions is limited to the economic institutions.
Duterte’s foreign policy preference and politics have been analyzed extensively (Baviera 2016; De Castro 2016; 2018). There are basically two main themes in Duterte’s foreign policy: 1) closer relationship with China, and 2) assertion of an independent foreign policy. The underlying premise of these themes is to reduce reliance on US and other Western allies.
Prior to becoming President in 2016, Duterte did not figure in any debate or discussion regarding foreign policy. During his career as a local politician for more than two decades and a lackluster career as congressman, perhaps the only time he figured prominently in an international issue was when he led a protest in Davao in 1995 against the hanging of the Filipina domestic worker Flor Contemplacion.5
During the presidential debates in 2016, his statement that he will “jet ski to Spratly” and personally plant the Philippine flag in the disputed island gave many people hope that he is a patriot who will fight for territorial integrity.6 However, after the elections, the bravado against China fizzled. Duterte pursued what some analysts referred to as “strategic appeasement” of China (De Castro 2019).
5.1 Duterte’s Policy Preference and Politics
During the September 2016 ASEAN meeting in Laos, US President Barack Obama issued a statement regarding his concern about President Duterte’s drug war. Obama’s advice to implement the anti-drug campaign the right way was not taken lightly. Duterte responded with expletive-laden remarks, while telling Obama not to interfere with internal policies of the Philippines. Likewise, the European Union’s statement against Duterte’s drug war was fiercely rebuked. In October 2016, during his state visit in China, Duterte announced in a speech his “separation of foreign policy from the US …”, his desire to strengthen bilateral relations with China and Russia, and “to follow the ideological path” of the two countries.7
Explanations on the foreign policy pivot of Duterte can be divided into three categories. One school of thought argues that Duterte is advancing a classic realist strategy in geopolitics. As a rising power, China needs new allies and is ready to provide the best possible security and economic benefits to build this alliance. That makes China a very attractive international partner. If Duterte is the classic realist strategist, as some people say he is, that is, someone who responds to opportunities and incentives to increase his material benefits from the alliance, it makes sense to push a new foreign policy in favor of the rising power, which can give him the benefits that he or the Philippines deserves (Ibarra 2017). Moreover, Duterte believes that the US has not accorded the Philippines the respect it deserves as a sovereign country, and through the years, the Philippines had been at the losing end of the US-Philippines alliance; hence, his position that it is time for the Philippines to be independent from the US and seek new partners and allies.
In contrast, the second school of thought believes that Duterte is an inward-looking politician who cannot rise above his parochial interests, and lacks understanding of world politics.8 This group of analysts believe that Duterte does not have a proper grasp of the role of the US in keeping the security balance in the Asia-Pacific, has no respect for the institutionalized and strongly rooted economic and security ties of the Philippines with the US, and has a naïve understanding of the unpredictability of behavior of a non-democratic rising power such as China. They also believe that Duterte’s inexperience and lack of political sophistication made him an easy target and pawn to support China’s expansionist behavior in the region.
The third explanation is connected with the second school of thought. Lacking in ideological, theoretical or practical grounds, some analysts argue that Duterte’s unorthodox foreign policy preference is the outcome of his mercurial personality and populist/authoritarian tendencies. Duterte campaigned and won on an almost monomaniacal platform of “war on drugs”, and from day one of his presidency, he had made it known that he will not hesitate to kill people involved in drugs, and punish those who will stop him from implementing the drug war. Coincidentally, dead bodies of so-called drug suspects started to pile.9
Duterte knows that the international community, in particular, the actors, states and institutions supporting the liberal democratic order will target him for the human rights violations from his drug war. Sticking with the US could mean he will be pressured to give up his brutal solutions on the country’s social problems. This can jeopardize the “strongman” identity that made him popular in the country. Rather than lose his “strongman” card, which is probably his most important political capital, Duterte took the risk to “separate” from the U.S.
The attention given by the media and the adulation of his supporters with his “crass politics” (Curato and Ong 2018) emboldened him to also attack the EU, the UN, the media, and domestic and international actors who come in his way. Having alienated the liberal democratic community, Duterte now turns to China, an illiberal state that shares the same scorn for the western model of human rights. A strongman regime seeking alliance or solidarity with other authoritarian states is a typical “authoritarian playbook” move. Authoritarians have the tendency to stick together and can be depended by other authoritarian rulers for help (Puddington, 2017).
