China and The Philippines:

Moving beyond the South China Sea dispute

Ian Story, The Jamestown Foundation, China Brief
10/25/2006

During the first decade of the post-Cold War era, the development of Sino-Philippine
relations was held captive by overlapping territorial claims of the Spratly Islands in the
South China Sea. Occupying an important strategic position next to major commercial
Sea Lines of Communication (SLOCs) and possessing a seabed reputed to be rich in
hydrocarbons, the Spratly Islands became a critical source of contention between China
and the Philippines as well as among four other parties (Brunei, Malaysia, Taiwan and
Vietnam).
Sino-Philippine relations deteriorated significantly in 1995 when China’s armed forces
occupied the Philippine-claimed Mischief Reef, located a mere 135 miles west of
Palawan Island. In 1998, tensions further escalated when China replaced the original
structures on Mischief Reef with a three-story concrete fortress [1]. During the 1990s,
Philippine politicians argued that the implications of China’s assertive behavior in the
area transcended the strategic or economic importance of the disputed islands and cut to
the heart of China’s long-term ambitions in Asia. In 1995, Philippine President Fidel
Ramos declared that the Spratlys had become a “litmus test” of China’s Great Power
ambitions, while his successor, Joseph Estrada, warned that the dispute was about
“Southeast Asia’s bottom-line security.” Negative Philippine perceptions of the PRC
were reinforced by a perceived lack of sincerity on Beijing’s part to resolve the dispute,
described by former Philippine Defense Secretary Orlando Mercado as “talk and take.”

The Dawn of the Golden Age

Since the turn of the century, however, Sino-Philippine relations have moved beyond the
South China Sea dispute, resulting in a more cordial and productive phase in bilateral
relations. Indeed, when People’s Republic of China (PRC) President Hu Jintao paid a
state visit to the Philippines in April 2005, Philippine President Gloria Macapagal Arroyo
hailed the visit as the beginning of a “Golden Age” in bilateral ties.

Of the several factors that account for the near-transformation of Sino-Philippine

relations, burgeoning economic ties have been a key factor. When President Arroyo
succeeded Estrada in 2001, her administration set economic rejuvenation as its top
priority. Manila looked to China, Asia’s fastest growing economy, as one of the key
economic engines that could help pull the country out of its economic torpor. Arroyo was
determined to prevent the Spratlys dispute from hindering the development of bilateral
ties, especially the goal of strengthening two-way trade and investment. As the new
century dawned, the economic relationship between the two countries was at last
beginning to show promise, mainly due to China’s thirst for imported raw materials and
other commodities. In 2000, the value of two-way trade stood at US$3.3 billion; by 2005,
it had risen to $17.6 billion, an increase of 433 percent (China Daily, January 16). In
2005, the PRC was the Philippines’ fourth-largest trade partner (after the United States,
Japan and the European Union) up from 12th place in 2001 (Philippines National
Statistics Office, June). Notably, the Philippines enjoys a healthy trade surplus with the
PRC, amounting to an astonishing $8.1 billion in 2005 (Philippine Star, June 1). The PRC
has also stepped up aid and investment to the Philippines in recent years. During Hu’s
visit, China agreed to invest $1.1 billion in the Philippines (including $950 million in a
nickel mining plant in the economically depressed Mindanao region). It also agreed to
provide a $542 million concessional loan for the upgrade of the North Luzon railway
project from Manila to the Clark Special Economic Zone, plus an additional $2.5 million
in grants (Philippine Star, April 28, 2005). Since Hu’s visit, several large delegations of
Chinese businessmen have passed through the Philippines and have shown a keen interest
in investing in infrastructure projects, agriculture and fisheries, mining and offshore oil
fields. The two sides have set an annual target of $30 billion in bilateral trade by 2010.
Given the extraordinary annual growth rate of 40 percent, this target seems quite realistic.

The second factor behind improved relations has been the potential breakthrough in the
Spratlys dispute. As part of China’s charm offensive toward the Southeast Asian region,
Beijing has sought to reassure the ASEAN countries that its growing power does not pose
a threat to regional stability. China wants to demonstrate that its behavior in the Spratlys
dispute is a “litmus test” of its benign intentions toward Southeast Asia. As a result, in
2002 China and ASEAN signed the Declaration on the Conduct of Parties in the South
China Sea (DoC) which aimed to freeze the status quo and encouraged the disputants to
pursue confidence-building measures (CBMs) to ease tensions. The DoC paved the way
for a landmark agreement between state-owned energy companies Philippine National
Oil Company (PNOC) and China National Offshore Oil Company (CNOOC) to conduct
joint seismic studies in the disputed waters of the South China Sea to assess the extent of
the oil and gas deposits in the area. The agreement—known as the Joint Marine Seismic
Undertaking (JMSU)—was signed in September 2004 during a state visit to the PRC by
President Arroyo. Manila has characterized the JMSU as “marine scientific research,”
one of the CBMs outlined in the DoC. In March 2005, after initially condemning the
agreement, Vietnam’s PetroVietnam joined the JMSU as well. The three parties have
stressed, however, that the three-year JMSU is a commercial agreement only, that it will
not involve any drilling and that it does not change the sovereignty claims of the three
countries involved. Nevertheless, Arroyo hailed the JMSU as a “historic diplomatic
breakthrough for peace and security in the region,” while China lauded the agreement as
the first step toward implementing Deng Xiaoping’s 1988 proposal to shelve the
sovereignty dispute in favor of the joint exploration and extraction of resources (People’s
Daily, March 18, 2005).

