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RP-China Scarborough Standoff: Reality Check and Economic Solutions

May 14, 2012
Joint U.S.-Philippines naval training (US Navy)

Joint U.S.-Philippines naval training (US Navy)

The Philippine government needs to prolong its discussions with China while focusing on its most crucial solution: economy. China is not the problem. Our economy is the main problem. There can be no strong defense or military without a stable, strong economy. 

A lot of people here and abroad have been talking about the possibility of military conflict between the Philippines and China, which have been embroiled in a maritime standoff in disputed waters in the South China Sea. China, which is now considered a military power, has recently denied it is embarking on military readiness while the Philippine government is determined to resume diplomatic discussions with Beijing.

Both parties have strong territorial claims to the disputed Scarborough Shoal. The escalating dispute over the shoal, a tiny rocky outcrop about 180 miles from the Philippines’ main island of Luzon, began when Philippine government sent the Philippine Navy frigate, BRP Gregorio del Pilar, to investigate and arrest the crew of eight Chinese fishing boats at the shoal 124 nautical miles west of Luzon. However, the arrest did not take place, as two unarmed China Marine Surveillance vessels appeared and intervened.

Two days later, while the Philippine government replaced the frigate with a Coast Guard vessel, China government deployed an armed Fishery Law Enforcement Command (FLEC) ship at the shoal. The assertive Chinese government claims virtually all of the West Philippine Sea, which is believed to sit atop huge oil and gas reserves. A few days ago, an anchor for China’s state-run TV station said “that the Philippines is China’s inherent territory, and the Philippines belongs to Chinese sovereignty”, adding “this is an indisputable fact.” The Philippines, on the other hand, claims the shoal falls within its exclusive economic zone. Other countries that have territorial claims are Taiwan, Brunei, Vietnam and Malaysia.

The mounting tensions between the two countries quickly spilled over into the virtual world, as Chinese hackers started defacing a number of Philippine websites, particularly government and media websites. An alleged group of Filipino hackers called #OccupyPhilippine reportedly retaliated by hacking Chinese government sites, which they posted on their Facebook page.

As expected, this territorial dispute gradually turned into an ‘economic cold war’, as China reportedly held 150 containers loaded with Cavendish banana at its three ports. Reports said that Chinese authorities suddenly tightened inspection rules after discovering that bananas shipped by Mindanao growers showed signs of disease found to be associated only with coconut. The Chinese government also issued  a travel advisory for its nationals ahead of the planned protests by Filipinos at Chinese embassies worldwide.

This led to calls from a number of Filipino politicians and groups to boycott Chinese products being shipped to the Philippines. We all know that cheap Chinese products dominate the Philippine retail markets. In protest of China’s growing economic war on the Philippines, several leaders in the House of Representatives have been considering proposals on whether or not China-made products will be taxed heavily or banned altogether. Calls to boycott, ban, or tax Chinese products can have negative implications on the Philippine market and economy.

Taxing Chinese products will certainly hurt the Filipino poor who buy cheap goods. This move might increase government revenue, but it will certainly punish millions of wage-earning Filipinos. Government-imposed ban on Chinese goods is also not a practical option, as thousands of workers could be severely affected. It is important to understand that there is no officially declared war between the Philippines and China. I believe our government is justified to officially ban all kinds of Chinese products only if there exists an ongoing military conflict against China. However, our government may restrict certain Chinese products for actual security and health reasons. It may also issue a travel advisory for Filipino nationals planning to visit China for existential security reasons.

However, private boycott is certainly the only proper, logical option left. Private boycott, as opposed to government-imposed boycott, is always a proper action or option because it involves personal choices, decisions, assessments, biases, or even idelogical dogma. This can be done through personal/individual boycott and group or collective boycott. Private boycott, in this case, can be influenced or motivated by various factors or reasons, such as ideology, patriotism, emotionalism, or personal choices or biases.

But the question is: Is it possible to boycott all Chinese products when nearly all kinds of consumer goods, whether personal or electronics, are being manufactured in China? For instance, China is the biggest producer of electronic parts and equipment (computers, cellular phones, camera, gadgets, etc.). Apple and other giant computer and electronics companies have manufacturing and production units in China. Also, this most populous empire maintains a monopoly on rare earth metals that are essential in the production and manufacturing of a wide variety of electronic technologies including lithium car batteries, solar panels, wind turbines, flat-screen television, compact fluorescent light bulbs, petroleum-to-gasoline catalytic cracking, and military defense components such as missile guidance systems.

