By Rene Acosta, David Cagahastian, Bianca Cuaresma, Jovee Marie N. dela Cruz, Butch Fernandez, Lenie Lectura & Cai U. Ordinario
THE Philippines sword remains in the scabbard, as government officials are monitoring the ripples from an international court’s ruling against China’s claims in the West Philippine Sea (South China Sea). But according to those outside the government, the biggest ripple would be on the country’s trade with the People’s Republic of China.
On Tuesday the International Tribunal for the Law of the Sea (Itlos) ruled in favor of Manila by rejecting Beijing’s claim in the West Philippine Sea, saying there is no legal basis for the latter’s “nine-dash line.”
A day later, local economists warned Philippine exporters they should brace for greater product scrutiny and higher costs when exporting to China in the next three to six months.
Former Tariff Commissioner George N. Manzano told the BusinessMirror this could be the likely scenario in the aftermath of the Itlos’s decision on the West Philippine Sea.
“We have a free-trade agreement with China through the Asean [Association of Southeast Asian Nations], so they could not increase the tariff,” Manzano said.
“What usually happens is they like to ‘retaliate’ or to express their displeasure [by working] on the nontariff barriers, such as the sanitary or safety issues of our agricultural products, [like] bananas or what have you.”
Manzano added uncertainties in the aftermath of the ruling could also impact cost of trade.
“What will happen also if there is going to be a bit of uncertainty in this region, the trade costs, especially trade financing, will, of course, increase [because there is a] premium [on] risk, so insurance will increase, increasing the cost of trade,” he said. “To what extent, we don’t know yet.”
Manzano also said the entire Asean region could suffer higher trade costs for the rest of the year, especially if tensions arise in the disputed waters.
He explained even countries like the United States could be affected by these costs given that the West Philippine Sea is a known ship lane or trade route for many vessels.
Overall, Manzano said, trade between the Philippines and China and trade through the West Philippine Sea will not stop due to trade agreements.
“Barring any untoward incidents, I don’t think there is going to be a [halt in trade] because the FTA [free-trade agreement] will keep it open,” Manzano said. “Besides, it’s [harmonious relations] important for the Philippines because we need China more than China needs us in terms of trade. So we’ll have to look into the non-tariff barriers if there is going to be some sanctions against us.”
Trade impact
GREATER scrutiny for products and higher trade costs will slow the country’s export earnings growth in the short term, University of Asia and the Pacific (UA&P) School of Economics Dean Cid Terosa said.
This can happen because China is one of the top export markets of the Philippines. Last year China accounted for 10.9 percent of the country’s total exports.
Manila’s export earnings for products shipped to Beijing reached $6.393 billion in the January-to-December period of last year.
Terosa also said the growth of investments in the Philippines by Chinese firms could also slow during the period.
In the first quarter of 2016, investment pledges from Chinese investors reached P190.1 million, or 0.7 percent, of total pledges in the January-to-March period.
Investment pledges from Chinese investors last year amounted to P1.455 billion of the P245.215 billion total investment pledges received by the country’s seven investment promotion agencies.
“The government should earnestly continue to show magnanimity and goodwill while pursuing firmly what is proper,” Terosa said. “We can show this through the conduct of our import trade relations with China. We should remain as open as we are now to Chinese goods.”
Little effect
SO far, however, the Philippines’s win against China in its arbitration case in the international tribunal has little impact on local financial markets or the economy at large, according to monetary authorities.
Central Bank Governor Amando M. Tetangco Jr. said the central bank has been monitoring the markets with regard to the Itlos ruling.
“We haven’t actually seen an impact, so far,” Tetangco said. “Looking at the behavior of the markets today [July 13], the conditions here continue to be more affected by developments in the US and Japan.”
What the market will be watching is how China is going to react to the decision, Tetangco said at the sidelines of the Bangko Sentral ng Pilipinas’s (BSP) 13th Awards Ceremony and Appreciation Lunch for Stakeholders in the BSP complex in Manila.
For his part, Economic Planning Secretary Ernesto M. Pernia said there is a need to assess the situation thoroughly before any action or measures are undertaken.
Pernia said the government is studying the decision, China’s response and its impact on the Philippine economy.
Not China
ACCORDING to Tetangco, in the case of the exchange rate, the peso opened stronger on Wednesday compared to the previous day.
“And that was because of an improvement in sentiment, given the announced additional stimulus [that] would be provided by the Japanese government,” Tetangco said. “This is being interpreted as being supportive of growth.”
“In addition to that the [US] Fed [Federal Reserve] is now seen as not really in a hurry to tighten—and may actually increase interest rates toward the latter part of the year, once,” he added.
The governor explained that, “at the beginning of the year, the expectation was four increases” in the interest rates by the Fed.