Arugay (2018) argues that the foreign policy shift to China of Duterte is the standard populist performance politics. The anti-US rhetoric is popular among segments of the population such as the left. The use of coarse and reckless language against a powerful state was a bold move that the Filipinos had not heard before. The foreign policy shift was part of Duterte’s performative populist politics – a show – to please and enchant his supporters, who claim to be the “real nationalist Filipino people”.
In addition, luck played a good part in the foreign policy maneuver of Duterte (Baviera 2017). The election of Donald Trump in the US in 2016 saved Duterte from a potentially more interventionist US government. Trump is an inward-looking politician who is more concerned with pleasing his base and securing domestic support than championing the liberal democratic principles of rule of law and accountability. Moreover, Trump could not care less about the human rights violation records of Duterte, as he himself wants to build closer partnership with other authoritarian leaders such as Russia’s Vladimir Putin and North Korea’s Kim Jong Un.
Analyzing the timeline of events leading to the foreign policy pivot to China, it seems that the shift can be strongly linked to a mix of populist politics, the authoritarian tendencies of Duterte, the opportunity provided by Trump’s election, and significantly to Duterte’s “politics of survival” or self-preservation. The political and economic justifications for the shift came much later, almost only as an appendix to provide credence to the policy preference of Duterte.10
5.2 Reaction of Key Economic Actors to the Policy Shift
The unpredictable and unorthodox leadership style of Duterte created a shockwave. The allies and economic advisers of President Duterte immediately issued statements to control the damage, each one providing interpretation on the “alternative” meanings of Duterte’s statements. The Philippine Ambassador to China, Jose Sta. Romana, stated that the announcement of Duterte should be interpreted against the backdrop of the President’s desire for an independent foreign policy in the context of a regional power shift. Sta. Ana pointed out that Duterte did not literally mean that the Philippines will ‘separate’ from its relations from the US, but rather “lessen dependence on Washington … (while) improving relations with China”.11 Other political analysts interpreted Duterte’s statement as a ‘hedging’ strategy to get as much benefit as possible from the different alliances.12
Duterte’s economic team issued statements to mitigate the impact of Duterte’s announcement. Former Philippine Socioeconomic Planning Secretary Ernesto Pernia said that Duterte’s statement, “are unlikely to have an impact.” Pernia stressed that, “The President has a strong, very solid economic team … whatever economic pronouncement, the economic team has the final say.”13 Pernia’s statement was supported by Trade and Industry Secretary Ramon Lopez, who likewise said that “the statement of the President simply means just breaking dependence with western allies, but (we) don’t need to necessarily sever ties and stop trade and investment … We protect and honor all our investments, nothing has changed.” Finance Secretary Sonny Dominguez followed this with a statement that, “The Philippines will only seek a “separation from the economic and defense dependence of the past.”14 Former Budget Secretary Benjamin Diokno and now Central Bank Governor said that “warming ties with China does not mean our relationship with other countries is cooling down.”15
Relative to his predecessors, Duterte is observed to be lacking interest in advancing the Philippine economic agenda and strengthening economic ties with traditional trade partners. During the Asia-Pacific Forum 2017 on Integration and Inclusiveness in Digital Society, former DTI Undersecretary Thomas Aquino stated that the Philippines, in general, had gravitated towards sovereignty issues and domestic political priorities. This was clearly manifested during the Philippine hosting of ASEAN in 2017 wherein economic issues were not given much attention. The Philippines instead focused on security issues, particularly the ‘war on drugs’ campaign.16 The action was a marked contrast from the previous administrations, which had always clearly brought economic issues at the forefront of regional talks, and always seized the opportunity to advance the Philippine development agenda, such as poverty reduction and job creation through economic and technical assistance from economic partners. Former DTI Undersecretary Aquino lamented that the Duterte administration pushed economic issues to the backseat to prioritize security issues.
5.3 Institutional Stability Amidst the Push for Policy Pivot
Duterte, by his own admission, said that he is not adept at economic issues, and hence would just continue what the previous administration had started, and leave matters to the experts in the government.17 However, Duterte continued to issue statements that were sending mixed signals. In particular, his hostile statements against the US, the EU and the UN, his personal preference for closer relations with Russia and China, his admiration for Hitler, and even his claim of being a socialist, had led to confusion and political uncertainty.18
In as far as the economy is concerned, despite Duterte’s rhetoric, bilateral and multilateral economic partnership of the Philippines seems to have remained stable, so far, and other than the temporary suspension of talks for a Philippine-EU FTA,19 there has been no policy reversals in the economic commitments between the West and the Philippines.
