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Juggling Super PowersShahaan Ahmed, Kyle Bernat-Riddle, Timon Li, Konner Fung-Kee-Fung, Josh Wine11.15.2016The Geopolitical Implications of a Populist Pivot in the Asia-Pacific

QGM#Queens Global MarketsA PREMIER UNDERGRADUATE THINK-TANK

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AgendaWhat we will be discussing today1Economic and Political Landscape of the Philippines2Chinese Philippine Relations3American Philippine Relations4ASEAN Philippine Relations5Where Should Duterte Turn?

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An Introduction to President Duterte

Sources: Rappler

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1Economic and Political Landscape of the Philippines2Chinese Philippine Relations3American Philippine Relations4ASEAN Philippine Relations5Where Should Duterte Turn?

#HistoryGovernanceCompetitive AdvantagesFirst settlement primarily by Negrito and Austronesian TribesFirst European Landings by Ferdinand Magellan and Miguel Lpez de Legazpi of SpainSpanish rule defeated in 1898 in the Spanish American WarPhilippine Commonwealth established in 1935 by the Jones ActOccupation of the Philippine Commonwealth by Japan in 1941Philippines becomes independent in 1945 after the surrender of JapanPresidential, Representative & Democratic RepublicIncumbent President: Rodrigo Duterte Governed by the 1987 Constitution of the PhilippinesStrategic Business LocationEducated Population (94.6% Literacy Rate)Liberalized Foreign Ownership RulesElevated infrastructure qualityASEAN MemberLiteracy Rate: 94.6%Forth Largest English Speaking Country Worldwide

Sources: : Consulate of the Philippines, VancouverHigh Level Overview: PhilippinesHistory, Governance & Competitive Advantages

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Sources: : Google MapsGeographic Context

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Top Exports of the Philippines (USD $Bn)Top Export Destinations of the Philippines by Value (USD $Bn)Trading Economies: ExportsSources: : Observatory of Economic Complexity, MIT

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Top Imports of the Philippines (USD $Bn)Top Countries of Import Origin of the Philippines by Value (USD $Bn)Trading Economies: ImportsSources: : Observatory of Economic Complexity, MIT

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Philippine GDP (USD $Bn)

Sources: World Bank & Bangko Sentral ng PhillipinasKey Economic IndicatorsPhilippine GNI (PPP $Bn)

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CPI Inflation

Sources: World Bank & Bangko Sentral ng PhillipinasKey Economic IndicatorsOvernight Lending Rate

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#OverviewSouth China Sea TensionsTrade (USD $Bn)Prior to the 1970s, The Philippines maintained close relations with Taiwan and perceived China as a threatThe two countries established diplomatic relations in 75 and have increased bilateral cooperation over timeThe Philippines and China have signed bilateral agreements in technology, IT, education, and sportsBilateral trade between the two countries has increased substantially over the past several yearsChina is the second largest export destination of The Philippines and is its largest importer93% of Filipinos surveyed were concerned that territorial disputes could lead to a military conflictSources: National Bureau of Statistics, PEW Research Centre, The Economist Pre-Duterte Philippines Chinese RelationsRelations Have Steadily Burgeoned Over TimeThe PROC claims that it is entitled to the South China sea, a 3.5 million km areaThis is a very important geopolitical location given its proximity to the Strait of Malacca The Philippines vehemently denies this and filed a claim at the PCA. In July 2016, the PCA declared that Chinas encroachment is unconstitutional This has been a hindrance to stronger ties

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High Level SummaryTrade and Investment

SubtopicDuterte will aim to expand relations with China at the expense of Philippines - USA ties Duterte has launched his foreign policy changes at lightning speedForeign investors are weary of Dutertes shiftFDI into the Philippines has slumped 41% YoY and the Peso dropped to an 8-month lowDefenseDuterte Changes Philippines Chinese RelationsAlterations Will Have Interesting EffectsSources: The DiplomatThe Philippines and China aim to further develop trade ties following a decline in tensionsDuterte has exclaimed that bilateral trade can increase three-fold by 2020Investment between the two countries is increasing as firms are being encouraged by the government and state department to investBaiyin Nonferrous Group Co, a Chinese state-owned enterprise, plans to open a USD 700 MM steel plant in the Philippines Duterte attracted USD 24 B in investment projects and credit facilities in a state visitThe Philippines Parliament is likely to ratify the nations AIIB membership in the next few months