“That has also affected and, in fact, improved the sentiment that led to some strengthening of the peso,” Tetangco said.
“So [the] peso is being affected more by developments in the US and Japan.”
Nothing immediate
ON Wednesday Moody’s Investors Service Senior Vice President Marie Diron also said the ruling on claims to maritime rights has no immediate sovereign credit implications for the Philippines or China.
“Geopolitical tensions can affect countries’ credit profiles if they are likely to have a negative economic impact or if they entail significant fiscal costs or if they hamper policy-making,” Diron said in a statement on Wednesday. “Per our sovereign methodology, we assess geopolitical strains as posing a very low risk of weighing on sovereign credit trends in China or the Philippines.”
The international credit watcher said the ruling does not pose substantial effect on either the country’s economy, budget or policy effectiveness.
“Nonetheless, the dispute does highlight emerging geopolitical issues for the two countries and for the region as a whole,” Diron said.
Quite complex
ING Bank Manila economist Joey Cuyegkeng said the market has expected the Itlos ruling to favor the Philippines.
“The market expects that the decision [would] favor the Philippines. But the issue is quite complex. The market also knows the stand of the Philippines and China,” Cuyegkeng said. “China rejects the jurisdiction of the Court and is unlikely to accept the decision. But both nations have sent signals they would be open to bilateral talks about the contested area.”
Still, Cuyegkeng cautioned against being lax.
“Meantime, near-term volatility cannot be swept aside,” he said. “We believe that it would be limited and could be fleeting as long as the Philippines and China reiterate [their] willingness to dialogue.”
Cuyegkeng also warned that the Itlos ruling “should not unduly create significant sustained volatility” in the local scene.
Security unchanged
VOLATILITY is also not yet felt in military terms as the Department of National Defense (DND) said on Wednesday the Itlos ruling has had no immediate effect on the security situation on the West Philippine Sea.
“I think the situation on the ground is the same as before the issuance of the [Itlos ruling],” Defense Secretary Delfin N. Lorenzana said. He added there were no changes in the situation after: “It’s still the same. I think status quo has been maintained by everybody.”
Lorenzana said the DND will defer any action in strict abeyance to the orders of President Duterte. He said Mr. Duterte ordered government officials late Tuesday night to thoroughly study the Itlos ruling while waiting for further developments in the aftermath of the decision.
President Duterte also ordered defense and foreign affairs officials to consult with their counterparts from other claimants on the West Philippine Sea, like Brunei, Malaysia and Vietnam. He explained these countries also stand to indirectly benefit from the Itlos ruling.
Lorenzana said he hopes that Beijing will observe the maritime ruling.
“I hope that China will abide by this because it will be good for the whole region if everybody will follow the rule of law,” he said. “Nobody can just cherry pick the laws that we are going to abide by. We believe in a community of nation and exist side by side harmoniously.”
Consulting allies
HOWEVER, the Itlos, an independent judicial body established by the United Nations Convention on the Law of the Sea, does not have enforcement power, according to Lorenzana.
Hence, he said the Philippine government will consult with allies that supported the Philippines in its position at the tribunal.
Allies, such as the United States, Japan and Australia, have supported the action of the country in bringing its case before the Itlos. The US military has also patrolled the West Philippine Sea to keep the area open for international navigation and overflights.
On Monday evening, Lorenzana said he received a call from US Defense Secretary Ashton Carter who, he said, reiterated US commitment of support to the Philippines and adherence to the Philippines-US defense agreements.
He said Carter also told him that China has assured the US of its restraint before and even in the aftermath of the ruling. Lorenzana said Carter also asked the same assurance from the Philippines.
“I told him, of course, we will exercise restraint.”
Setting policy
Lorenzana said, given the Itlos ruling, the DND would craft a policy direction involving the West Philippine Sea.
“We are studying what we should do,” he said. “So I cannot answer for now while we are developing the courses of actions and plans for that.”
When asked if tensions would arise and lead to a confrontation, Lorenzana said: “You cannot say what will happen in the Ayungin [Shoal] or what not, we still have to study our course of action on the issue.”
Days before the UN court issued its ruling, the biggest ever flotilla of Chinese military and paramilitary ships was seen at the Scarborough Shoal since China exercised a de facto control over that patch of land four years ago.
The armada included 10 People’s Liberation Army Navy ships and six Coast Guard vessels.
Malacañang welcomed the favorable verdict from the United Nations Permanent Court of Arbitration with a subdued sense of victory. The Palace said officials will proceed with caution on the next steps to take to enforce the ruling.
Justice Secretary Vitaliano N. Aguirre II described the Cabinet meeting last Tuesday night after the promulgation of the arbitration court ruling as a “subdued victory celebration.”