Duterte’s lack of interest in economic issues seemed to have served the technocrats well to pursue their priority policies. The situation provided many technocrats the policy space to continue the programs from the previous administration, with some of them actively promoting constructive policies. For instance, the current government kept the manufacturing strategy started by the Aquino administration. The Manufacturing Resurgence Program, implemented in partnership with the US, the EU, and Japan and projected to be completed in 2025, is expected to improve the competitiveness of the Philippine manufacturing sector.20
The technocracy and the partnerships built through the years with the Philippines’ traditional allies protected the economy from Duterte’s knee-jerk policies. Institutions have the ability to lock-in values, norms, and arrangements. In the long run, the investment in institutions can have high returns as they create stability and “path dependence” which can be very valuable in periods of uncertainty and political vulnerability (North 1990). Decades of partnerships and cooperation with the US, the EU, Japan and the UN and other Western allies embedded institutions that set the standards for economic partnership. They had shown commitment in helping the Philippines meet its development needs, provided economic and technical assistance to improve the competitiveness of the country, and helped in improving the living conditions of the people.
Overseas Development Assistance (ODA) is one of the channels by which these countries/institutions harnessed partnership with the Philippines. In 2018–2019, the US, the EU, Japan, and the UN remain to be the top sources of ODA. Despite Duterte’s hostile rhetoric, they had remained committed in providing economic and technical assistance to the Philippines in the form of grants, loans, and aid. (Based on data accessed from the NEDA’s ODA page as of August 14, 2020)21
While technocrats are able to temper the negative impact of the foreign policy shift, reactions still vary. As stated in the framework in Section 3, the policy shift sends signals in the external environment that can change the country’s foreign economic relations. The next section surveys the trade and investment patterns in the Philippines before and after Duterte’s announcement of a foreign policy pivot to China to see if there had been changes.
6 Trade and Investment Trends before and after the Foreign Policy Shift
6.1 Philippine Trade Profile
In the past three decades, the Philippines had established an open economic regime as a result of economic reforms undertaken since the 1990s. The Philippine economy has become more outward-oriented. Internationalization of the economy could be attributed to the trade policy that were implemented in the redemocratization years, which resulted in the Philippines establishing a more open economic regime.
Philippine trade data shows that in absolute terms, international trade has been increasing since 1986 (Based on data from WITS, August 9, 2020). However, trade’s contribution to GDP has not really grown much (Figure 2). Trade ratio to GDP was at 60% in 1990. As of 2019, trade share to GDP was at 69%. This is quite low especially compared to other middle-income ASEAN countries (Malaysia at 123% Thailand at 110%; Vietnam at 210%) (Based on WDI Figures August 8, 2019). The trade performance of the Philippines was at its peak in the Ramos years, ironically, reaching 108% and 99% during the Asian Financial Crisis years of 1997 and 1998, respectively.
6.2 Philippine Exports
Philippine export growth had been stable, despite the US-China trade tensions. Total exports increased in dollar terms in 2019, at US$ 69.5 billion dollars (Figure 3). Except for a slight decline in 2018, total Philippine exports did not suffer as much as other Asian countries primarily because of the huge amount of services exports, which comprise almost half of total exports. (IMF Country Report 2020, 6–13)
Moreover, the Philippines is among the least affected by the US-China trade war because of its relatively lower participation in the global trade and global value chains, compared to other countries in East Asia. While both the US and China are top export partners, only a few Philippine products are included in the China tariff retaliation list against US producers. (IMF Country Report 2020, 6–13). The Philippines has stake in the computer, electronics and electrical industry – among the most vulnerable industries in the trade war between the US and China. However, the Philippine share of gross value added in that industry is only 4%, which is lower than most East Asian countries. (Holland, Ben and Cedric Sam 2019)
In 2019, the US, Japan, and ASEAN were the top three recipients of Philippine exports. The US received 16.7% of Philippine exports, while Japan and ASEAN received 15.3% and 15.6% respectively. Trade relationship with the EU remains stable; its share of Philippine export slightly declined, as a result of ASEAN and other Asian countries increasing their export share. The decline in the EU trade share is a reflection of the EU economies slowing down due to the trade tensions between the US and China and the US and the EU, as well as the uncertainties after the Brexit vote (Business Europe Economic Outlook, Autumn 2019). Meanwhile, China’s share of Philippine exports had been increasing since 2016 from a share of 11% to 14% in 2019, which shows that China is becoming an attractive destination for Philippine products. Based on latest data, Russia has not yet become an important export market (Table 1).