This is why I find the proposal to tax or ban Chinese products by some of our lawmakers utterly outrageous and irrational. We can can boycott certain Chinese products for personal reasons. This is what many people do. I know a lot of people who boycott McDonalds and other Western goods for ideological reasons. Unsurprisingly all of them are either hardcore leftists or closet leftists. Yet they smoke Marlboro and some of them go to Starbucks to take a sip of deliciously made capitalistic frappuccino or ice-blended coffee. For me, my main motivation is purely intellectual and ideological. I cannot buy and support counterfeit or fake products manufactured in China because these are in breach of intellectual property rights.

We have to understand that our ongoing dispute with China is not purely territorial; it is also economic. However, if not handled properly it could ignite a ‘cold war’ or an arms race.

The Philippine government’s handling of this Scarborough issue is very disappointing from the very beginning. Whether or not China is guilty of provocation by allowing or deliberately sending fishermen to that disputed area, the Philippine authorities should have acted with due care and caution. Consider the following assessment by a purportedly impartial observer.

Carlyle A. Thayer, an emeritus professor at the University of New South Wales, published an article in in which she detailed “at least three major implications that go beyond a fisheries jurisdiction dispute.” These three implications are as follows:
First, the standoff at Scarborough Shoal exposes the Philippines’ lack of capacity to enforce its sovereignty over its EEZ and thus undermines the credibility of official Philippines statements that it “will secure our sovereignty.”
China is building up the size of its civilian maritime enforcement fleets and it is only a matter of time before China either dominates the fishing grounds off the west coast of the Philippines or a clash occurs between Chinese and Philippines vessels.
Second, the Scarborough Shoal incident has provoked a domestic outcry in the Philippines that is largely critical of the role its ally, the United States. Philippine Senators and Congressmen have berated the US for its inaction. So far the US has only released a statement urging “all parties to exercise full restraint and seek a diplomatic resolution.” Filipino elites have also been critical of the Association of Southeast Asian Nations (ASEAN) for not providing political support.
The domestic reaction in the Philippines reveals unrealistic expectations about its Mutual Defense Treaty with the United States. This treaty provides for consultations in the event “the territorial integrity, political independence or security of either of the Parties is threatened by external armed attack in the Pacific.” So far China has scrupulously avoided using force.

Third, from April 16-27, the Philippines and the United States commenced their 28th Balikatan (Shoulder-to-Shoulder) combined and joint military exercise. This was planned long before the Scarborough Shoal incident. Balikatan involves two phases of simultaneous multiple exercises. The first phase focuses on humanitarian and civic assistance in Palawan, while the second phase involves field training exercises in Luzon and Palawan. None of the Balikatan exercises will take place outside the Philippines’ territorial waters including an exercise to defend and retake an oil rig captured by terrorists.

I strongly agree with the assessment that the Philippines showed its incapacity to enforce its sovereignty over its exclusive

Chinese goods are sold in Divisoria.

Chinese goods are sold in Divisoria.

economic zone. As already stated, China might have been trying to provoke the Philippines into starting a diplomatic,  or even military, conflict. But we have to understand our capability, both militarily and economically.

In regard to military and economic capability, the indisputable facts are as follows:

  • The Philippines is militarily inferior to China;
  • The Philippines is also economically inferior to China;
  • The main economic weapon– or the source of military fuel– of China is its attractive labor market that pumps up its centrally planned market economy;

These facts show that we cannot possibly win an arms race against China. However, this does not mean that we should bow down to China and simply surrender our territorial claims. There are possible options and solutions.

First, the Philippine government needs to prolong its discussions with China while focusing on its most crucial solution: economy. China is not the problem. Our economy is the main problem. There can be no strong defense or military without a stable, strong economy. The second (strong economy) is the cause, while the first (strong military) is the effect. We cannot reverse, or twist, the law of causality. Yes, this law certainly applies to politics, economics, or even military issues. It is universal; it applies anywhere, anytime.

The most important question that will guide our leaders in their quest for economy prosperity and stability (if ever they considered this solution) is: What is the primary source of wealth? Practical economics tells us that the real source of wealth is not the government, but the private sector, and that wealth-creation is only possible under a system in which private individuals are free to produce, to trade, to employ, and to contract. The freer the economy, the more people will participate in wealth-creation. Free economy means both local and foreign participants are free to do business, to trade, and to practice their professions. This is how all developed countries built their economies. This is the history of the United States of America, the economic and military superpower built by immigrants. This is the history of Germany, Japan, Canada, Great Britain, South Korea, Hong Kong, Singapore, and even China.