At the said Cabinet meeting, Solicitor General Jose Calida briefed the Cabinet members on the arbitration court’s decision, which favored the Philippines’s position on the issue of economic rights over disputed areas of the West Philippine Sea and invalidated China’s claim over areas within its so-called nine dash line.
However, Communications Secretary Martin M. Andanar said the arbitration court’s ruling would still have to be studied carefully. Andanar added an official interpretation would be out within five days.
“We shall wait for the Solicitor General’s interpretation of the ruling,” he said. “The decision just came out. So it will still be studied.”
Presidential Spokesman Ernesto C. Abella said Mr. Duterte and his Cabinet welcomed the favorable verdict and will proceed on the delicate issue with sobriety and restraint.
“The ruling was welcome, and the government will proceed with sobriety and restraint,” Abella was quoted in a statement as saying.
The UN’s arbitration court sustained the Philippines’ position that China’s nine-dash line claiming most of the West Philippine Sea has no basis under the Unclos.
“Having found that none of the features claimed by China was capable of generating an exclusive economic zone, the tribunal found that it could—without delimiting a boundary—declare that certain sea areas within the exclusive economic zone of the Philippines, because those areas are not overlapped by any possible entitlement of China,” the court said.
Energy, finance
THE Department of Energy (DOE) said on Wednesday it would coordinate with the Department of Finance (DOF) in assessing its next step in relation to the favorable Itlos ruling.
Energy Secretary Alfonso G. Cusi said the Department of Foreign Affairs (DFA), together with concerned government agencies, will thoroughly study the verdict of the Permanent Court of Arbitration under Annex VII of the 1982 Unclos.
“The DOF will be assessing the overall implications of the verdict in coordination with other agencies of the government, among them the Department of Energy,” Cusi said. “The Philippines reiterates its abiding commitment to pursue a peaceful resolution of disputes in the South China Sea and promote peace and stability in the region through diplomacy and consultations.”
The DOE is in charge of a program called Philippine Energy Contracting Round (PECR) that allows the government to develop and utilize indigenous petroleum resources under a service contract regime through partnerships with qualified local and international exploration companies.
Two of the exploration blocks under PECR5 are close to the Spratly Islands, which are areas under territorial dispute with China.
The US Energy Information Administration (EIA) estimates the West Philippine Sea contains approximately 11 billion barrels of oil and 190 trillion cubic feet of natural gas in proved and probable reserves.
“The area we are offering in the [West Philippine] Sea is near Palawan,” former Energy Secretary Carlos Jericho L. Petilla said. It was during Petilla’s term when PECR5 was launched.
Exploration activities under Service Contract 72, an oil and gas exploration permit covering the Sampaguita natural-gas prospect in the Reed Bank, to the west of Palawan, was suspended by the DOE after the agency declared force majeure on the license.
UK-based Forum Energy Plc. has a 70-percent stake in SC 72. Forum Energy is 60.49 percent owned by Philex Petroleum Corp., led by Manuel Pangilinan.
Urging China
ON Wednesday lawmakers agreed the ball is in China’s hands.
Sen. Loren Legarda warned that China’s rejection of the United Nations arbitral tribunal’s ruling upholding Manila’s case will “undermine the primary objectives” of the UN Convention on the Law of the Sea.
Beijing’s initial rebuff of the UN’s Permanent Court of Arbitration ruling in favor of the Philippines also prompted Sen. Sherwin T. Gatchalian to call on the leadership of the PROC to “take steps to comply with the ruling laid down by the arbitration court, including the immediate withdrawal of ships and personnel from Philippine waters and land features.”
At the same time, Gatchalian prodded the UN, as well as Manila’s regional allies, to support the Philippines in enforcing its legal rights under the arbitration ruling.
“As members of the community of nations, we must all subject ourselves to the wisdom and authority of international law, no matter how big or small our nations may be,” he said.
Legarda said in a separate statement that, “as state parties to the Unclos and responsible members of the international community,” both governments in Manila and Beijing “are duty-bound to respect its decision.”
Even as she welcomed the “impartial, authoritative decisions rendered by the tribunal,” Legarda voiced hopes “that these will serve as guideposts for the parties in this dispute.”
“It serves no valid purpose to further exacerbate the dispute by refusing to heed the decision handed down by the tribunal,” Legarda said, adding that “in the end, such refusal to honor its decision will only undermine the primary objective of the Unclos—and that is to establish a legal order for the seas to promote its peaceful use.”
For his part, Sen. Juan Edgardo Angara suggested that the Philippine government “reiterate our commitment to a rules-based and peaceful settlement of disputes.”
“All states should refrain from hostile acts in the contested area in view of the ruling,” Angara said, adding, “diplomatic efforts to settle issues will still be very important given the nature of international law.”
Angara also voiced confidence that the UN Tribunal’s decision “will be welcomed not just by the Philippines but also by several states comprising the community of nations.”
