When the Philippines attracts U.S. news coverage, it is usually about maritime disagreements with China. The standoff between a World War II-era ship manned by a handful of Philippine Marines and a Chinese Coast Guard vessel on the Second Thomas Shoal is just the latest in a series of incidents. The potential for an outbreak of fighting over competing territorial claims for the shoal could bring the United States into war with China under the longstanding U.S.-Philippines defense treaty. The U.S. Indo-Pacific Command (INDOPACOM) has worked hard to counter China’s aggressiveness over the shoal with a strategy of steady deterrence aimed to show that the United States will rise to the Philippines’ defense—if Beijing overplays its hand—consistent with its treaty obligations. 

The military threat understandably receives top attention, but lurking underneath is a comparable challenge posed by China’s increasing soft power in the Philippine economy. If current economic trends continue, the Philippines could move into China’s orbit without a single shot fired. Rather than using naval warships, China can gradually achieve its strategic objectives through peaceful trade and investment. The reality is that China’s growing position in the Philippine economy poses as much of a critical a challenge to U.S. national security interests as confrontations in the South China Sea. 

Historically, the United States has often stood as the primary customer for Philippine exports, but China has begun to challenge that in recent years. According to recent trade statistics for April 2023, China nudged past the United States as the Philippines’ largest buyer. On the import side, China consistently outperforms the United States as the largest importer into the Philippines by an overwhelmingly wide margin. Through April 2023, China’s imports into the Philippines were more than three times as large as those of the United States.

Simply put, China is now the Philippines’ most important trading partner and that trend shows no signs of abating. In a March 2023 press release by the Chinese Embassy in Manila, the PRC asserted that China and the Philippines are “natural partners” based on their close geographic proximity and historical ties extending back over a thousand years. The press release sharply criticized recent announcements by the United States to plan military activity in the Philippines, arguing that the best way to foster prosperity instead is by promoting peaceful economic relationships. 

President Marcos visited the United States earlier this year, during which he stressed the importance of pursuing not only defense but also mutual economic relationships. During the visit, the White House released a fact sheet detailing the various steps and initiatives underway between the two countries on promoting trade and investment. The Chinese Embassy announcement riposted in a March press release that President Marcos had also visited China earlier in the year, during which fourteen cooperation agreements in the economic sphere were announced. Since then, numerous Chinese delegations have visited the Philippines to explore and build more trade relationships. Approximately forty government cooperation deals are underway, including major bridge construction and irrigation projects.

Washington likely feels some relief over its current relations with the Philippines compared to the situation it faced just two years earlier under the administration of former President Duterte. On his first trip to China as President in October 2016, he announced it was “time to say goodbye to Washington.” Duterte embarked on a policy of building closer relations with China. Persistent Chinese aggression in the South China Sea forced Duterte to reconsider his policies toward the latter part of his administration. Still, his dalliance with China serves as a warning that close U.S. relations with the Philippines cannot be taken for granted. President Rodrigo Duterte’s daughter, Sara Duterte, currently serves as the country’s Vice President. Vice President Duterte even made China-friendly remarks as recently as September 2023. More importantly, she has not ruled out running for president when President Bongbong Marcos’ term ends in June 2028. 

Were Beijing wise enough to ease its military pressures on disputed maritime territory, its path to supplanting Washington with Manila could become far more straightforward. In fact, Manila just announced that it is pulling out of participation in China’s Belt and Road Initiative (BRI). Surprisingly, Manila’s volte-face was not motivated by disputes in the South China Sea. Instead, Transport Minister Jaime Bautista announced that the decision was due to unhappiness over the lack of BRI funding for a Philippine railway project. 

Washington will have to focus on new ways to help counter China’s economic influence in the Philippines. Negotiating a free trade agreement—similar to the one with Vietnam—between the Philippines and the United States is not a realistic goal at this time. On the other hand, pursuing sector-specific free trade understandings could be achievable, particularly on economic security, supply chain, and green energy projects.

A practical opportunity for pursuing such a sector-specific approach has come up with the passage of the Inflation Reduction Act (IRA). U.S. vehicle makers are entitled to tax credits for importing critical minerals like nickel to build batteries for clean, electric vehicles. However, only critical minerals imported from countries with which the United States has a “free trade agreement” are eligible for such credits. The IRA does not statutorily define a “free trade agreement.” Using its implementation authority, the IRS recently issued proposed regulations that flexibly define qualifying free trade agreements for IRA purposes. 

The Philippines is one of the world’s leading nickel-exporting nations, a key strategic material for the manufacture of electric vehicles. Its top customer today is China, accounting for 90 percent of Philippine nickel exports. The IRA creates an opportunity to increase U.S. imports of strategic nickel from the Philippines. The proposed IRS rulemaking guidance allows the U.S. Trade Representative to negotiate executive agreements, broadly defining “free trade agreements” with partner countries.

In March 2023, the United States entered a critical minerals agreement with Japan. It was referenced in the proposed IRS rule as an acceptable kind of “free trade agreement” under the IRA. The United States should consider adopting a similar executive agreement on nickel with the Philippines, an arrangement consistent with the Trade and Investment Framework Agreement between the United States and the Philippines. 

Promoting more trade between the United States and the Philippines to counter China’s influence will not be easy for Washington. Unlike the CCP in Beijing, U.S. policymakers cannot use directive industrial policy to achieve aims. Washington is only beginning to find ways to grapple with the reality that economic factors can have as much impact on U.S. national security interests as military threats. The military cannot do it alone. Economic competition with China has become a critical component of safeguarding U.S. national security in the Asian Rim. There is much more to the China challenge in the Philippines than the South China Sea.

Ramon Marks is a retired New York international lawyer and Vice Chair of Business Executives for National Security (BENS). He recently visited the Philippines as part of a delegation meeting with senior government and business leaders.

Image: Creative Commons.