Table 2 compares the export pattern in the years 2015–2016 on a quarterly basis to see if there had been remarkable changes after Duterte declared a foreign policy pivot to China in October 2016. Comparing export figures in 2016Q3 and 2016Q4, it can be seen that total exports declined by $297,000. Export figures in top export destinations of the Philippines, Japan, the US, the EU, ASEAN and China, decreased. However, this pattern seemed not unusual as the same patterns of export decline also happened in the 4th Quarters of 2015 and 2017. In relation to the foreign policy shift, the data shown in the table below presents two possibilities: 1) the policy pivot has no impact on export patterns, or 2) the policy pivot has no impact in the immediate short-term.
Table 3 shows the average growth rate of exports and compares the average growth of exports in the Aquino years and the first half of Duterte’s term as President. There are three columns: the average growth rate spanning 2010–2019 for both administrations, the years 2010–2016 during the Aquino years, and 2016–2019 of the Duterte administration. Based on the data, growth of exports to the US and the EU actually improved a bit during the time of Duterte. Growth of exports to China also increased. Exports to China grew at an average rate of .17% in 2016–2019, compared to .01% in 2010–2016. Exports with Russia also showed signs of increasing.
Given the pattern in growth rates, there is a possibility that the policy shift slightly affected export patterns by the mid-term of Duterte’s administration. However, other than growth rate data, there are still no other clear patterns or changes linking the increase in trade in the Philippines to Duterte’s pivot. There are just too many other factors that could have also contributed to positive growth in those periods. In particular, the global economy has kept on growing after the recovery from the Global Financial Crisis in 2008. As such, countries like the Philippines that actively engage in global trade can keep on expanding. In addition, the demand for Philippine goods and services had remained stable in those years, as shown by the steady growth of trade. Finally, Trump was elected in 2016. His ‘America First’ policy urged the Federal Reserve Board (FRB) to keep the attitude for financial expansion, which boosted trade prospects of economies tied to the US and are plugged to the global value chain, including the Philippines.
The country’s top export products for the periods cited were manufactured and electronic goods, products that have steady markets in industrialized countries. This also shows that the Philippines remains to be a vibrant part of the global production network and has kept competitiveness in the sophisticated electronic and manufacturing sectors (IMF 2020).
Meanwhile, growth rate of trade with Japan decelerated in 2016–2019. This was part of an overall pattern of decline in Japanese exports to Asia and other destinations of Japanese electrical equipment, general machinery, and transport equipment from 2016 to early 2018 (Mizuho Economic Outlook 2018).
The other side of the story is that imports had also been increasing at an accelerated pace, worsening the Philippine trade balance (Figure 4). Massive imports coming from China and Southeast Asia were responsible for the deteriorating trade balance. In particular, importation of manufactured products from China increased its share from 8% in 2010 to 22% in 2019 (Table 4). Electrical machinery and transport equipment were the top imports from China (Table 5).
Increasing imports per se is not bad for the economy as imports are often necessary to support the continued expansion of the economy. For the Philippines, in particular, imports help meet the growing demand for consumer goods, as well as inputs for construction and the manufacturing sector. However, the import-driven trade deficit further put pressure on the peso, which had depreciated to an all-time low in the past 10 years, making the Philippine peso Asia’s worst performing currency.22 This creates a heavy burden in a country such as the Philippines which has a huge external debt (22% of GDP as of 2019) and is heavily dependent on imported fuels, as well as imported foods such as rice, grains, and meat products. A striking development is that under Duterte’s term, bilateral trade deficit with China further widened. Import share of China was at 22.8% of Philippine imports in 2019, almost a quarter of Philippine imports. Such high level of dependence on cheap imports from China have potential adverse effect on domestic production, as well as the country’s prospects for re-industrialization, given that a huge volume of imported products are electronics and machinery.