The third factor was an acceleration of China’s charm offensive toward the Philippines
following Arroyo’s decision to withdraw Philippine military personnel from Iraq in July
2004. After 9/11, the U.S.-Philippine alliance was rejuvenated as Arroyo emerged as one
of Asia’s strongest supporters of the U.S.-led war on terrorism. In the wake of the al-
Qaeda terrorist attacks, the United States stepped up its economic and military aid to the
Philippines and became further involved in efforts to resolve the country’s internal
security problems. Beijing found the reinvigorated U.S.-Philippine alliance unsettling;
some Chinese security analysts viewed it as an attempt by Washington to strengthen its
military profile in Southeast Asia as part of an on-going strategy to “contain” the PRC
(Beijing Review, March 14, 2002). In July 2004, however, U.S.-Philippine relations
suffered a downturn when Arroyo withdrew 51 Philippine military personnel from Iraq to
appease Iraqi insurgents who had kidnapped and threatened to execute a Filipino truck
driver. The Bush administration was disappointed with the decision, but relations
recovered quickly, and Manila continues to stress its on-going support for the war on
terrorism.

Growing Military Relations

Viewing the Iraq controversy as an opportunity to strengthen its bilateral ties with the
Philippines, the PRC offered greater economic and security interaction. Manila was
responsive to Beijing’s overtures, possibly signaling to Washington not to take its
Philippine ally for granted. While Manila officially denied any link between its increased
ties with China and the fallout from the Iraq pullout, soon after the withdrawal Manila
and Beijing agreed to expand security ties. At the Hu-Arroyo summit in September 2004,
the two sides agreed to initiate regular high-level talks on defense cooperation, increase
military exchange visits and swap intelligence on transnational threats. In May 2005, the
first annual PRC-Philippines defense talks were held in Manila [2]. At the talks, China
agreed to donate $1.2 million worth of heavy engineering equipment to the Armed Forces
of the Philippines (AFP), offered five training slots for Philippine officers to attend
training courses in the PRC and proposed joint naval exercises (Philippine Star, May 24,
2005). The military equipment, consisting of six bulldozers and six earth graders, was
delivered in December 2005. Manila quietly rejected the offer of joint naval exercises,
however, due to the dilapidated state of the Philippine Navy.

The strengthening of Sino-Philippine security ties should, however, be kept in

perspective. As Defense Secretary Avelino Cruz has emphasized, defense links with
China were previously nearly nonexistent, involve non-sensitive issues such as
humanitarian and disaster relief and in no way represent a loosening of the U.S.-
Philippine alliance (Philippine Star, April 27, 2005).

Challenges Ahead

Despite the rhetoric of a “Golden Age” in Sino-Philippine relations, several dark clouds
linger on the horizon. The first is the Spratlys dispute. Once the three-year JMSU study is
completed, the three countries will still face the knotty problem of dealing with the
overlapping sovereignty claims. Presuming that significant oil and gas deposits are
discovered, the parties will be faced with the problem of sharing the joint exploitation
costs as well as any profits earned. As Ralf Emmers has argued, the crux of the problem
will be the asymmetry in power between China on the one hand, and the Philippines and
Vietnam on the other, which may significantly weaken the latter parties’ negotiating
positions [3]. In the past, Asian countries have set aside competing sovereignty claims
and engaged in profitable resource extraction—but these have invariably been bilateral,
not trilateral endeavors. In addition, the public wrangling between East Timor and
Australia in 2004 over the division of offshore energy resources exemplifies the problem
of having an asymmetry in power. The JMSU represents an important potential
breakthrough in the dispute, but significant hurdles remain before the South China Sea is
transformed from a sea of conflict into a sea of cooperation.

The second is that of Taiwan. Although recent years have seen an easing of China-
Taiwan tensions, the possibility of a cross-Strait war cannot be ruled out. Such a conflict
might lead to U.S. military involvement in the defense of Taiwan, and if such a scenario
were to occur, Washington could invoke the 1951 U.S.-Philippine Mutual Defense Treaty
and request landing rights for U.S. military aircraft in northern Luzon. For reasons of
regional stability, no country in Southeast Asia would like to see a China-Taiwan
conflict, especially one involving the United States. Furthermore, while the majority of
ASEAN countries could probably remain neutral in such a conflict, only the Philippines
would be forced to choose sides.

After more than a decade of strain, Sino-Philippine relations have matured, broadened,
deepened and moved beyond the South China Sea dispute. In terms of economic
interaction, bilateral relations have certainly entered a “Golden Age.” Two-way trade will
continue to grow, as will PRC investment in the Philippines, especially in the resource
extraction sector and related infrastructure. Security and defense ties between Beijing and
Manila will advance only incrementally, however, and will remain small in scale,
especially when compared to the Philippines’ ties with the United States.

Notes

1. See Ian Storey, “Creeping Assertiveness: China, the Philippines and the South China
Sea Dispute,” Contemporary Southeast Asia, Vol. 21, no. 1 (April 1999), pp. 95-118.
2. The second round of annual defense talks is scheduled to take place in Beijing later
this year.
3. Ralf Emmers, “Maritime Disputes in the South China Sea: Strategic and Diplomatic
Status Quo,” Institute for Defense and Strategic Studies (IDSS) Working Paper No. 87,
September 2005, p. 16.