China-Philippines Bilateral Relations: Trade and Investment

The China-Philippines relationship is characterized by a blend of economic opportunities through initiatives like the Belt and Road Initiative, alongside significant trade and investment ties. Recent high-level meetings have aimed to enhance these economic connections while addressing geopolitical challenges, reflecting a complex but evolving partnership.

In recent years, the relationship between China and the Philippines has become a focal point of geopolitical interest in Southeast Asia. As both nations navigate complex historical ties, territorial disputes, and economic opportunities, their interactions are marked by a blend of cooperation and tension.

China’s growing influence in the region, particularly through initiatives like the Belt and Road Initiative (BRI), presents significant opportunities for Philippine infrastructure development and trade. In fact, China has emerged as the Philippines’ largest trading partner, with bilateral trade reaching impressive figures that highlight the potential for economic growth.

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However, the economic landscape is not without its challenges. The Philippines faces concerns over reliance on Chinese investments, particularly in sectors like infrastructure and mining. Additionally, ongoing territorial disputes in the South China Sea complicate economic collaboration, as both nations vie for resources in contested waters.

This article explores the multifaceted relationship between China and the Philippines, examining the historical context, current challenges, and future prospects for collaboration.

China-Philippines relations

China and the Philippines established formal diplomatic relations in 1975. Relations between the two countries have been “predominantly warm and cordial” over the years, as expressed by the Office of the Press Secretary. The early decades of the relationship saw the signing of several bilateral agreements and treaties, which included a bilateral investment (BIT) in 1992 and a double taxation agreement (DTA) in 1999.

However, territorial disputes in the South China Sea, which include the disputed sovereignty of the Spratly Islands have plagued bilateral relations over the years. The major flashpoint for this dispute has been the arbitration that the Philippines brought to the United Nations (UN) with regard to China’s territorial claims in the South China Sea. The arbitral tribunal in the Hague ruled in favor of the Philippines with regard to several of its claims in 2016, although China has rejected this ruling.

China and the Philippines have made efforts to resolve these issues on several occasions. These include an agreement for “Shelving disputes and going in for joint development” during a state visit to the Philippines by the then-president of China Jiang Zemin in 1996, a joint statement signed between China and the Philippines in 2000 which sought to “establish a long-term and stable relationship on the basis of good neighborliness, cooperation, mutual trust, and benefit”, and the issuing of a joint statement “reaffirming the commitment of taking further steps to deepen the strategic and cooperative relationship for peace and development between the two countries” during former Chinese President Hu Jintao’s visit to the Philippines in 2007.

The dispute over the territory in the South China Sea has nonetheless still not been resolved. Despite this, relations between China and the Philippines have been growing considerably stronger over the last five years, and in particular during the tenure of the former Philippine President Rodrigo Duterte. The former President’s state visit to China in 2016 led to investment and credit line pledges that amounted to approximately US$24 billion in business and trade deals.

Recent developments

In 2023, Philippine President Ferdinand Marcos Jr. held two significant meetings with Chinese President Xi Jinping, reflecting both the complexities and the potential of the bilateral relationship between the two nations.

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The first meeting took place in January 2023, when Marcos made an official visit to Beijing, seeking to “shift relations into a higher gear.” This visit was characterized by a series of high-level bilateral talks aimed at boosting economic ties, even as the territorial disputes in the South China Sea remained a contentious issue.

During this trip, Marcos and Xi Jinping presided over the signing of 14 bilateral agreements, spanning several sectors critical to the Philippine economy.

Among these agreements were key deals on agricultural and fisheries cooperation, digital and ICT collaboration, and a renewed memorandum of understanding (MoU) on the Philippines’ participation in China’s BRI. The two sides also formalized agreements on infrastructure investment, notably the handover of China-funded bridge projects in Manila and the signing of loan agreements for other critical infrastructure initiatives. These moves demonstrated China’s role as a key bilateral lender to the Philippines, although most of the financing was in the form of loans with terms close to market rates rather than outright aid.

