Despite Duterte’s Rants, Philippines is a Major Beneficiary of U.S. Aid, Trade, & Investment

 By Nicole Smolinske —

MV Hong Kong Express drifting north of the Philippines in the South China Sea. Source: Tim.md's flickr photostream, used under a creative commons license.

MV Hong Kong Express drifting north of the Philippines in the South China Sea. Source: Tim.md’s flickr photostream, used under a creative commons license.

During Philippine president Rodrigo Duterte’s visit to China in mid-October, Beijing offered Manila more than $9 billion in low-interest loans and businessmen from the two countries signed economic agreements worth more than $20 billion. Duterte’s new enthusiasm for China prompted him to talk about “separating” from the United States militarily and economically.

Despite Duterte’s recent rants and courting of Chinese business, it is important to recall that U.S. companies and government aid have long played a critical role in helping build the Philippines economy.

Trade and Investment

Last year, trade between the United States and the Philippines topped $18 billion, making the United States the Philippines third largest trading partner. The Philippines exports $10.8 billion to China and imports $6.4 billion, making China its second largest trading partner. China’s trade with the Philippines is expected to grow significantly in the wake of Duterte’s trip with China agreeing to again to allow the import of Philippine bananas and other fruit and vegetables and to encourage Chinese tourists to visit the Philippines.

The World Bank reports that the Philippines received $5.7 billion in foreign direct investment (FDI) in 2015, with the United States contributing $4.7 billion.  U.S. companies have accounted for 28 percent of FDI to the Philippines over the past decade. FDI is one sector where the Philippines lags behind its ASEAN neighbors. China’s contribution has been negligible in recent years, but this could start to change after Duterte’s discussions in Beijing,

During Duterte’s trip to China, Philippine and Chinese companies signed investment deals worth $24 billion. These are only handshake deals at this point, and as other Southeast Asian nations can attest, actual implementation of Chinese projects often falls short of announcements that capture the headlines. In Indonesia, for example, investment officials estimate that about 7 percent of Chinese projects for which memoranda of understanding are signed are actually implemented.

The business process outsourcing (BPO) sector in the Philippines employs 1.2 million people with 77 percent of the services outsourced intended for U.S.-based companies A dramatic policy change away from the United States could potentially shift jobs away from the Philippines to other countries.

According to the Philippine Department of Trade and Industry, the United States in 2015 was the top ranked country employing Filipinos sending back remittances, accounting for roughly one third of the $17.6 billion that Filipino overseas workers sent home.

Duterte’s threats at “separation” from the United States have made U.S. investors nervous, and U.S. Assistant Secretary of State for East Asian and Pacific Affairs Daniel Russel said during a recent visit that such policy changes are “bad for business.”

Disaster Relief in Response to Typhoon Haiyan

In response to the devastation caused by Typhoon Haiyan (Yolanda) which killed at least 10,000 people in November 2013, the U.S. military provided 66 aircraft, 12 naval vessels, and 13,400 military personnel, which delivered 2,495 tons of relief supplies in the wake of the storm. In addition, the U.S. Agency for International Development provided assistance worth $90.8 million.

China, which had frosty relations with the Philippines over the South China Sea, offered $1.4 million in relief supplies, in addition to $100,000 from the government and $100,000 from the Chinese Red Cross.

Millennium Challenge Compact

The United States accounts for 36.1 percent of all official development aid in the Philippines. Notably, the Millennium Challenge Compact (MCC) between the United States and the Philippines provided $434 million in aid for a variety of development and reform projects to “reduce poverty and accelerate economic growth” in the five-year period to 2016. A second compact has been approved for a second tranche of funding beginning in 2017.

Until now, the 2017 MCC funding has not been derailed. However, Duterte’s violent war on drugs and his attitude towards the United States is beginning to sway congressional leadership in Washington. Senator Benjamin Cardin, a top Democrat in the Senate Foreign Relations Committee, has expressed his displeasure with the human rights abuses associated with Duterte’s drug war in which 4,700 people have died. Cardin has threatened to hold up the sale of 26,000 M4 assault rifles to the Philippine National Police, perhaps as warning of more funding suspensions to come should human rights abuses continue.

Military Aid

The Enhanced Defense Cooperation Agreement (EDCA) between the United States and the Philippines, signed in 2014, allows U.S. forces, warships, and fighter jets access to five Philippine military bases. The United States has provided tens of millions of dollars in Foreign Military Financing (FMF) to the Philippines in recent years, including a request for $66 million in 2016. The Philippine military relies heavily on ties with its U.S. counterparts, and the United States also intends to earmark funds for the construction of military facilities under the EDCA. These upgrades would expand the U.S. access to the South China Sea and joint-operations would also provide training for Philippine armed forces, which are among Asia’s weakest. Of course, none of this will be possible if Duterte decides to follow through on his threats to tell Washington to “forget” its plans for EDCA.

The Philippines has also been a major beneficiary of the U.S. Maritime Security Initiative (MSI), receiving the lion’s share of the $79 million in 2015 intended to increase the armed forces’ maritime domain awareness. Additionally, the International Military Education and Training (IMET) program allocated $2.29 million to the Philippines.

The long-standing economic role of the U.S. government and businesses in the Philippines suggests that rather than trying to play Beijing off against Washington, the country might benefit most if Duterte would maintain existing economic links to the United States while pursuing new opportunities with China.

Ms. Nicole Smolinske is a researcher with the Southeast Asia Program at CSIS.

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1 comment for “Despite Duterte’s Rants, Philippines is a Major Beneficiary of U.S. Aid, Trade, & Investment

  1. November 17, 2016 at 18:20

    Excellent summary. Finance Secretary Dominguez has corrected the term “separation” to “economic diversification.”

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