In May, Rodrigo Duterte was elected president of the Philippines, winning 39% of the vote. He is the first resident of the island of Mindanao to hold the office, making him a political outsider. An unconventional political figure, he is considered populist in the mold of Turkish leader Recep Erdogan or Indian PM Narendra Modi.

Although Philippine economic growth has been generally strong, with per capita real GDP rising 4.2% last year, the general feeling was that only the political elites were benefiting from the growth. Crime and poor infrastructure were the primary concerns of the election and Duterte promised to address both of these issues.

In fact, on the former, Duterte has unleashed a crackdown on drug dealers1 with such fury and lack of due process that he has been facing criticism from the West. Duterte’s response has been to vigorously2 reject these charges and, in general, opinion polls suggest the policy is popular with the general public.

Perhaps the most controversial action Duterte has taken has been to embrace China and reject its long-standing ally, the United States. If this rupture in relations continues, it will significantly change regional geopolitics.

In Part 1 of this report, we will begin with an examination of the geography of the Philippines, discussing its geopolitical importance. From there, we will offer a history of U.S./Philippine relations. In Part 2, we will use this history to discuss Duterte’s recent foreign policy moves. It does appear that Duterte is moving his country to at least a neutral stance and downgrading the American relationship. If true, it would seem that one of the signature foreign policy goals of the Obama administration, the “pivot” to Asia, has essentially failed. We will conclude with the potential impact of Duterte’s actions and their prospective effects on financial markets.

Geopolitics of the Philippines

The Philippines is part of the first island chain that surrounds China.

Philippines

(Courtesy of Stratfor.com)

The map above shows the key chokepoints for shipping in the Far East. As shown on the map below, the U.S. has the Sembawang Naval Base near the Strait of Malacca which, in case of an American blockade, would force shipments on the way to China well into Indonesia. Even if they got past U.S. interdiction, U.S. control of the waters around the Philippines, Taiwan and Japan means the U.S. could likely close off most shipping to China.3

Losing The Philippines: Part 1

(Used with permission from Geopolitical Futures, https://geopoliticalfutures.com/)

Philippines

(Source: UNCLOS, CIA)

This chart shows the competing claims in the South China Sea. China has claimed the “nine-dash line” that virtually controls all the waters in the area, including Scarborough Shoal, which has also been claimed by the Philippines.

China’s Navy4 took effective control of the shoal in 2012. In response, the Philippines, under Duterte’s predecessor, Benigno Aquino III, sued in the Permanent Court of Arbitration at The Hague. In July, the court returned its verdict, strongly rejecting China’s claims of the nine-dash line and ruling in favor of the Philippines.5 China was furious about the outcome of the trial and vowed to ignore it. As with most international law, there is no enforcement mechanism (unless, of course, the U.S. decides to intervene), therefore winning in court was more of a moral victory. On the other hand, it made China look bad and would likely lead other nations to take similar steps, further weakening China’s image.

Although the U.S. pivot to Asia is not officially about containing China, it is generally accepted (and rather obvious) that the U.S. intends to use the island chains to prevent China from becoming a true “blue water” navy.

Philippines

(Courtesy of Stratfor.com)

As this map shows, the Philippines are a critical element of the first island chain. Thus, keeping this island nation as an ally is an important goal for the U.S.

A Short History

Although human history in the Philippines is long (it’s estimated that the first known human settlement was 67,000 years ago), our focus will be on the period of American involvement. The U.S. first became involved in the Philippines as part of the Spanish-American War. This war against Spain began in 1898 with its primary theater in the Caribbean.6 Prior to that war, in 1896, the Philippine revolution against Spanish rule was already underway. The Spanish-American War did spread to the Philippines, where the U.S. decisively defeated the Spanish Navy in the Battle of Manila Bay. Philippine rebel groups initially supported U.S. actions and increased their attacks on Spanish forces. By June 12, 1896, the rebels, who controlled nearly all the land area of the Philippines except Manila, declared independence. Neither the U.S. nor Spain recognized the rebel government.

The Treaty of Paris in 1898 ended the Spanish-American War and led Spain to cede Cuba, the Philippines and other territories to the U.S. The independent Philippine government objected to the treaty and tensions rose. American forces controlled Manila, while the countryside was in the hands of various rebel groups. By February 1899, war had broken out between U.S. and Filipino forces, marking the beginning of the Philippine-American War. In June, the independent government of the Philippines formally declared war on the U.S. American forces prevailed and the conflict officially ended on July 2, 1902, although insurgent groups continued to fight well into 1913 with the last of the insurgents surrendering on the island of Mindanao.

The U.S. was conflicted over its new imperialist position. The founding of the U.S. was based on the desire for independence from a colonial power and so gaining colonies itself was troubling. On the other hand, as noted above, the Philippines are a geopolitical prize. If the U.S. had not taken control, it is highly likely that European powers or Japan would have moved to overthrow the nascent Philippine government. Faced with that prospect, the McKinley administration reluctantly decided to take control of Philippine territory. However, given America’s history, the U.S. steadily moved to create conditions that could grant the country its independence.

The process toward independence accelerated during the Great Depression as labor unions and sugar interests did not want to compete with Philippine low labor costs or cheap sugar. In 1933, Congress passed (over President Hoover’s veto) the Hare-Hawes-Cutting Act, which started the process of independence. However, the Philippine legislature rejected the proposal, opposing parts of the bill that gave the U.S. control of naval bases in the Philippines. Under the Roosevelt administration, the Tydings-McDuffie Act established the Commonwealth of the Philippines, which gave the country its own constitution and self-governing legislature, although foreign policy would remain under the U.S. After a decade, the Philippines would be granted independence. This bill was approved.

The move to independence was interrupted by Imperial Japan’s attack on the U.S. in 1941. Ten hours after the assault on Pearl Harbor, Japan launched a surprise attack on Clark Air Base. Over the next year, Japan took control of the Philippines as Gen. Douglas MacArthur declared Manila an “open city” to prevent its destruction. Japan declared the Philippines independent in 1943; however, it

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