China, for instance, did not become economically prosperous by keeping its Maoist past. In 2001, China quickly transformed its closed economy into a market-socialist model by joining the World Trade Organization. As a new TWO member, China was compelled to open its economy to foreign investors and to protect property rights and intellectual property rights. In just ten years since its WTO membership, China became the fastest growing economy. China’s fast-rising economy is the very reason why it was able to expand its military. In fact, China is even more economically free than the Philippines in terms of foreign participation. Foreigners are allowed to own 100% equity in land and business in China. By contrast, the Philippines limits foreign investors’ participation, and totally bars foreign professionals from practicing their respective professions in the country.

Second, the Philippines needs economic freedom. It needs to institute radical free market reforms. However, this cannot be done

Free market and constitutional reforms are not forthcoming under the Yellow regime.

Free market and constitutional reforms are not forthcoming under the Yellow regime.

without revising the 1987 Constitution, which mandates protectionism and economic interventionism. The primary goals of this economic solution are as follows: 1) to  grow the economy by attracting local and foreign participation; 2) to attract the brilliant minds to become part of our team; 3) to ensure long-term economic growth. This solution was deftly implemented by Singapore under the leadership of Lee Kuan Yew.

This economic solution offers a huge advantage to the Philippines because it is freer compared with China in terms of political freedom. Both statistics and reports show that China is about to lose its millionaires, professionals and intellectuals in the next few years. A survey published last year found that 60% of about 960,000 wealthy Chinese citizens with assets over 10 million yuan ($1.6 million) were either contemplating on leaving the country or taking steps to do so. The top destinations are the U.S., Canada, Singapore and Europe. Many great leaders understand the importance of having a great number of professionals, inventors, scientists, and intellectuals in economic development and in building a socially and economically stable nation.

However, this solution would remain futile without concrete actions, which include:

  • Eliminate certain taxes or lower tax rates. Taxes that can be eliminated are income tax, estate tax, capital gains tax, property tax, community tax, and corporate income tax. The government may focus on consumption tax as its source of revenue. However, the elimination of taxes should be done in a gradual, cautious manner.
  •  Lower government spending
  • Privatization. It is time to privatize all government-owned and controlled corporations.
  • Legalize gambling and lottery. Allow both foreign and local entrepreneurs to run gambling and lottery businesses. Let them compete with each other.
  • Allow 100% foreign ownership of land and business.
  • Allow foreign professionals to practice their professions here.
  • Allow foreigners to put up schools, media, public utilities, etc.
  • Allow foreign investors to put up power companies and compete with Filipino-owned power utilities.
  • Decontrol or deregulate by repealing economic regulations and restrictions.
  • Allow private insurers and social security companies to compete with SSS and GSIS.
  • Abolish certain government departments and agencies like DepEd, CHED, DSWD, DOH, national housing authority, NFA, DPWH, DoE etc. But this should be done gradually.
  • Abolish certain welfare programs like PhilHealth, government loan programs, subsidies, etc.
  • More focus on our judiciary or court system, police, and military.

The main purpose of these concrete actions is to make the people independent. Welfare programs and services only make the people dependent on the government. With strong and healthy economy, the people will have more employment and business opportunities and they no longer need to rely on government freebies and services. The only proper role of government is to protect individual rights.

Third, the Philippine government may then focus on vital issues, such as the country’s legal system, the police force, and the military or national defense. With stable economy and independent citizenry, the government could then pay more attention to its primary functions: 1) court system to settle legal disputes, 2) police force to deal with criminals, and 3) and military to handle internal and external threats like civil war or invasion.

China may be a giant bully, but nothing is impossible under a free market system. The best real-world model is Israel, which unfortunately is not a complete representative of free market system. The best thing about Israel is that it is more economically free compared with the Philippines, it embraces foreign professionals and investors, and it can afford to focus more on national defense because of its stable, strong economy. According to CIA World Factbook, Israel recorded an unemployment rate of 5.6%, with $235.1 billion GDP, making it the 52nd wealthiest country in the world. Despite its relatively small population, Israel’s military is considered one of the strongest in the world.

Currently, China is the third biggest economy in the world, with GDP of $11.29 trillion in 2011. This figure alone shows that we’re nothing compared with China. However, with free market solutions and reforms, we may be able to uplift our economic status in a matter of years. It is possible. Israel, which has been in conflict with the entire Arab world for decades, did it. In fact, China did it 12 years ago. There’s no reason that this country cannot do it. Again, the problem is not China; it is our economy and the very people who incompetently run this already bankrupt nation.

4 Comments leave one →
  1. July 20, 2012 3:38

    Never shall invaders trample thy sacred Philippine shores

  2. February 25, 2014 3:38

    No problem with the Philippines prolonging its discussion with China so long as its not done in a bilateral approach. Territorial disputes involving the West Philippine Sea should be multilateral. Otherwise, we’ll be on the losing end and China will get what it wants.


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