In addition to infrastructure and trade agreements, China pledged to address the trade imbalance by increasing imports of Philippine fruits, such as durians, to further support economic ties. This visit was seen as a diplomatic success, providing a boost to bilateral cooperation, especially in economic areas, despite the simmering geopolitical tensions over the South China Sea.

The second notable meeting between the two leaders occurred in November 2023, on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit in San Francisco. This meeting came at a critical time, as tensions in the South China Sea had escalated due to incidents between Chinese and Philippine vessels, including a collision.

Thus, during this meeting, Marcos emphasized the importance of de-escalating tensions, calling for “mechanisms to lower tensions” in the disputed waters. While acknowledging the significant geopolitical challenges, both leaders agreed that these issues should not overshadow the broader relationship between their countries. For his part, Xi reiterated China’s commitment to peaceful development and mutual cooperation, aligning with his broader message during the APEC summit about fostering an open, dynamic, and peaceful Asia-Pacific community.

While the San Francisco meeting was more focused on geopolitical circumstances compared to the earlier economic-focused talks in Beijing, the leaders maintained a pragmatic approach. In particular, Xi’s statements about reducing tensions between the world’s largest economies, including China and the US, also indicated China’s broader strategy of avoiding unnecessary conflicts that could harm economic growth and stability.

These recent developments showcased the delicate balancing act in Philippine-China relations. As of 2024, the relationship between the Philippines and China continues to evolve, with both nations navigating the challenges of geopolitical tensions while seeking to maintain beneficial economic ties.

The role of the Philippines in the Belt and Road Initiative

The recent shift in China-Philippines ties has led to several bilateral cooperation agreements and projects valued at billions of dollars and strongly supported by Chinese investments. The Philippines’ involvement in China’s BRI is one of the key elements of this rapprochement.

For example, the Philippines’ “Build Build Build” (BBB) program, which seeks to address the enduring issues of poverty, economic growth, and industrial development by increasing public spending on infrastructure, is expected to benefit from this particular development as the influx of Chinese investments will provide the necessary financial support for such a large-scale domestic infrastructure project.

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Indeed, despite its rising maritime disputes with China, the Philippines signed to become a founding member of the Chinese-led Asian Infrastructure Investment Bank (AIIB) – the main funding source for the BRI projects. Together with the Asian Development Bank (ADB), in 2016, the AIIB financed two transportation and flood control projects in Manila, the Philippines’ capital.

In November 2018, the two countries signed a Memorandum of Understanding (MoU) on Cooperation on the Belt and Road Initiative in which China and the Philippines agreed to cooperate in strategic sectors such as infrastructure, trade, investment, development, transportation, telecommunication, and energy. The MoU will likely be extended beyond 2022 (its original termination date).

The Sangley Point International Airport (SPIA) is one of the many symbols of the Philippines’ participation in the BRI. Opened in 2020, Sangley Point was built primarily to serve general aviation and turbo-propped airlines in the proximity of South Luzon and the Greater Manila Area. In April 2022, former President Duterte inaugurated the China-funded Binondo-Intramuros Bridge, the second of two bridges funded through a Chinese grant. The Binondo-Intramuros Bridge is part of a US$96 million Chinese grant agreed upon during Duterte’s visit to China in 2017. The other bridge is Estrella-Pantaleon, which was completed in July 2021. Both bridges were initially planned to be constructed by 2020 but were delayed due to the pandemic.

The Philippines can benefit from participating in the BRI also from the point of view of human capital deployment and development: in 2020, the BRI-related projects were expected to employ almost 21,000 Filipino citizens, while other arrangements with Chinese companies would bring in US$12 billion in investment to the country.

Arguably, a key component of the Philippines’ engagement in the BRI involves the creation of maritime corridors and commercial networks, which also entail the planning of ports, bridges, routes, and other key infrastructure.