The Philippines has signaled strong interest in acquiring military hardware from China over the coming yearsThe Chinese Military Industries Complex has become more sophisticated and can adequately meet defense needsDuterte announced that he is willing to hold joint military exercises with China and Russia

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Future OutlookDespite a sharp foreign policy pivot, many domestic obstacles will hinder Dutertes plans75% of polled Filipinos strongly trusted the USA relative to only 22% who trusted ChinaThe cash-strapped Armed Forces of Philippines also favors the USA given decades of military aid and defense agreements The pivot towards China will have positive consequences for the economyInbound Chinese FDI targets key financial services and manufacturing sectorsBeijing has a penchant to use economic stimuli as a political tool (Africa, Pakistan)Over-reliance on China will distance The Philippines from other ASEAN nationsFuture Effects Of Policy ChangePositives and Negatives of The New RomanceSources: Social Weather Stations

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Spanish-American WarCoincides with Philippine militia uprisingPurchased by United States for $2 million (1898) American Colonial RuleRebel Uprising 20,000 Philippine deaths (1899)Moro Massacre (1906)Policy of benevolent assimilationJapanese OccupationTreatment of Philippine Veterans, Rescission Act (1946)Newfound Independence (1946) Joint military exercises (1947)Mutual Defense Treaty (1951)New Constitution, bans US military bases (1987)Bush administration declares Philippines key front in war on terror (2001)Defense Cooperation Agreement (2014)Greatest export: peopleAround 4 million people of Philippine ancestry currently live in the U.S

A Complicated Friendship A brief overview of the history of American Philippine Relations Sources: New York Times, The Economist, Foreign Policy

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PersonalPragmatic

I Want Them OutDutertes rejection of United States: both personal and pragmatic

Sources: Time, Bloomberg, Wall Street JournalGrievances over historical injusticesAtrocities committed under colonial rulePersonal claims of molestationEntrenchment of Philippine eliteArrogance and Condescension: we refuse to be little brown brothersCriticisms of extrajudicial killing campaignsRefusal of weapon salesPerceived snub 2016 Hague Tribunal RulingObama administration misstep: failure to reinforce

Only China has the resourcesLargest trading partner of every nation in regionDuterte wants infrastructure, restoration of fishing industryFirst-mover advantageUnited States perceived to be in disarrayAnti-trade rhetoric jeopardizes fate of TPPBeijing visitSigns trade agreements valued at $13 billionRe-open bilateral negotiations on territorial disputes

#Undermining the Pivot to AsiaEmphasis on Asia-Pacific a cornerstone of Obama Administration foreign policyErodes Strategic Rebalancing narrativeKey component: framingChina the aggressor, smaller Asian countries the victimsDuterte will not go full ChavezPhilippine public one of the most pro-American in the worldPrecedent set among other nationsDespite inflammatory rhetoric, not much has actually changed, officials from both countries insistJoint military and naval exercises continue, so does tradeDuterte supposedly represents the everymanPopularity rating of 76%

More Than A Popularity ContestThe ramifications of realignment for American presence in the regionSources: New York Times, Bloomberg, Foreign Policy

Implications for Trump AdministrationTrump has expressed anti-trade, anti-military support for alliesHas also expressed regret at loss of American influence over PhilippinesNo clear way to project how he will handle balance of power in Asia-PacificHawkish factions of GOP would favour more aggressive containment of China

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#ASEAN: A Philippine HistoryUS-ASEAN Relations