The table below compares the import pattern in the years 2015–2016 on a quarterly basis. This is to see if Duterte’s foreign policy pivot, which was declared in October 2016 had an impact in Philippine import movement, in the short term. Comparing import figures in 2016Q3 and 2016Q4, it can be seen that total imports increased. Import figures in the US, the EU, ASEAN, Japan, and other top trade partners increased. Imports from China decreased in the 2016Q4, although China remains the top import source for that year. (Table 6).
To sum up, trade with the Philippines’ traditional trade partners, the US, Japan, and the EU remains robust. The US and Japan remain to be the main export destination of the Philippines. The US has always been a top trade partner of the Philippines and destination of its exports, reflecting the deep historical and economic ties between the US and the Philippines. Moreover, China’s rise as a top trade partner did not come as surprise. Even before Duterte’s active engagement with China, the said country was already an important trade partner of the Philippines and of the rest of ASEAN, specifically a main source of imports. ASEAN has been incurring huge trade deficits from China. Significantly, the Philippines’ Balance of Trade deficit with China dramatically increased in 2019 compared to previous years (Table 7). As mentioned, such high level of trade dependence can increase the country’s vulnerability, in the long run.
6.3 FDI Trend during the Duterte Period
Figure 5 shows the amount of Philippine FDI inflow per year from 2010 to 2019. Except for a slight dip in 2015, there had been an upward trend until 2017, peaking at P10.2 Billion. From 2018-2019, FDI trend had gone downwards and decreased to P7 Billion in 2019. The decrease in FDI was said to be the result of uncertainties brought by prolonged debates on amending the Corporate Income Tax and Incentives Rationalization Act (CITIRA) and the US-China trade war, which made companies put on hold their plans for investment and expansion in the Philippines.23
The Philippines’ traditional economic partners, ASEAN, the EU, Japan, and the US were the biggest investors in the past four years (2016–2019). Summing up the FDI inflows in that period, ASEAN countries delivered the biggest FDI, followed by the EU, Japan and the US. FDI coming from China was P353 Million, a huge jump from Chinese FDI inflow from the Aquino years of a total of P51 Million. China still lags behind FDI inflows from Hong Kong (P1.6 Billion) and Taiwan (P604). Japan’s FDI dropped in the periods 2016–2019, although it was the biggest source of FDI in 2016. Notably, Russia, still failed to make it as a top FDI source of the Philippines, despite the investment pledges and the efforts exerted by the Philippine government in campaigning for stronger economic relations with Russia. (Table 8)
A month-on-month assessment of 2016 FDI data showed some notable patterns. There was a huge FDI outflow from the US in September (–3.1), October (–1.3) and December (–12). It is significant to note that those months coincide with the period of Duterte’s declaration of pivot to China. The EU also had a huge FDI outflow in November 2016. There was an FDI outflow from Hong Kong as well (–4.3) and ASEAN in the month of December (–12.6). (Table 9)
It is possible that the changes in FDI flows is a reaction to Duterte’s hostile remarks against the West. Sentiments of investors can deteriorate with unfriendly remarks from the government. The London-based think tank, Capital Economics issued a cautionary statement regarding Duterte’s erratic leadership as a risk factor in the economy. Other political factors also come into play such as the brutal drug war which the government started to implement seriously at that time and were criticized by the international community. Panel data analysis conducted by Erkekoglu and Kilicarslan (2016) in 91 countries, including the Philippines, showed a strong correlation between political stability, absence of violence, and the efficacy of administration, and their relations to FDI flows. Deterioration in these political factors had been found to decrease foreign investments inflows in the host country.
