The impact of China’s trade sanctions on the Philippines

(Part 2)

In my previous column on Dec. 30, 2024 (https://tinyurl.com/2arr2vm5), I speculated on how and when China might wield trade as a weapon and eventually de-escalate. In this second installment, I examine the potential impact on the Philippine economy if China were to impose trade sanctions amid escalating maritime and national security disputes. I also explore strategies the Philippines can adopt to mitigate these effects.

Using 2023 trade data from Harvard’s Observatory of Economic Complexity, I outline three scenarios. The first considers a targeted sanction strategy in which China applies selective pressure, limiting Philippine exports that it can easily replace while ensuring its own industries remain unaffected. The second examines a more aggressive situation in which trade is reduced by 50%, perhaps triggered by heightened security tensions such as the deployment of US missiles in Philippine territory, an escalation similar to what happened with South Korea in 2017. The third and most extreme scenario envisions a 75% trade reduction, potentially occurring if the Philippines becomes entangled in a direct US-China conflict. These scenarios estimate potential losses in trade volume, job displacement, inflationary pressures and broader macroeconomic consequences.

ECONOMIC IMPACTSChina remains the Philippines’ largest trading partner, with bilateral trade reaching about $41 billion in 2023. Philippine exports to China amounted to $15.3 billion, with imports from China totaling $25 billion. This trade relationship covers a wide range of industries. Electronics and semiconductors dominate exports, accounting for 38% of total shipments, followed by nickel ore, refined copper and agricultural products. On the import side, China supplies the Philippines with electronic components, fertilizers, steel, chemicals and consumer goods — inputs that are vital to the country’s manufacturing and construction industries. Any disruption in these sectors would have cascading economic effects.

If China were to impose selective sanctions, focusing on curtailing imports of electronics, agricultural goods and low-value exports, the Philippine economy could face a $6-billion loss. The hardest-hit industries would include electronics manufacturing, agriculture and consumer goods, with about 250,000 jobs at risk. The strategy would allow China to exert significant economic pressure while minimizing harm to its own industries, avoiding disruptions to imports of raw materials like nickel and copper that remain essential to its production lines.

If trade restrictions escalated to a 50% reduction, the economic impact would be far more severe. In this scenario, Philippine trade losses could exceed $20 billion, affecting nearly 882,500 jobs. The repercussions would extend beyond the immediate loss of export markets, affecting supply chains, logistics, retail and financial services. The electronics sector, concentrated in industrial hubs such as Cavite, Laguna and Batangas, would see significant contractions, with job losses climbing to 145,000. A deeper cut of 75%, as might happen if the Philippines became involved in a US-China military confrontation, would push trade losses past $30 billion and displace over 1.3 million workers, leading to profound disruptions in key industries.

SECTORAL IMPACTSThe electronics sector would be one of the first to suffer. As the largest export category to China, accounting for 38% of total shipments, any disruption in demand would have immediate consequences for manufacturing firms in export processing zones. A reduction in trade would not only affect factory workers but also ripple across the entire supply chain, including logistics companies, component suppliers and supporting industries. The mining sector, while somewhat shielded under a targeted sanction strategy due to China’s ongoing need for nickel and copper, would still face significant setbacks under broader trade restrictions. If Chinese purchases of Philippine minerals fell by half, about 32,500 jobs would be lost, increasing to 49,000 in a 75% trade reduction scenario. The impact would be particularly severe in mining-dependent regions such as Caraga and Northern Mindanao, where entire communities rely on mineral exports.

Agriculture, which is often overlooked in trade discussions, would also suffer significant consequences. The banana industry, heavily reliant on Chinese markets, would be among the first to feel the strain. A 50% reduction in banana exports could cost 19,000 jobs, climbing to 28,000 if trade were cut by 75%. The loss of the Chinese market would create an oversupply, driving prices down and hurting small farmers and plantation workers in the Davao region. While alternative markets exist, they are unlikely to absorb the excess volume quickly enough to prevent severe financial losses. However, given that Davao is the political base of the Dutertes, China may choose to leave this sector untouched for political reasons.

Beyond goods exports, the tourism industry has already been affected by shifting trade and diplomatic tensions. In 2019, about 1.7 million Chinese tourists visited the Philippines, making them a key driver of the hospitality sector. By 2024, that number had dropped to just over 300,000, a sharp decline compared with neighboring countries that have rebounded more quickly.

BROADER MACROECONOMIC IMPACTSThe trade deficit would widen significantly under all scenarios. In the worst case, it could increase by as much as $8.75 billion, as reduced exports combined with ongoing import needs would put downward pressure on the peso. A weaker currency would, in turn, make imported goods more expensive, further exacerbating inflationary pressures. Inflation, already a major concern for Filipino households, could rise by 1.5% to 3.5% under a 50% trade reduction and by as much as 5.5% in the event of a 75% cut. The consequences would be particularly harsh for low- and middle-income households, for whom rising food and transportation costs constitute a major financial burden. The labor market, particularly in regions dependent on trade-related industries such as Metro Manila, Calabarzon, Central Luzon and Davao, would also experience significant strain, with rising unemployment and limited alternative employment opportunities for displaced workers.

TINIKLING STRATEGY
Navigating these challenges will require a carefully calibrated response — one that can be likened to tinikling, a traditional Filipino bamboo dance that demands agility, precision and strategic timing. Managing the Philippines’ complex economic, security, maritime and diplomatic relations with both China and the United States will require a similar skill and coordination. President Marcos’ recent proposal to de-escalate tensions by withdrawing US missiles from the Philippines in exchange for China’s restraint in the South China Sea is a step in the right direction.

At the heart of this strategy is the need for trade diversification. Overreliance on a single market — whether China or the US — creates significant vulnerabilities. The Philippines should actively expand its trade relationships with other partners to mitigate geopolitical risks. Industrial policy should also evolve. The country’s longstanding role as an assembly hub for electronics and semiconductors leaves it vulnerable to shifts in global demand. While the US military presence in the Philippines is ostensibly meant to protect American and Taiwanese interests, the reality is that most US and Taiwanese investments in the semiconductor industry have gone to other ASEAN countries, bypassing the Philippines entirely.

The potential disruption of imports also highlights the need to secure alternative supply routes. The Philippines imported $4 billion worth of steel from China in 2023, largely because Chinese steel is at least 10% cheaper than that of other suppliers. Similarly, China provides 45% of the Philippines’ fertilizers, and any disruption would push food prices even higher at a time when self-rated poverty is at an all-time high of 63%.

China’s potential use of trade sanctions against the Philippines presents significant economic risks, with severe implications for key industries such as electronics, mining, agriculture and tourism. A sharp reduction in trade could lead to widespread job losses, inflationary pressures and a widening trade deficit, making the economy increasingly vulnerable. The Philippines should respond with a strategic, flexible approach — one that balances diplomacy, trade diversification, industrial policy adjustments and alternative supply chain development. It should also reassess its security assumptions, recognizing that alliances alone do not guarantee economic or geopolitical stability.

Eduardo Araral is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. This op-ed is written in his personal capacity.