Philippine-ASEAN RelationsA Philippine policy cornerstoneSources: ASEAN, US State DepartmentA founding member of ASEAN in 1967, the trading bloc has since grown to include ten Southeast Asian statesObjectivesRegional peace and stabilityEconomic integrationSecurity, foreign-policy cooperationPromotion of trade and development

US influence derived from four bases:Role as an international arbiterCapacity to exercise military and intelligence communitiesRole in promoting ASEAN-bound trade and developmentPublic opinion within constituent nations themselvesThe significance of such factors, however, is declining rapidly

Philippine Exports to ASEAN (%)

#The Philippines relationship with ASEAN is arguably their most crucial in terms of both trade and foreign policy. To this we must look at how Dutertes rhetoric may affect Philippine relationships with other member states, and how itll affect ASEANs relationships with other global powers on the whole. Markets within ASEAN seem to be the largest consumers of Philippine exports, and in recent years their numbers have increased from 19 to nearly 21 percent of all export goods in the past three years. The absolute values tell the same story. Given the high degree to which the Philippines rely on the ASEAN for economic growth, its imperative that Dutertes administration consider the views of ASEAN nations when condemning the Obama administration as a hindrance to his own countrys development. To his credit, the influence that US foreign policy holds over the region is falling: influence is traditionally derived from four bases

Arbiter: propensity to be perceived moral thought leader and it is respected for ability to turn global (public) opinion against a given interest in resolving inter-state conflict the endorsement of the united states carries significant weight all the way up to the Hague

Defence: After the fall of the soviet union, US foreign policy moved away from grandiose ideological clashes to something very operational: refining asymmetrical warfare capabilities to combat the growing threat of terrorism southeast asia is not designated a hotbed of such terrorism, nor are their communist-fighting expertise needed given the broad liberalization of both cultural and economic values throughout the region after a decade of bitter conflict, the Vietnamese were quick to reconcile with American values and understood that they needed to assimilate rather than hold out if they were to have any chance of surviving in the American hegemonyInvestment in intelligence, direct-action apparatuses throughout the region has been largely diminished, with increasingly-staggered troop and equipment commitments, though these may be expected to increase should the conflict in the south china sea persistAgain, military presence in southeast asia simply isnt what it used to be its certainly not the staging patterns of the mao or vietnam-era

Trade: Though they are owed a debt of gratitude by many nations within the bloc for establishing the requisite infrastructure necessary to support investment, social development and more-sophisticated capital market activities (introducing the doctrines of property rights, rule of law, binding precedent, etc), the United States no longer has the influence it had with respect to curtailing consumption and demand of ASEAN goods largely due to a shortfall in trade with ASEAN it simply isnt the customer it used to be, and its share of overall export demand from ASEAN gradually falling as Japanese, European, South Korean export numbers increase

Public Opinion: Though high in the Philippines, its falling elsewhere20

ASEANs Pivot to ChinaHistorically US-CentricHistorically China-CentricASEAN nations have long viewed the United States as a steadfast ally and guarantor of order & sovereignty, hosting bilateral ASEAN-US meetings on issues including security, trade, and developmentChinas status as the fastest-growing and largest trading partner of countries in region and the USs rejection of TPP provisions have forced some administrations to re-evaluate pragmatism of US-centric policy, pushing a majority of nations toward eager free-trade partner China

Sources: Economist, The DiplomatPhilippine-ASEAN RelationsWidening the ideological divideThailand

Philippines

Cambodia

Laos

Myanmar

Vietnam

#When we look at the direction of ASEAN itself and Dutertes compatibility with regional sentiment, youll see that hes not that far off the mark there is indeed a pivot to china with respect to trade and foreign policy harmonization, especially given the recent developments surrounding the USs refusal to ratify the TPP which has called into question the USs commitment to freer markets and access.

Certainly, the ASEAN is divided on largely historical lines socialist nations further inland are predisposed to favor the Chinese, while the Philippines and Thailands have been largely pro-American in past decades to the point where both countries are long-term treaty allies with the US. Its definitely argued that there is a need for a pro-American camp to balance the significant relationships on both sides but this pattern will serve to further polarize the region and set a dangerous precedent if the phiilipines abandons its LONG TERM treaty obligations in favor of Chinese interests.