The timing of FDI outflow corresponds with the period of the announcement of the policy shift, so there is a probability that the outflow was a reaction to the Duterte’s policy pivot. Still, it is difficult to make a conclusive statement since investment decisions could have been made months ahead. Moreover, the reaction of business groups vary. Notably, businesses with strong connections to China saw things positively. In 2017, FDI inflow to the Philippines from the EU and the US increased again. In particular, FDI from the EU increased by P1.7 Billion in 2017, the highest inflow since 2010 (Table 10). According to some analysts, there are investors from the EU who actually saw an opportunity in the Philippine pivot to China; subsequently, the Philippines attracted a lot of Greenfield investments from that region. The Philippines was hailed as one of the top investment destinations in 2018. The new-found attractiveness of the Philippines as an investment destination was based on the projected increase of FDI coming from China. (Oxford Business Group)
Remarkably, despite the rhetoric of Duterte against the US, the US government exercised restraint and did not make any corresponding policy actions that could have affected its economic relationship with the Philippines. In fact, in an official report of the US government, the ‘2019 Investment Climate Statements’, it was acknowledged that the Philippine government, including the Duterte administration, had accomplished a lot in improving the country’s investment environment in the past decade. The said report recognizes the efforts undertaken by the Duterte administration to remove the constraints in doing business, such as the passage of the Foreign Investment Negative List (FINL) which expands the scope of foreign ownership in investments, and other bills that are pending in the Philippine Congress to ease the restrictions in FDI. (US Department of State: 2019 Investment Climate Statements, https://www.state.gov/reports/2019-investment-climate-statements/).
However, even during the peak of FDI inflow in the Philippines in 2017, the Philippines continued to lag behind other middle income ASEAN countries. The US Investment Climate report pointed out that the Philippine government needs to do a lot of cleaning up to improve its investment position. Particularly, there is an urgent need to address the restrictive FDI environment and the infrastructure problems in the Philippines.
This paper examines President Duterte’s foreign policy pivot by looking at the factors that led to the policy shift and analyzing one of the important outcomes of the pivot: the possible change in foreign economic relations. A comprehensive framework is developed to analyze Duterte’s policy preference, the institutions that enabled and constrained the unorthodox policy shift, and the politics behind the policy implementation. Examination of these factors aim to shed light on the nature of the foreign policy, how it is implemented, and the feedback transmitted to the external environment, which could have affected patterns of foreign trade and investment.
As pointed in Section 4, the policy pivot to China mainly emanated from President Duterte himself. Based on the timeline of events, the policy shift can be strongly linked to Duterte’s rage over the West’s (the US and the EU) disapproval of his war on drugs. Duterte’s motivation appears to be purely self-preservation or “survival politics”. His authoritarian tendencies and crass politics enabled him to unilaterally declare such a policy shift, without regard to protocols and norms, particularly in administrative departments that are unable to oppose him such as the Department of Foreign Affairs.
External factors played a crucial part and reinforced Duterte’s push for a policy pivot. The turn of events, particularly the November 2016 election of Donald Trump, an inward-looking politician who lacked interest in human rights issues and geopolitics, provided the opportunity to carry out the policy shift without getting challenged by the US. Also, the global economy had recovered from the crisis and kept on expanding. The Philippines benefitted from this, and Duterte reaped the rewards. Other than inheriting a cash-rich government from the previous administration, the stable demand for Philippine goods and services in the global market kept the economy in good shape in the early Duterte years, saving Duterte from a potential disaster from his unpredictable leadership style. Amidst the political and diplomatic uncertainty that followed, the economic institutions provided stability. Immediately after Duterte’s announcement of a policy pivot to China, the top technocrats issued statements reminding everyone that “it is business as usual” and that the Philippines is merely diversifying its partners. The intervention of technocrats had played an important role in cushioning the impact of Duterte’s unorthodox leadership. This generated positive signal to the international community that despite the policy pivot, the economic policies that enabled the economy to expand will be continued, and therefore the economy can continue to steadily grow (Oxford Business Group). Trade and investment policies with traditional partners had been kept stable, and hence the trade and investment ties with the US, the EU, and Japan remained robust. In sum, despite the foreign policy pivot promoted by Duterte, the economic policies from the previous administrations were continued, and the foreign economic relations and prospects of the Philippines has not radically shifted.
This study covers up to the mid-term of Duterte’s presidency, and is a preliminary analysis on the impact of the foreign policy pivot on trade and investments in the Philippines. Research on the long-term impact of the foreign policy shift should be addressed. Moreover, developments in global politics, particularly the direction of US politics, can have a strong impact on the sustainability of this foreign policy pivot and should be closely monitored.
Excellent research assistance of Shinji Takenaka is acknowledged. The author also acknowledges the sharp comments and inputs provided by the reviewers on the paper. The author has sole responsibility for any possible errors and shortcomings in the paper.
Notes on the Contributor
Jenny D. Balboa has a Ph.D. in International Relations from the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan. She was a former Supervising Research Specialist at the Philippine Institute for Development Studies (PIDS) and Project Consultant at the Asian Development Bank Institute in Tokyo.
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