Tag Archives: South China Sea

America’s Philippines Blunder

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America’s Philippines Blunder
Failing U.S. trade policy exacerbates Manila’s doubts of Washington’s security promises.

By GREG RUSHFORD
July 28, 2016 12:46 p.m. ET

U.S. Secretary of State John Kerry on Wednesday discussed the “full range” of economic and security issues with Rodrigo Duterte, the Philippines’ newly elected president. The visit comes in the wake of The Hague’s July 12 ruling that Chinese actions in the South China Sea violate Philippine rights.

Mr. Kerry’s diplomatic mission was to assure Mr. Duterte that Manila can count on Washington’s mutual-defense promises. But there are also Mr. Duterte’s doubts that the U.S. can support the Philippine trade and economy.

When Mr. Duterte was sworn in to office on June 30, U.S. Trade Representative Michael Froman announced a new trade policy that upends important economic growth plans in the Philippines. It threatens to wipe out an estimated $100 million annual boost to Philippine exports of travel goods such as luxury handbags, wallets and backpacks. It also complicates Philippine investment aspirations to create some 75,000 travel-goods-related jobs in the next five years.

At first glance, Mr. Froman’s announcement gives no hint of the economic controversy it has sparked. He says that President Obama wants to make “a powerful contribution to lifting people out of poverty and supporting growth in some of the poorest countries in the world, while also reducing costs to American consumers and businesses.” The policy benefits 43 least-developed beneficiary countries, such as Cambodia and Haiti, and 38 African nations. Pursuant to the U.S. Generalized System of Preferences (GSP) program, these countries will no longer have to pay stiff tariffs of up to 20% on handbags, wallets and other travel goods exported to the U.S.
The U.S. decision to give preferential treatment to the industry’s small players, while blindsiding the most competitive producers, is perplexing. Cambodia, for instance, holds a modest 0.4% of the U.S. market, producing mostly backpacks. Africa’s total travel-goods exports to the U.S. amount to roughly one hundredth of one percent market share. As a result, the policy gives just two countries—China and Vietnam—a combined 90% share of the $5 billion U.S. travel-goods market.
It is unlikely that preferential treatment will prompt least-developed countries to boost their exports. Even with 15 years of duty-free access to U.S. clothing markets under the African Growth and Opportunity Act, 40 African countries combined to export less than 1%, or $1 billion, of garments each year to the U.S. The Philippines alone exceeds Africa in clothing exports by more than $100 million.

Diplomats from other countries and industry giants in the U.S., such as Coach, Columbia Sportswear and Kate Spade, have written to Mr. Froman asking for an explanation. On Wednesday 14 members of U.S. Congress, including 10 from the powerful Ways and Means Committee that has jurisdiction over trade, also issued a strong letter to the U.S. trade chief. But Mr. Froman has yet to offer any economic rationale for the decision, nor is there any evidence on the public record to support it.

Developing countries with larger market shares of the travel-goods industry, such as India, Indonesia, Pakistan, the Philippines, Sri Lanka and Thailand, must now reconsider their plans to expand their investments. Major U.S. players such as Coach and Michael Kors, which looked to U.S. trade officials to provide financial incentives to shift production away from China, will now put those investment plans on hold. China is thus poised to keep its 85% share of the U.S. travel-goods market.

Vietnam, as a communist country, is not eligible for the GSP preferences. But in the Trans-Pacific Partnership trade deal, the U.S. agreed to give the Vietnamese—who now hold a 5% market share—the same duty-free treatment withheld from GSP-eligible countries. Pakistan’s Prime Minister Nawaz Sharif thought he had received assurances directly from President Obama last year that U.S. trade officials understood the “importance” of increasing enhanced market access for Pakistan’s GSP-covered exports. Diplomats I have spoken to chafe at the unfairness.

Viewed through the Philippine lens, the failure to connect economic cooperation with the security aspect of Obama’s pivot to Asia is glaring. Cambodia, apparently thanks to financial inducements from Beijing, has been the spoiler whenever the Philippines has sought solidarity from its partners in the Association of Southeast Asian Nations in standing up to China in the South China Sea.

Asked repeatedly for his side of the story, Mr. Froman asserted through a spokesman that “travel goods are a product particularly well-suited to be produced in least-developed countries.” He declined to explain further.

While the broader security relationship will survive, it is worth noting that in international economic diplomacy, like in personal relationships, unnecessary smaller slights erode trust. With the Chinese watching on the sidelines and eager to buy their way out of their South China Sea mess, this is not a wise time to rub the volatile new Philippine leader the wrong way.

Mr. Rushford edits an online journal that specializes in international economic diplomacy.

One President Away from Disaster

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One President Away From Disaster
Why the Philippine election threatens to break an economic winning streak.

