Philippines. More than seven thousand islands with a hundred million people. This is the point on the world map that periodically flashes red because of the conflict with China. And it causes a certain itch not only among politicians and the military, but also among business representatives and logisticians. Because there is a potential threat of an escalation of the conflict, which will affect an important sea trade route. Furthermore, if a war breaks out, it could involve not only China and the Philippines, but also other countries such as the United States, Australia, Japan... CFTS immersed itself in this theme and talked to experts about both military risks and the prospects for infrastructure projects in the region.
Sharing the islands
August 19, 2024. Global news agencies are reporting a clash between Chinese and Philippine coast guard ships. This time, near one of the Spratly Islands in the South China Sea, the Philippine ships BRP Bagacay and BRP Cape Engano "encountered aggressive maneuvers" by Chinese ships. As a result, both Philippine ships sustained significant damage. In response, one of the Chinese ships was rammed. And such episodes in this region are happening all the time…
China and the Philippines have a long-standing conflict. In fact, Beijing has been arguing over territory with its other neighbours, laying claim to almost the entire South China Sea. After the end of World War II, it introduced the so-called "Eleven-dash line" defining Chinese claims to this part of the sea.
Subsequently, in the 1950s, China ceded to Vietnam, and the Nine-dash line remains. China is in contention with Malaysia, Vietnam, Brunei, the Philippines, and Taiwan over certain islands and atolls.
The Ayungin Atoll, which is part of the Philippines' exclusive economic zone, has been a point of constant clashes between the Chinese coast guard and the Philippines. Manila's rights to the atoll were confirmed in 2016 by the Permanent Court of Arbitration in The Hague.
Since 1999, the BRP Sierra Madre, a ship purposely set aground there to mark the Philippines' territorial claims, has been sitting on the Second Thomas Shoal near the atoll. The ship is old and rusty, but a small number of Filipino soldiers are permanently stationed on it. This small garrison needs to be supplied with food, water, etc. In addition, Manila wants to fortify its base, which requires the supply of materials for building.
Beijing does not pay attention to the court's decision. That is why the Chinese fleet is constantly guarding the shoal. There are clashes between the parties. The largest clash occurred on 17 June this year, when the Chinese coast guard blocked a supply mission and 8 Filipino sailors were injured.
In general, the escalation occurred after Ferdinand Marcos Jr. became president of the Philippines in 2022. His predecessor, Rodrigo Duterte, had moved towards rapprochement with China.
But Marcos' foreign policy has changed. He does not want to cede territory to China, which is rumored to contain vast reserves of oil. The Philippines has recently submitted an extended claim to the United Nations for the continental shelf.
According to Euan Graham, senior analyst at the Australian Strategic Policy Institute (ASPI), Marcos "has publicly laid out a clear and principled stance, founded on international law". And this "has helped generate sympathy and support for Manila as a plucky David standing up to Beijing’s Goliath".
The key is that the current President of the Philippines has strengthened military cooperation with the United States. This includes the deployment of personnel at military bases, joint exercises, etc. The United States has been given the opportunity to stay at northern Philippine military facilities close to Taiwan. And in recent exercises, it deployed missile systems in the Philippines. This is not to China's liking with its ambitions in the region.
The Philippines has stated that a conflict over the disputed shoal could involve countries in the Indo-Pacific region and even threaten to use nuclear weapons.
The United States has had a mutual defence treaty with the Philippines since 1951. And they have warned Beijing that it extends to Sierra Madre.
A sea of resources
So why is huge China clinging so stubbornly to this piece of the South China Sea? The answer, as always, is on the surface, or rather under it, there's oil. Hydrocarbon deposits in the region were discovered in the late 1960s, and a decade later the first Philippine field was discovered. Currently, oil from the waters off the Spratly Islands covers more than 15% of the Philippines' needs. However, recent explorations have shown that the deposits of black gold are not as significant as expected.
Therefore, the two countries are more interested in the exclusive economic zone - 200 miles around a piece of land belonging to one country or another. According to some reports, these areas may contain 50 trillion cubic meters of natural gas and more than 5 billion barrels of oil.
The region is also rich with fishery resources, so it is interesting to all six countries that claim to be present on the islands to some extent.
