For the Philippines, caught between the US and China, trade war is an opportunity to move up the value chain

As the trade war escalates between the US and China – the world’s two largest economies – their trade partners are becoming increasingly wary. The timing could not be more ominous for the Philippines, one of the world’s fastest-growing economies, a long-time ally of the United States trying to bolster its economic ties with China.

China and the US currently represent the largest and third-largest trade partners of the Philippines respectively, while the US, Hong Kong and mainland China form the country’s top three export markets, and China and the US constitute the largest and fourth-largest sources of its imports.

The Philippines is already experiencing high inflation and is still in the early stages of addressing its decades-old infrastructure deficit, so the trade war casts a long shadow over the country’s prospects. It is an active player in the increasingly integrated global supply and production chains through which goods bound for external markets like the US and China pass. There is potential for the trade war to disrupt this, inflicting collateral damage on national economies in the chain.

A total of 16.9 per cent of Philippine exports form part of China’s value chain, among the highest percentage in Southeast Asia. However, these only account for about 3.2 per cent of its GDP. In contrast, Malaysia and Singapore have higher exposure, at 7.3 per cent and 5.7 per cent respectively.

Migrant Filipino workers in export-oriented factories in Taiwan, South Korea and Japan who churn out intermediate or final goods destined for China, America or third-party markets may also be affected. Being less dependent on exports could give the country some breathing space, but its relatively high volume may eventually hurt it.

That said, there are also opportunities, in the form of trade diversification. With its young demography, burgeoning middle class, proficient manpower and increased investment in infrastructure, the Philippines has potential: it has emerged as the world’s top investment destination this year.