BY GREG RUSHFORD APRIL 29, 2016
The Philippines offers one of the world’s most heartening economic success stories. Once the “sick man” of Southeast Asia, the country has recently become one of the fastest-growing economies in the region. Over the past six years its annual GDP growth rate has been above six percent.

The credit belongs to President Benigno Aquino.The credit belongs to President Benigno Aquino. Elected in 2010, Aquino promised an honest government, staffed by competent administrators who would start freeing the economy from the shackles of corruption and kleptocracy. He has largely kept his promise: he has awarded public contracts honestly, held corrupt officials accountable, and removed obstacles to much-needed foreign investments. But now Aquinio’s six-year term is nearly over, and the constitution does not allow him to run for president again. As a result, on May 9, voters will head to the polls, when they will pick their new chief executive from a field of five candidates.
The bad news is that none of the frontrunners appears likely to continue Aquino’s reforms, which remain fragile and subject to reversal. In fact, the whole group is downright disturbing — a feeling that will probably be familiar to anyone who has been following the U.S. presidential race.

The frontrunner is a misogynist whose attitude on women makes Donald Trump look like a choir boy, and who has pledged to drown criminals in Manila Bay. Another is dodging criminal investigations that allege money laundering, kickbacks, and bid rigging. Still another is a political neophyte who might be a welcome fresh face, if only she were not backed by some of the worst of the old-style cronies whose main contribution to their country has been to impoverish it. Admittedly, there is one candidate who is widely respected for his personal honesty and wealth of high-level government experience — but he has also earned a reputation for being unwilling to make tough decisions. (The fifth aspirant, Miriam Defensor Santiago, who is polling in the single digits, is not considered a serious contender due to her bout with lung cancer.)

“If this looks like a circus, it’s because it really is,” prominent investigative journalist Marites Vitug told me. In sum, after the new president is sworn in this July, the bad old days, when corrupt politicians were (disastrously) in charge of the economy, could soon come back.

If that happens, the timing couldn’t be worse. The Philippines’ recent progress in becoming a more attractive place to invest has only thrown into sharp relief how much more needs to be done.The Philippines’ recent progress in becoming a more attractive place to invest has only thrown into sharp relief how much more needs to be done. For starters, a whole series of key sectors — ports, shipping, energy, logistics, mining, finance, telecommunications, agriculture, and food — are, one way or another, closed to meaningful competition. To sustain genuine economic growth, the next president will have to take on and break up an array of entrenched cartels, monopolies and duopolies. President Aquino has made a start, but unless these and other structural problems are addressed head-on, the country’s growth is almost sure to slow.

Yet the candidates seem to have other priorities on their minds. The rule of law, for example, is notoriously weak in the Philippines — problems range from poor respect for property rights to a judicial system in desperate need of reform. So it says a lot that the frontrunner is 71-year old Rodrigo Duterte, who for more than two decades has been mayor of the city of Davao on the southern island of Mindanao. He’s known as Duterte Harry, after the Clint Eastwood movie character. That’s because, once a playground for violent criminals, Davao has become perhaps the Philippines’ safest city. The credit for that is widely attributed to death squads, widely viewed to be connected to the mayor, that have taken out an estimated 1,000 street criminals with no semblance of a fair trial.

Whatever the truth, Duterte cultivates his tough-guy image.Whatever the truth, Duterte cultivates his tough-guy image. “If you do not know how to kill people and you’re afraid to die, that’s the problem, you cannot be a president,” he has declared.

If he becomes president, Duterte promises to throw the bodies of thousands of drug dealers into the ocean. “The fish in Manila Bay will get fat,” he boasts. He has also threatened to dissolve the congress and impose martial law as “an extreme option” if corrupt politicians get in his way. Onlookers may cringe, but many Filipino voters, fed up with corruption, applaud.

Duterte’s foul mouth tends to get him in trouble. He has apologized for cussing out Pope Francis in anger after getting stuck in a massive traffic jam during last year’s papal visit to Manila. But he’s never expressed sincere regret for some of his astonishing statements about women. Recently, Duterte recalled a case where an Australian missionary had been gang-raped and killed in Davao in 1989. The rape was regrettable, he said — but somewhat understandable given how “beautiful” the victim was. She was so attractive, Duterte joked, that “the mayor” — meaning himself — “should have been first.” When his insensitivity sparked a flurry of international headlines, Duterte basically shrugged, noting that “was how men talk.”

If elected, the first “big fish” to go to jail, Duterte promises, will be one of his presidential rivals. “I have killed criminals,” the mayor has declared. “But Binay steals from the poor.”