21st Century Maritime Silk Road

In 2013, President Xi Jinping presented a two-way plan for the BRI development, simultaneously launching the Silk Road Economic Belt (SREB) and the 21st Century Maritime Silk Road (MSR). A few years later, in 2017, China’s National Development and Reform Commission (NDRC) and the State Oceanic Administration released more details on maritime cooperation, unveiling a vision for three maritime “blue economic passages” connecting Oceania, Africa, and Europe. The China-Oceania-South Pacific route, in particular, is responsible for linking the South China Sea to the Pacific Ocean.

In the case of the Philippines, the MSR is expected to link the north and south of Manila in the Philippines to the Chinese cities of Ningbo, Qingdao, and Shanghai. According to the Xinhua-Baltic International Shipping Centre Development Index Report, the establishment of a shipping network in these seaports will create a great advantage in providing direct services from Qingdao and central China to Manila.

China-Philippines bilateral trade

Trade between the Philippines and China has experienced steady growth in recent years, with Philippine imports from China increasing at an average annual rate of 20.7 percent between 2010 and 2017. By 2021, China had solidified its position as the Philippines’ largest trading partner and main source of imports, while also becoming the country’s second-largest export market, according to the Philippine Department of Trade and Industry.

In 2023, total trade between the two countries reached US$41 billion, making China the Philippines’ top trading partner, followed by Japan with US$21 billion and the United States with US$20 billion.

Among the Philippines’ top exports to China in 2023 were electrical and electronic equipment (US$5.26 billion), ores, slag, and ash (US$1.44 billion), copper (US$1.07 billion), edible fruits, nuts, and citrus peels (US$0.55 billion), and machinery, nuclear reactors, and boilers (US$0.51 billion).

China is also a major importer of Philippine agricultural products, ranking as the third-largest destination for these exports. Bananas, pineapples, coconuts, and avocados are especially popular, with fresh durians soon set to be added to the list of growing agricultural exports to China.

Meanwhile, the top products exported from China to the Philippines in 2023 included electrical and electronic equipment (US$8.17 billion), machinery, nuclear reactors, and boilers (US$4.65 billion), iron and steel (US$3.81 billion), mineral fuels, oils, and distillation products (US$3.59 billion), and articles of iron or steel (US$2.85 billion).

China-Philippines bilateral investment

China’s investment in the Philippines has grown considerably over the past two decades, particularly through state-directed development finance and foreign direct investment (FDI). Between 2000 and 2022, China provided over US$9 billion in development finance, making it one of the Philippines’ leading lenders.

Additionally, from 2010 to 2023, Chinese firms committed nearly US$22 billion in FDI, demonstrating a strong economic partnership. These funds have supported a range of projects, from major infrastructure undertakings to smaller community initiatives, facilitated by various Chinese state-owned enterprises and international financial backers.

While China’s financial contributions have surpassed those of the US, which invested under US$5 billion in comparable initiatives during the same timeframe, Japan’s involvement of nearly US$22 billion highlights the competitive environment for foreign investment in the Philippines.

From 2016 to 2019, the Philippines’ direct investment in China increased year by year, reaching US$276 million in 2019. But in 2020, this number decreased to US$52 million.

China-Philippines investment and trade agreements

Bilateral treaties and agreements

China and the Philippines have signed hundreds of bilateral agreements in several cooperation areas, such as defense, tourism, agriculture, finance, and trade. The BIT and the DTA treaty, in particular, aim to facilitate investment and business exchanges between the two countries.

BIT

The 1992 China-Philippines BIT ensures that investors from both contractual nations would have their investments in the other contracting country protected. This is codified in the most-favorable-nation (MFN) provision, which also guarantees that investors from the other contracting country receive the same treatment as investors from each party’s own country and investments from a third country.

Investors covered by the BIT include:

• Citizens of the PRC or the Philippines;
• Economic entities established in China; and
• Companies, which may be corporations, partnerships, or other associations, incorporated or constituted and doing business in the Philippines.