Sen. Panfilo Lacson likewise affirmed the widespread acceptance of the UN ruling favoring the Philippines over China’s rejected nine-dash-line claim.
“By no means,” this is not a pyrrhic victory for the Philippines because this [ruling] would lead us somewhere, Lacson said in Tagalog.
Sen. Juan Miguel Zubiri urged Filipinos to exercise restraint in rejoicing, following Manila’s victory over Beijing in the UN Tribunal.
“Let us practice restraint,” he said. “I would suggest we still continue the tack of diplomacy and cooperation with China. At least, now we are on higher moral ground.”
Zubiri said the Philippines would now come from a position of strength because of the favorable ruling. He recommends for a continuing dialogue with China and not pick a fight with the communist-led country.
“At the same time, [China should] respect our sovereignty in this particular area,” he said, adding that it would be “very unfortunate” if China ignores the ruling.
Zubiri suggested Mr. Duterte could consider going to China in his first state visit as the new Chief Executive of the Philippines to widen the “open lines [of] communication.”
Legarda hopes all parties concerned will uphold international law, but stressed that the issue of territory and sovereignty can only be fully resolved through meaningful multi-stakeholder dialogue and the China’s cooperation.
Environmental concerns
Legarda, meanwhile, also raised concerns over the destruction of the marine environment in the contested waters and hoped that such activities harmful to the marine ecosystems will be stopped immediately.
“Our interest in protecting the marine environment stems not only from territorial concerns but also from our collective responsibility to conserve and ensure the sustainable use of our marine resources.”
In its ruling, the UN Tribunal took note of the effects of China’s land reclamation and construction of artificial islands at seven features in the Spratly Islands. It said, “China had caused severe harm to the coral reef environment and violated its obligation to preserve and protect fragile ecosystems and the habitat of depleted, threatened, or endangered species.”
The tribunal, likewise, stated that Chinese fishermen have been harvesting endangered marine species, such as sea turtles, coral and giant clams, on a “substantial scale” using methods that are harmful to the coral reef system in the West Philippine Sea. Chinese authorities knew about these but “had not fulfilled their obligations to stop such activities.”
House orders
FOLLOWING the Itlos ruling, a lawmaker urged Congress to declare the Spratlys Group of Islands and the Scarborough Shoal as protected areas.
In a news conference, Party-list Rep. Harry Roque of Kabayan said the government should declare these territories located at the West Philippine Sea as protected areas before the Philippines resumes its negotiation with China.
“Before we start our negotiation with China, I am suggesting to the government and Congress to declare these areas—the Spratlys Group of Islands and Scarborough Shoal—as maritime reserves and recognized by all the countries,” he said. “This declaration is needed to protect our resources.”
Until there’s no agreement yet with China, “let’s leave the areas as maritime reserves to protect it so that whoever eventually claims title to the islands will have something to explore and exploit,” added Roque, an international law expert and former law professor at the University of the Philippines.
According to Roque, he will lead the filing of the bill in the 17th Congress establishing a Spratlys Island Development Council patterned after the Subic Bay Metropolitan Authority or Clark Development Corp. to manage economic exploration efforts in the area.
The legislator, meanwhile, said the government should still push negotiations with China since the PCA did not resolve the issue of territorial claims within Spratlys.
“We should return to the negotiating table with China, take advantage of the ruling of the Court, and settle once and for all the issue of conflicting claims within the Spratly Islands,” he said. “Nonetheless, the ruling does not settle the entirety of the dispute as it involves claims to islands, which is beyond the jurisdiction of the Itlos.”
Reconsider
MEANWHILE, presumptive Speaker Pantaleon D. Alvarez of Davao del Norte asked China to respect the decision of the international tribunal and reconsider its position not to honor the Itlos ruling.
“We should urge China as part of the community of nations to respect the decision of the arbitral court and to adhere to the peaceful settlement of territorial disputes in accordance with international law,” he said.
Alvarez also reminded China that Beijing is one of the signatories of the Unclos that guarantees a 200-mile exclusive economic zone (EEZ).
“Because of our EEZ, we should be allowed to conduct exploration activities in the area for our own economic benefit,” he said.
Moreover, Alvarez said the Philippine government, including Congress, will thoroughly study the ruling of the tribunal “so that we can determine our next moves on the issue, particularly with respect to stepping up economic exploration efforts in the South China Sea and maintaining peace and stability in the region.”
Image credits: Permanent Court of Arbitration via AP, AP/Bullit Marquez
1 comment
China has been bullying smaller countries for a long time. The Philippines is not alone in the fight against China over the vast territory. The South China Sea does not belong to China and China alone. There are other claimants to the territory and kudos to the Philippine government, it courageously filed a complaint to assert its territorial claim and even called it the West Philippine Sea to assert its right.