Philippines’ Trade Strategy Amid Geoeconomic Tensions

By Francis Allan L. Angelo

The Philippines has long been at the crossroads of global trade, balancing relationships with major powers while safeguarding its national interests. In recent years, this balancing act has become more intricate due to escalating geoeconomic tensions, particularly involving China and the United States. An analysis by William Alan Reinsch and Reena Samuel for the Center for Strategic and International Studies (CSIS) sheds light on the nation’s evolving trade strategy in this complex environment.

China: A Double-Edged Sword

China stands as the Philippines’ largest trading partner. In 2023, Chinese exports to the Philippines reached $52.4 billion, encompassing goods like electrical equipment and machinery. Conversely, the Philippines exported $10.65 billion worth of products to China, primarily electrical equipment and ores. Despite these robust trade figures, the relationship is fraught with challenges. Territorial disputes in the South China Sea and delays in Chinese-funded infrastructure projects have prompted the Philippines to seek economic diversification. Notably, in October 2023, following a maritime incident near the Second Thomas Shoal, the Philippines canceled three Chinese-funded infrastructure projects due to prolonged delays, turning instead to Japan, South Korea, the United States, and the European Union for more reliable partnerships.

In response to the uncertainties with China, the Philippines has intensified its economic engagements with other nations. In July 2024, under the U.S.-Philippines Trade and Investment Framework Agreement, both countries addressed challenges in agriculture, labor, and supply chains, reaffirming their commitment to bolstering bilateral trade. Similarly, in October 2024, the Philippines and South Korea signed memorandums of understanding to enhance defense cooperation, trade in critical raw materials, and infrastructure development. These agreements signify the Philippines’ strategic move to diversify its economic partnerships and reduce overreliance on any single nation.

Friendshoring: The Semiconductor Opportunity

The concept of “friendshoring” involves relocating supply chains to countries with shared values and mutual trust. The Philippines, with its burgeoning semiconductor industry, is well-positioned to benefit from this trend. The sector is projected to grow by 10–15% annually until at least 2027. In March 2024, U.S. Secretary of Commerce Gina Raimondo emphasized the Philippines’ pivotal role in diversifying semiconductor supply chains. Under the CHIPS and Science Act’s International Technology, Security, and Innovation Fund, the U.S. has designated the Philippines as a partner country, aiming to train 128,000 semiconductor engineers and technicians by 2028. This collaboration underscores the Philippines’ potential as a key player in the global technology supply chain.

To attract foreign investment and ensure sustainable growth, the Philippines recognizes the need to develop reliable energy sources and robust infrastructure. The nation has expanded its energy commitments through public-private partnerships and governmental loans with the United States, South Korea, and Japan. In November 2023, the U.S. and the Philippines signed a civil-nuclear cooperation agreement to support the Philippines’ clean energy transition. Following this, in May 2024, the Philippine Department of Energy inked agreements to promote workforce development in the nuclear energy sector. Additionally, South Korea and the Philippines are conducting a feasibility study on reviving the Bataan nuclear power plant, signaling a forward-looking approach to energy security.

South China Sea: A Delicate Balance

The South China Sea remains a focal point of tension between the Philippines and China. Incidents such as the June 2024 confrontation near the Second Thomas Shoal, where Chinese coast guard vessels rammed Philippine boats, highlight the ongoing challenges. In response, the United States reaffirmed its security commitments to the Philippines, emphasizing support in the event of a conflict in the region. Despite these tensions, the Philippines maintains that it is open to trade with China, with officials stating in June 2024 that the nation welcomes investments from “any country, including China.” This stance reflects the Philippines’ careful navigation between asserting its territorial rights and fostering economic ties.

Apart from traditional trading relationships, the Philippines has pursued new trade agreements to strengthen its economic position. The country is actively participating in the Indo-Pacific Economic Framework (IPEF), which focuses on supply chain resilience, digital economy advancements, and trade facilitation. The Philippines is also leveraging its membership in the Regional Comprehensive Economic Partnership (RCEP) to enhance trade with ASEAN neighbors, Japan, South Korea, and Australia. Additionally, the European Union remains a vital economic partner. Ongoing discussions for a free trade agreement (FTA) with the EU signal the Philippines’ intent to gain broader market access and attract European investments in key sectors like energy and manufacturing.

Challenges in Economic Policy Implementation

Despite its proactive trade strategies, the Philippines faces internal challenges that hinder its full economic potential. Bureaucratic inefficiencies, regulatory uncertainties, and infrastructure bottlenecks continue to pose obstacles for foreign investors. While the government has initiated reforms to improve the ease of doing business, investors still cite concerns regarding inconsistent policies and slow approval processes. Furthermore, the looming global economic slowdown poses risks to export-driven industries. The Philippines must also navigate the delicate balance between economic liberalization and protecting local industries from external competition.

The intersection of trade and geopolitics has become increasingly evident in the Philippines’ economic strategy. The shifting power dynamics between the United States and China have placed the country in a complex position, requiring calculated policy decisions to avoid economic retaliation while securing strategic benefits. The Philippines’ growing defense ties with the United States, including expanded military base access under the Enhanced Defense Cooperation Agreement (EDCA), have economic implications. China has previously used trade restrictions as a geopolitical tool, such as its import bans on Philippine bananas and pineapples during diplomatic disputes. As such, the Philippines must remain vigilant in mitigating potential economic repercussions while pursuing security interests.

Balancing Risks and Opportunities

Looking ahead, the Philippines has significant opportunities to strengthen its trade resilience amid global uncertainties. Key areas for development include:

1. Enhancing Manufacturing and Industrial Capacity: Strengthening domestic manufacturing, particularly in high-value industries like semiconductors and automotive parts, will reduce dependence on imports and boost export competitiveness.
2. Expanding Digital Trade: Investments in digital infrastructure and cybersecurity will enable the Philippines to tap into the growing digital economy and e-commerce sector.
3. Improving Infrastructure and Logistics: Efficient transport and logistics networks are crucial for facilitating trade and attracting foreign direct investments.
4. Sustainable Energy Development: Transitioning to renewable energy sources will enhance energy security and position the country as a key player in green technology markets.

Amid rising geoeconomic tensions, the Philippines is proactively reshaping its trade strategy. By diversifying economic partnerships, investing in critical industries like semiconductors, and strengthening energy and infrastructure sectors, the nation aims to build resilience against external shocks. While challenges persist, particularly in its relationship with China, the Philippines’ multifaceted approach positions it to navigate the complexities of the global economic landscape effectively.