With Duterte as the incumbent chairman planning the next annual ASEAN summit, the Philippines will have immense power with respect to agenda-setting and the invitation of observers such as Chinese foreign policy and trade officials to further strengthen ties, to the exclusion of the traditional allies of the American hegemony Duterte has exhibited a willingness to stand up and shut out American diplomatic officials from negotiations in the Philippines, and theres certainly a chance that this thinking will pervade his planning of the ASEAN summit.21

Obama Still Polling High ASEANs Shifting Export Patterns

Philippine-ASEAN RelationsPopular views on regional American stewardship remain favorableSources: Pew Research Center, ASEANSlumping exports to China offer argument against complete polarization, with steady increases in American consumption of ASEAN goods

The American relationship polls high in the Philippines and Vietnam, while Indonesia, Malaysia take more moderate positionsDuterte administration in strong conflict with domestic, bloc opinionGrowing administrative influence in the pro-American faction of ASEAN spells trouble for US sympathizers like ThailandASEAN Exports (USD $Bn)

#That said, the populations of countries within ASEAN generally favor their nations current relationship with the United States, and in particular, viewed the Obama administration in an increasingly positive light from 2008 through 2015. Ratings have fallen slightly in the most recent data given the uncertainty that loomed over the result of the US election, and a policy shift within the United States to reject the principles of trade agreements involving ASEAN nations such as the TPP that they once championed.

In the wake of election results, however, Duterte has been somewhat reconciliatory with his remarks given his own favorable view of Trumps character and his similarly tough-on-crime stance the implications of this with respect to planning the next ASEAN summit remain to be seen.

Though China remains the predominant trading partner with respect to overall trade, the fact that those numbers are increasing is deceptive exports are sharply falling with the chinese economic slowdown, while American numbers are steadily increasing. For a trading bloc reliant on commodity and manufactured goods exports, they shouldnt be become a proxy of one to the detriment of the other.22


#Build me a train around Mindanao, build me a train from Manila to BicolIll shut upDutertes Shift to ChinaThe President has announced he will trade sovereignty rights in exchange for Chinese FDISources: The Washington Post, The Economist

Scarborough Shoal

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Election ResultsPresidential Popularity

SubtopicEconomic IndicatorsFDISnapshot of the Philippines Duterte Swept to Power with a populist message, yet things seemed pretty good!Sources: Social Weather Stations, GMA News, Bloomberg, Economist Intelligence Unit

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Porters Diamond ModelNational Competitiveness ScoreASEAN Competitiveness (0.0 - 7.0 Scale)Sources: World Economic Forum, Michael Porter, Harvard Business Review, Dr. David DetomasiPhilippine National CompetitivenessA shift to a broader consumer and labour base could be a boon for competitiveness

Context for Firm Strategy and RivalryFiercely intense domestic competitionMany fragmented industriesNo national championsRelated and supporting IndustriesFew true supporting industriesHistorical distrust of government and public institutions has made JVs less commonFactor (Input) ConditionsHighly educated workforceEnglish speaking countryWell-situated geographically and endowed with natural resourcesDemand ConditionsDeveloping local consumer baseMarket for goods is at low endDemand is mostly foreign

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Bargaining Power in TradeSingaporean Approach to Drugs

SubtopicFlying Geese ModelOpportunity for Technology TransferRoadmap for the PhilippinesWe recommend that the Philippines turn to ASEAN, rather than continue to rely on China or the U.S Sources: Research Institute of Japan, Christian Schrppel and Nakajima MarikoDuterte can follow through on his tough on crime and tough on drugs stance through increased cooperation with the ASEANOne possible route might be through working with the Singaporean Army and Police force to develop effective strategies for tackling drug crime

In the context of a macro, five forces model, the Philippines has little independent bargaining power relative to China and the U.S.In joining forces with ASEAN, the Philippines would expand its bargaining power and set in motion a process for technology transfer from which it can benefit

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