Trade warning to Philippines

If tensions are not eased over Huangyan Island, trade prospects between China and the Philippines will be affected and economic sanctions might be applied, experts said.

"For the moment the dispute will not have a great effect on bilateral trade because government decisions have a delayed impact on trade performance," Zhao Jianglin, an economic expert at the China Academy of Social Sciences' Institute of Asia-Pacific Studies, told China Daily on Friday.

"But if the tensions continue to develop with no relief, the bilateral trade relationship as well as tourism and investments will have a negative effect and China may consider economic sanctions against the Philippines," she said.

China maintains it has sovereignty over the island and was angered by the harassment by the Philippines' navy of Chinese fishermen in the vicinity.

The Chinese ambassador to the Association of Southeast Asian Nations, Tong Xiaolong, said on Tuesday that "if the Huangyan Island situation keeps developing, bilateral ties, including the trade relationship, will surely be affected".

China is the third largest trade partner of the Philippines and the Philippines is China's sixth largest trade partner among ASEAN members. Bilateral trade grew fast over the past decade and reached $30 billion in 2011, according to the Chinese embassy in the Philippines. During President Benigno Aquino III's visit to China last year, both governments agreed to expand trade to $60 billion by 2016 and make China the biggest export market for the Philippines.

Wang Zaibang, vice-president of the China Institute of Contemporary International Relations, said the impact on trade has begun to show after China's tourism authorities urged people not to visit and quality watchdogs imposed stricter inspections on fruit from the Philippines.

"In addition to the great effect on Philippines' tourism, the country's exports to China will be severely affected if the situation is not resolved. The bilateral trade, a small share of China's foreign trade, is closely related to the Philippines' economic growth," he said.

China's quality watchdog, the General Administration of Quality Supervision, Inspection and Quarantine, recently issued a notice of stricter inspections for harmful organisms in fruit from the Philippines after bacteria and insects were found in bananas and pineapples and other fruit from last year. Local authorities are told to send samples containing living species to a laboratory for further testing. The fruit will be returned or destroyed if harmful organisms are found. Half of the Philippines' bananas are exported to China.

"The notice is a warning to the Philippines. The move of enhancing fruit quality inspections, which is convenient and easy to operate, intends to test the reaction of the Philippines before economic sanctions are introduced. Lengthy inspections or customs declarations will result in the fruit rotting and cause losses for exporters," Zhao said.

China National Tourism Administration advised Chinese nationals not to visit the island country on Thursday over safety concerns. China is the fourth largest market for tourists to the Philippines, with 243,137 Chinese tourists visiting last year, accounting for 6.21 percent of the Philippines' 3.9 million tourists in 2011, according to the Department of Tourism of the Philippines.

The tense situation also put Chinese investments and construction projects in the Philippines under risk because "the excited masses could cause great trouble to Chinese investors and workers", said Wang of the China Institute of Contemporary International Relations.

China's non-financial direct investment in the Philippines amounted to $251 million by the end of June 2011 and the value of contracted projects was $7.9 billion by the same period.

Wang added that if the situation cannot be successfully resolved China will resort to sanctions including limiting imports from the Philippines and reducing Chinese investment in the country.

"China is expanding domestic consumption and economic sanctions against the Philippines will deprive the country of the huge market in China and a good chance for the country to maintain high-speed economic growth," Wang said.

Zhao added that economic sanctions, once introduced by China, would have a very adverse effect on the Philippines' economy because of the country's high labor costs and high incidence of poverty - as much as 55 percent of the population.

But she played down the possibility of economic sanctions after the Philippines resumed diplomatic dialogue with China on Wednesday.

"China is indeed willing to develop good trade relationships with the Philippines and both parties can cooperate on developing the natural resources in the South China Sea. The huge energy demands of fast economic growth can partly explain the country's risky move in the South China Sea," Zhao said.

Wang said that the successful resolution of the dispute will lift the bilateral trade relationship to a higher level and set a good example for solving other disputes in the South China Sea.

"The Philippines has embarked on fast economic development and China can be a good opportunity for the country in providing foreign investment. In the long run, both countries need to enhance trade because a confrontation benefits no one," Zhao said.