And of course, maritime trade. The disputed waters, which China and the Philippines are arguing over, are located near one of the world's busiest shipping routes, through which goods are delivered between China, Japan, South Korea, India and Europe. According to Reuters, $3 trillion worth of goods are transported here annually in monetary terms. Chinese sources say it was $3.4 trillion in 2016, out of $16 trillion in total global maritime trade.
About 50,000 ships pass through the Strait of Malacca, which, along with the Suez and Panama Canals, is one of the world's busiest shipping lanes, and the majority of them pass through the South China Sea.
So, on the one hand, for China, its presence here means the ability to control one of the main routes of world trade. On the other hand, for shipowners and shippers from other countries, it means a hypothetical headache, higher transportation costs, and the necessity to find alternative routes in case of an escalation of the conflict in the region.
Dollar against yuan
The Philippines' renewed partnership with the United States is not only about the military-political bloc, but also about the economy.
Last year, the Philippines withdrew from the New Silk Road project, which it joined under Duterte. Despite the fact that China promised to allocate about €4.7 billion for the construction of railway lines on the islands of Luzon and Mindanao. Manila explained this step by the fact that Beijing "did not respond to requests for funding for railway construction projects". And "no" geopolitics for you.
This spring, during a trilateral summit of leaders, the leaders of the United States, Japan and the Philippines announced their intention to develop the Luzon Economic Corridor, which will provide a link between Subic Bay, Clark, Manila and Batangas in the Philippines. The partners aim to accelerate "coordinated investment in high-impact infrastructure projects, including rail, port modernisation, supply chain and clean energy and semiconductor deployment, and agribusiness to further connect and stimulate economic growth in each of the hubs".
The Americans also promise to invest over a billion dollars. As U.S. Secretary of Commerce Gina Raimondo stated in the spring, investments will be directed to digitalisation, solar energy, and the construction of electric vehicles. US officials also want to increase chip production here to reduce dependence on China and Taiwan. But it has to be private capital, and Raimondo urged businesses to double the number of chip testing and packaging plants located here (currently 13).
Earlier, in 2021, G7 leaders launched the Build Back Better World Initiative (B3W), a large-scale programme of infrastructure investment in middle- and low-income countries. It was later reorganised into The G7 Partnership for Global Infrastructure and Investment (PGII), which is expected to implement projects worth $600 billion. But it is difficult to compete with the Chinese initiative.
Currently, the United States is more active in providing financial support to the Philippines' defence sector. For example, it has recently been announced that the US will allocate $500 million to modernise the ally's army and coast guard.
Mustafa Cem Koyuncu, founder of the Turkish consulting firm Bridge Turkey, has been following the development of relations between China and the Philippines for a long time and has written academic articles on the topic. He believes that in terms of investment, Duterte's period was still a "golden period for both countries".
“In October 2016, Manila and Beijing finalized $24 billion in deals and signed 13 government-to-government agreements. In November 2018, the Philippines officially announced its cooperation with the Belt and Road Initiative (BRI) by formalizing the deal through a memorandum of understanding. However, since Marcos took office, relations have been deteriorating day by day. One symptom of this deterioration is the Philippines' decision to quit China's Belt and Road Initiative," he said in a commentary to CFTS.
According to Cem Koyuncu, the United States and its Western partners will not be able to replace China for the Philippines. "The initiative aims to enhance commercial connectivity through trade corridors, operating within the decision-making framework of a single nation that promises timely completion and funding. However, currently, the primary motivation behind US and Western financing is to create a counterbalance to China and diminish the effectiveness of the Belt and Road Initiative. For this reason, this approach does not inspire confidence among countries seeking investment. Atlantic countries, particularly the US, adopt a security-oriented approach toward the Philippines, whereas China focuses more on economic interests," he explains.
“Decision-making processes for Western-based funds are slower and require approval from multiple states. Given the West's financial crises and rising trade protectionism, it seems unlikely that an alternative to the Belt and Road Initiative will materialize anytime soon,” he adds.
