Limited Impact: Philippines-China Tensions and Economic Consequences

A London-based think tank has assessed that the economic fallout for the Philippines from the escalating tensions with China over the West Philippine Sea is likely to be “limited.” This comes amid recent incidents, including a collision near a contested reef that further strained Manila-Beijing relations.

Senior Asia economist Gareth Leather of Capital Economics highlighted that the Philippines is not deeply integrated into China’s economy, which mitigates potential economic impacts. The Philippines’ exports to China constitute only 2.7% of its GDP, one of the lowest ratios in the region, suggesting limited vulnerability in trade. Additionally, the impact on tourism is also expected to be minimal, as spending by Chinese visitors before the pandemic was just 0.4% of the Philippines’ GDP.

Further, the situation presents a strategic opportunity for the Philippines amidst the global shift in supply chains, fueled by the growing rivalry between Beijing and Washington. The Philippines, with its low-wage economy and proximity to existing supply chains, is well-positioned to benefit from these global economic shifts. This dynamic is observed as countries like Vietnam and India have already started reaping the benefits of this transition.

The recent developments follow a series of tensions between the two countries, with President Ferdinand Marcos Jr. shifting the Philippines closer to Washington and away from China. This geopolitical realignment has affected investment ties, with the Philippines withdrawing applications for Chinese funding for significant infrastructure projects. These decisions signal a move away from the previous administration’s approach of setting aside territorial claims in exchange for Chinese investments.