The economic impact of a break in U.S. Philippines ties

The economic impact of a break in U.S.-Philippines ties

In an unexpected yet not entirely surprising turn of events, Philippines President Rodrigo Duterte continued his anti-U.S. rhetoric in late October by declaring that the island country would be “breaking up with America.”

The U.S. and the Philippines have shared strong relations dating all the way back to the late 19th Century when the U.S. occupied the Philippines as a colony. The relationship between the two nations has even been described as a “special relationship.”

Announced on 17 November, the Philippine economy expanded 7.1% in the third quarter of 2016 despite Duterte's antics since taking over in June. The economy is going strong, for now. In this post we take a look at what is at stake for the Philippine economy if Duterte does indeed move to break off relations with their long-time ally and driver of economic growth, the U.S.

Duterte: "U.S. has lost"

Since taking office in June, President Duterte has shown a propensity for making outlandish statements especially against the U.S. In August he called for an end to joint military drills with the U.S. He also recently had expletive-laden words for both the U.S. Ambassador and President Barrack Obama, himself.

Duterte’s latest comments came during a visit to Beijing in which he declared that the “U.S. has lost” and that he’d look to realigned himself with China stating, “I’ve realigned myself in your ideological flow and maybe I will also go to Russia to talk to Putin and tell him that there are three of us against the world: China, Philippines, and Russia. It's the only way.”

Following the speech, in what appears to be an attempt at damage control, Philippine Trade Minister, Ramon Lopez, stated that the country would not stop trade and investment with the US.

"The statement the President made maintains the relationship with the West. What we are saying is that there will be less dependence just on one side of the world."

The damage, however, was done as the White House began seeking answers shorthly thereafter. U.S. State Department spokesman, John Kirby, said the US would be seeking an explanation, as the U.S. was blindsided by Duterte’s comments.

Kirby described the comments as "yet another string in some pretty strong rhetoric that we think we believe is at odds with the kind of relationship that we have had and continue to have with the Filipino people."

The economic impact: What does breaking up really mean?

Duterte elaborated on the exact kind of separation that he has in mind commenting, “I announce my separation from the United States, both in military, not maybe social, but economics also."

The separation could have implications for the Philippine’s and U.S. economies especially in terms of labor and trade movements. 

Remittances are vital to the Philippine economy, accounting for approximately 9.8% of GDP in 2015. They are an important source of income for many Filipino families and thus one of the main drivers of private consumption. One of the main sources of Philippine remittances comes from, of course, the U.S.

Business process outsourcing (BPO) is also very important to the Philippines economy, something U.S. firms have invested heavily in the Philippines. According to CNBC, it accounts for roughly 6 percent of GDP

For the U.S., the separation could mean restricting entry of U.S. citizens to the Philippines.

As Duterte mentioned during his speech in Beijing, "The Americans can enter the Philippines anytime without visas. Why? Why don't we make it reciprocal?"

Tighter rules on entry to the Philippines for Americans is a possibility. Other possibilities could include, “changes in access to resources, tax credits and preferential custom tariffs on industries controlled by Americans,” according to Ramon Casiple, executive director at Quezon City-based think tank Institute for Political and Electoral Reform, in an interview with CNBC.

The U.S. economic impact would most likely be minimal, in the short term, in comparison to the effect on the Philippines. However, as mentioned previously, U.S. businesses have invested heavily in BPO in the Philippines as well as the electronic sector. The changes to access to resources, tax credits and preferential custom tariffs on U.S. controlled industries could be harmful.

The Pacific Century, a term used to describe how the 21st Century will be dominated, especially economically, by the states in the Asia-Pacific region, is of particular concern for the U.S., especially in the longer-term. A realignment of ties with China is a blow to the U.S., as Washington had made the Philippines a pillar of its foreign policy ambitions to firmly position itself in the Pacific Century. 

According to some analysts, the U.S. will find it hard to hold back China's increasing moves into the South and East China seas in the event of a Philippines alignment with China.

According to a report by Max Boot, a senior fellow at the Council of Foreign Relations (CFR), "if the Philippines becomes a Chinese satrapy [...] Washington will find itself hard-pressed to hold the 'first island chain' in the Western Pacific that encompasses the Japanese archipelago, the Ryukyus, Taiwan and the Philippine archipelago.”

According to Boot, 5.3 trillion USD passes through the South China Sea per year, 1.2 trillion of which is U.S. trade.   

What about Asia?

Not only could Duterte’s comments threaten U.S.-Philippines ties, but some analysts believe the comments could also disrupt the entire Asia-Pacific region.

China’s territorial claims over waters in the South China Sea have been hotly contested by many ASEAN countries. Indonesia, Malaysia, and Vietnam have been particularly at odds with China over the territorial disputes. If the Philippines indeed shifts its alliance from the U.S. to China, this could give China more leverage to tighten its grip on the already tense region. The major political effect this would have on the region could have spillover effects that negatively impact the economies of the region.  

Empty words?

Some analysts believe that Duterte's anti-U.S. rhetoric adds up to nothing but hot air.

"Part of me is thinking that this is all just posturing. After the U.S. elections, you could expect the Duterte administration to come back to Washington [ ... ] Duterte and his minions are far from being the master chess players they think they are, they are just muddling and bumbling through every day," commented Joseph Franco, a research fellow at Singapore's Nanyang Technological University.

The Duterte administration has yet to officially send a notification of termination of relations to Washington, which signals to some that it could be nothing more than a PR stunt in an attempt to make new friends.

More recently, Duterte seems to have changed his tune with regard to the U.S. now that Donald Trump is heading to the Oval Office come January 2017. Nontheless, the potential economic and political impact of a break up between the Philippines and the U.S. could be great. Keep an eye on this spot to see how things unfold.  

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: November 17, 2016

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