Powerful Chinese investments are indeed "not burdened" by European regulatory rules, says Victoria Orlyk, an expert on international relations at the National Institute for Strategic Studies. But she reminds us that the Chinese initiative is known not only for the successful implementation of individual projects, but also for the growing credit dependence of BRI partner states, the use of debt-trap diplomacy, violation of EU rules and standards for transparency and sound project management, etc. As a reminder, the CFTC has previously analyzed the impact of Chinese investment on logistics to Europe and the economies of the countries.
Nevertheless, Cem Koyuncu is convinced that the Philippines has significant advantages in finding alternative sources outside of China. And finding funds for many projects in institutions such as U.S.-dominated World Bank, Japan Cooperation Agency, India who wants to balance China or the Asian Development Bank, in which the U.S. and Japan hold the most shares.
“In times of geopolitical pressure and erosion of unipolarity, countries in critical geographies can come to the fore and gain some privileges. Located in the center of the South China and Philippine Sea, linked between Indonesia, Japan, and China and a strategic destination on maritime transport lines between the Indian and Pacific Oceans, The Philippines is one of these countries,” he told CFTS.
Waiting for the election
"The South China Sea in general is of great importance for global trade. It is a transport artery with a turnover of a trillion dollars. And China, Vietnam, Indonesia and other countries want to have influence here. China is violating the sovereignty of neighboring states, creating artificial islands in the sea. The Philippines has attracted the most attention in recent months, but the conflict should be viewed more broadly," expert in international affairs Yevhen Dobriak comments to CFTS.
"At this stage, it is unlikely that anyone can predict how long the truce between China and the Philippines will last. Even the terms of the new agreement between them are not disclosed, and its duration is not known. Perhaps Manila hopes that in the future it will be able to make a separation by joining forces with other countries in the region. But the threat of escalation also remains," he says.
Now, both China and the Philippines, as well as other players, are awaiting the results of the US election, experts say. The main intrigue is whether Donald Trump will become president.
“Coming to power in 2016, Trump, with his “America First” rhetoric, caused a significant shift in US policies, affecting Trans-Atlantic relations and alliance ties in the Pacific. Departing from the traditional grand strategy of the US in the Indo-Pacific region, Trump often acted independently rather than with allies, pursuing his own agenda,” Mustafa Cem Koyuncu says.
"First of all, the US has internal problems to address. The budget deficit is higher than ever. Growing sociological divisions and political polarization among the population threaten the political integrity of the US. If Trump focuses on the US's internal structural problems, he will have less time to pay attention to global issues," says the founder of Bridge Turkey.
He predicts that some initiatives launched by the United States, such as the Indo-Pacific Economic Framework (IPEF), QUAD, the Blue Pacific Partnership (PBP), etc., may be suspended or their impact may be reduced.
“Countries in the region will increase their armament and form military alliances. In this context, Japan, which has gradually launched armament programs after Abe's assassination, may come to the forefront. Military alliances could be established between India, the Philippines, Vietnam, and Taiwan. Additionally, Russia and North Korea will likely seek to be more active in the region,” Cem Koyuncu pointed out.
"If the US reduces its interest in the region economically, politically and militarily, it will simultaneously reduce the interest in the US from countries in the region that are trying to maintain a policy of balance," he adds.
Oleg Posternak, head of the Centre for Political Intelligence, advises not to rush to judgement, especially before Trump has presented his foreign policy doctrine. "The issue is covered with speculation, given the possible anti-Chinese orientation of Trump's policy as a key direction," he says.
"If we recall the situation with the 60 billion for Ukraine that was blocked, then there was also talk of 11 billion for infrastructure development in the Pacific, which also got stuck. The Republicans themselves advocated for more funds to be allocated for these needs," says Ivan Kyrychevskyi, a military analyst at Defense Express.
"Therefore, we should distinguish between political rhetoric and strategic interests. Another question is whether America has an effective plan of action in case of a serious escalation of a conflict in the South China Sea," he adds.
"Everyone is waiting for the US election results. Perhaps this uncertainty is why the Philippines did not want to take advantage of American help and signed an agreement with China. But no matter who comes to power, Democrats or Republicans, the US will not just withdraw from the region. It will still be important to them," emphasizes Yevhen Dobriak.
A truce, but a temporary one
Following the above-mentioned clash, the Philippines and China reached an agreement on 21 July "on supply missions to de-escalate tensions in the South China Sea". According to the agreement, when the Philippines needs to send essential supplies to personnel staying on a stranded ship, China will allow it to do so, provided that the Philippines informs it.
