China and the Philippines: Moving Beyond the South China Sea Dispute

Publication: China Brief Volume: 6 Issue: 17

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.


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.