Meanwhile, investments covered by the BIT include:

• Movable and immovable property and other property rights;
• Shares in companies or other forms of interest in such companies;
• Claims to money or to any performance having an economic value;
• Copyrights, industrial property, know-how, and technological process; and
• Concessions conferred by law, including concessions to search for or exploit natural resources.

The BIT also ensures investors from both nations the ability to return earnings made on the territory of the other contracting party to their own nation. This involves the distribution of earnings such as profits, dividends, and interest as well as other types of revenue such as royalties and funds resulting from the partial liquidation of investments.

The BIT also includes articles addressing dispute resolution procedures, such as litigation before an independent international tribunal.

The BIT mandates that both countries take actions to encourage and facilitate bilateral investment in addition to ensuring the protection of investments. This includes making sure there are resources available to allow citizens of the other party to apply for visas so they can visit and conduct business in the other party’s country.

DTA

In 1999 China and the Philippines signed a DTA to prevent investors operating in the other party’s country from having to pay tax on profits and income twice.

The DTA applies to the residents of either one or both contracting countries and it generally applies to the taxes on income. In China, the DTA covers the following taxes:

• Individual income tax (IIT);
• Income tax for enterprises with foreign investment and foreign enterprises; and
• Local income tax.

In the Philippines, the DTA applies to:

• Income taxes on individuals, corporations, estates, and trusts;
• Stock transaction tax.

Moreover, the DTA also applies to any identical or substantially similar taxes which are imposed after the date of signature of the Agreement in addition to (or in place of) the existing ones.

To understand China’s tax regime, refer to our country portal here.

Under the DTA, the “permanent establishment” of a company is a fixed place of business through which the business of an enterprise is wholly or partly carried on. It may include:

• A place of management
• A branch
• An office
• A factory
• A workshop
• A mine, an oil or gas well, a quarry, or any other place for the extraction of natural resources.

It also refers to:

• A building site, a construction, assembly, or installation project, or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than six months.
• An installation, drilling rig, or ship used for the exploration of natural resources, but only if so used for a period of more than three months.
• The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 6 months within any twelve-month period.

The DTA ensures that a company’s profits shall all be taxable only in the contracting state where the business is registered – unless the company carries on business in the other Contracting State through a permanent establishment situated therein. Likewise, the Agreement also establishes that profits from international shipping will not be taxed in the state other than the company’s resident one, which also applies to profits from the participation in a pool, a joint business, or an international operating agency.

Multilateral treaties

RCEP

The Regional Comprehensive Economic Partnership (RCEP) represents a pivotal moment in the China-Philippines relationship, as both nations are now integral members of this significant multilateral trade agreement. Officially effective as of June 2, 2023, RCEP encompasses 15 countries in the Asia-Pacific region, collectively accounting for approximately 30 percent of the global population and GDP. This framework aims to facilitate trade and investment flows, reduce barriers, and create a more transparent business environment, thus providing both China and the Philippines with enhanced opportunities for economic cooperation.

For the Philippines, RCEP opens avenues for increased market access, particularly in sectors such as agriculture, electronics, and business process outsourcing (BPO). By leveraging its strategic geographic location and competitive advantages, the Philippines can deepen its participation in regional supply chains, especially in industries where it holds a comparative edge. The agreement also allows for greater foreign direct investment, stimulating economic growth and fostering innovation.

RCEP offers a platform to both countries for collaborative economic engagement, potentially strengthening ties and enhancing mutual benefits in trade and investment.

China-ASEAN Free Trade Agreement

The China-Philippines relationship is further strengthened by their participation in the China-ASEAN Free Trade Area (CAFTA), established through the Framework Agreement on China-ASEAN Comprehensive Economic Cooperation in 2002. This landmark agreement enhances economic and trade relations between China and the ASEAN member states, promoting regional economic development and integration. Following an upgrade in 2015, CAFTA continues to facilitate trade in goods and services, reduce tariffs, and create a transparent investment environment.