Mustafa Cem Koyuncu is convinced that the agreement cannot resolve the conflict between China and the Philippines. And after signing the agreement, both sides made statements that are negating its conditions.
So, without naming China, Marcos said the Philippines will address challenges to its territorial sovereignty in the South China Sea, known as the West Philippine Sea in Manila, by asserting “our rights and interests in the same fair and pacific way that we have always done”.
Synchronously, a Chinese Foreign Ministry said that Ren'ai Jiao is part of China's Nansha Qundao and China has sovereignty over Ren'ai Jiao and the rest of Nansha Qundao as well as their adjacent waters. By keeping its warship grounded at Ren'ai Jiao for decades running, the Philippines has been violating China's sovereignty and the Declaration on the Conduct of Parties in the South China Sea, especially Article 5 which says the parties should refrain from action of inhabiting on the uninhabited islands and reefs.
"China will control the entire supply process. This means that the Philippines cannot supply large quantities of construction materials to the warship and try to build a permanent facility or a permanent base on it," Koyunju said in a commentary to CFTS.
Nevertheless, there is evidence of a decrease in tension in this conflict, the expert says. After all, the Philippines has refused the US offered assistance in the Sierra Madre resupply operation at Second Thomas Shoal. White House National Security Adviser Jake Sullivan stated that "the United States will do whatever is necessary to ensure that its treaty ally can resupply in the Sierra Madre at Second Thomas Shoal".
“In essence, China has agreed to permit the Philippines to resupply food and water to the soldiers stationed on the ship, while prohibiting the delivery of building materials. This stance was established during former President Duterte's administration and has now been accepted by President Ferdinand Marcos Jr. Consequently if both nations revert to this agreement, it appears that the Philippines will have gained nothing from the recent confrontation,” he comments.
“Under Duterte, the Philippines established strong relations with China, and under Marcos, the country has moved closer to the US. To create a more realistic and stable foreign policy, the Philippines must pursue a balanced approach. In this context, ASEAN's "centrality" policy can serve as a valuable guide,”the expert emphasizes.
Meanwhile, signs of easing tensions in the region are being overshadowed by new incidents. Two Chinese aircraft dropped flares in the path of a Philippine Air Force plane patrolling the Scarborough Shoal. Diplomats are exchanging accusations of violating international law and, of course, the "need to de-escalate tensions".
Maritime parallels
Watching the Sino-Philippine conflict against the backdrop of the current large-scale war allows us to draw certain parallels with the Russian-Ukrainian confrontation in the Black Sea.
In both cases, there is a clear heavyweight in the form of either a former empire or a "sub-empire" with its insatiable appetite for neighboring territories. Both situations demonstrate that cooperation with such a neighbor is relatively peaceful only as long as the "junior partner" is willing to sacrifice its economic interests, otherwise it will lead to war or escalation.
By the way, a year or so ago, when the Russian Black Sea Fleet could obstruct shipping to Ukrainian ports, the term "pirates of the twenty-first century" was often used to describe the Russians. Similarly, now on social media, you can find similar Filipino memes about the Chinese - "pirates of the twenty-first century" referring to the Chinese navy, respectively.
It is also noteworthy that since 2021, China and Russia have been conducting joint naval exercises in the Philippine Sea, which is neighboring the South China Sea. In June of this year, they jointly trained to detain a ship, as well as carried out practical artillery and simulated missile firing at maritime targets.
The Russian industry media also sings the praises of the Chinese maritime police. This is a flotilla of fishing and other civilian vessels, supplemented by special vessels, that is tasked by Beijing with controlling disputed waters. These civilian-military forces are designed for operations in the "gray zone" and have long been a powerful tool for China at sea. Therefore, we should be careful that the Russians do not start creating something like this in the Azov-Black Sea basin.
And we should keep an eye on the conflict in the South China Sea from a logistical perspective. After all, the situation with the Houthis in the Red Sea has shown that changes in global sea routes can affect Ukrainian shippers. An additional logistical obstacle on the way of goods to Asia is also unlikely to please domestic exporters.