The reference was to current Vice President Jejomar Binay, 73, the former mayor of Makati City, the Philippines’ financial center, who at times has also led the polls. Binay, who ran Makati’s political machine for 21 years, has been accused of amassing unexplained wealth — accusations he has always brushed off as unsubstantiated and politically motivated.

Binay rose from humble beginnings, working his way through law school and into politics, and eventually creating one of the country’s most powerful dynasties. One of his daughters is a senator, another a congresswoman. His son served for a time as mayor of Makati until being dismissed last year to face allegations of corruption.

Meanwhile, a senate subcommittee has investigated allegations that Binay himself indulged in bid rigging during his stint at mayor. The Philippines Anti-Money Laundering Council, an enforcement arm of the central bank, obtained a court order last year freezing more than 200 bank accounts allegedly used for money laundering by Binay and his associates. (His reply was that “allegations are not evidence.”)

Binay has cultivated a base among his poor compatriots.Binay has cultivated a base among his poor compatriots. As mayor of Makati, he generously doled out free scholarships and medical care to his grateful constituents. A video that went viral in Manila showed him handing out what appeared to be small peso bills to a line of grateful constituents — just Christmas presents for the downtrodden, his operatives bragged (without explaining exactly where the money had come from). Binay told one audience last year that poverty, not corruption, would be the number one “moral problem” he would address as president. This, needless to say, offers little hope that he would prove effective at fighting graft, often cited by Filipinos as one of their country’s most pressing problems.

Binay has raised eyebrows by being the only presidential candidate to suggest that, if the price were right, he might agree to let China buy its way out of its maritime disputes with the Philippines in the South China Sea. Chinese naval forces have seized control of some 80 percent of the Philippines’ internationally recognized exclusive economic zone, which includes valuable oil and gas reserves and traditional fishing grounds. To his credit, President Aquino has stood up to the intimidation, even embarrassing Beijing by filing an international legal challenge in The Hague. Chinese officials have made no secret of their hopes to settle the dispute by contributing money for “joint development” projects — if the Philippines will accept that China is entitled to keep control of lucrative resources that rightfully belong to the Philippines. An accommodating President Binay could be just what Chinese officials have been hoping for.

Senator Grace Poe, the adopted daughter of popular movie stars, is the third leading presidential aspirant. At 47, Poe is still considered a neophyte, having only been in the senate for three years. But she does have a team that includes several respected economic advisers who understand that the Philippines will never enjoy sustainable growth without addressing the many structural weaknesses that have held the country back for so long.

Yet Poe, too, comes with baggage that casts doubt on her capacity to sort out her country’s economic problems. Above all, she has close ties to the bad old crowd that created many of the problems that plague the Philippines today. One of her strongest political backers is former President Joseph Estrada, a boozer and womanizer who was hounded out of office in 2001 and convicted of corruption. (He has certainly demonstrated political resiliency, having been elected Manila’s current mayor in 2013.) Estrada is one of Poe’s godfathers, a relationship that has real meaning in the Philippines.

Even more worrisome, another godfather, Danding Cojuangco, is pushing hard for Poe’s election. Cojuangco, one of the country’s most notorious crony capitalists, became one of the Philippines’ richest men (and perhaps the richest) during the old Marcos dictatorship. He was on the plane when Ferdinand Marcos fled the country for Hawaii in 1986. Now chairman of the giant San Miguel conglomerate, Cojuangco has made his corporate aircraft available to fly Poe around the campaign trail.

San Miguel beer holds some 90 percent of the Philippine beer market, and the conglomerate’s revenues are estimated at some 5 percent of the country’s GDP. Besides beer, San Miguel is into chickens, hot dogs, oil refining, insurance, property developments, banks, power plants, and more. If investigators from the new Philippine Competition Commission start asking questions about undue concentration of economic power, where would a President Grace Poe stand?

The good news about Mar Roxas — a viable candidate, although never a frontrunner — is that he’s one of the rare Philippine politicians who has never been tainted with allegations of malfeasance. And although just a couple weeks short of 59, he’s had a wealth of high-level experience: senator, trade secretary, energy secretary, interior, and transportation. But he also has a reputation as a relatively weak administrator. During his stint as transportation secretary, for example, he proved unable to push through plans for a long-overdue international airport project.

Happily, the picture isn’t completely bleak. The Philippines still boasts inherent strengths that could compensate for the possibility of a severe leadership deficit following the presidential election. The country has a high literacy rate and a resourceful and talented workforce. And the country’s 100 million people are in a demographic sweet spot — their average age is in the 20s, making for a youthful, energetic population that can drive consumption and growth.

All this offers at least a faint hope that present growth trends will continue no matter who wins on May 9. Even so, pessimists are entirely entitled to ask why, despite its virtues, the Philippines always seems to be just one president away from disaster.