As part of CAFTA, the Philippines stands to benefit significantly from increased market access and streamlined trade processes. The agreement not only fosters closer economic ties but also strengthens regional supply chains, particularly in sectors where the Philippines holds competitive advantages, such as agriculture and electronics. This multilateral framework allows for collaborative growth and investment opportunities, positioning both nations to capitalize on the broader economic landscape of the Asia-Pacific region.

ASEAN – China Investment Agreement

As members of the Association of South East Asia Nations (ASEAN), the Philippines are covered by the ASEAN-China Investment Agreement (hereafter “Agreement”) signed in 2009. The objective of the Agreement is to promote investment flows and to create a liberal, facilitative, transparent, and competitive investment regime in China and ASEAN through the following:

• Progressively liberalizing the investment regimes of China and ASEAN;
• Creating favorable conditions for the investment by the investor of a Party in the territory of another Party;
• Promoting the cooperation between a Party and the investor who has an investment in the territory of that Party on a mutually beneficial basis;
• Encouraging and promoting the flow of investment among the Parties and cooperation among the Parties on investment-related matters;
• Improving the transparency of investment rules conducive to increased investment flows among the Parties; and
• Providing for the protection of investments in China and ASEAN.

The MFN treatment included in the Agreement ensures equal treatment for all parties involved when importing or exporting “similar products,” using the same tariff and regulatory treatment to all Parties as is applied to the product of any one Party.

In addition, the Agreement specifies the transfer of investments of each Party to their territory in a freely usable currency at the prevailing market rate of exchange. Transfers protected by this clause include:

• The initial capital, plus any additional capital used to maintain or expand the investments;
• Net profits, capital gains, dividends, royalties, license fees, technical assistance and technical and management fees, interest, and other current income accruing from any investment of the investors of any other Party;
• Proceeds from the total or partial sale or liquidation of any investment made by investors of any other Party;
• Funds in repayment of borrowings or loans given by investors of a Party to the investors of any other Party – recognized as investments;
• Net earnings and other compensations of natural persons of any other Party;
• Payments made under a contract entered into by the investors of any other Party or their investments including payments made pursuant to a loan transaction; and
• Payments made pursuant to Article 8 (Expropriation) and Article 9 (Compensation for Losses).

Lastly, the Agreement also covers provisions for safeguarding payments and dealing with investment disputes among parties.

WTO treaties

China and the Philippines are both WTO members, hence they both take part in a range of multilateral agreements on trade and investment. These include (but are not limited to):

• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which requires WTO members to extend intellectual property (IP) rights to the IP owners in any member state or region. It includes a most-favored-nation (MFN) clause, guaranteeing equal treatment for IP rights protection for all member countries and regions, and offers dispute resolution and compensation mechanisms.
• The Agreement on Trade-Related Investment Measures (TRIMs), which prohibits members from implementing investment measures that have the effect of restricting trade with other members, such as local content requirements (requirements for a company to use locally-produced goods or local services in order to operate in the market).
• The General Agreement on Trade in Services (GATS), which guarantees MFN status to service providers of any WTO member (except governmental services such as social security schemes, public health, education, and services related to air transport).

Conclusion and future prospects: a new golden era

Before his election as President of the Philippines, Marcos publicly defended his predecessor’s Beijing-friendly approach, declaring that the policy of engagement applied by the Duterte government was more than appropriate and that engagement with China would be the only way to move forward.

After the election, Marcos immediately received high-ranking Chinese officials, including the Chinese ambassador to the Philippines, Huang Xilian, and former Foreign Minister, Wang Yi. On this occasion, he made it clear that China would have a central role as the “strongest partner” for the post-pandemic economic recovery, and that the Philippines would be sustaining a “new golden era” of bilateral ties.

Both China and the Philippines seem to understand that the cooperation between the two countries in the areas of bilateral trade and economics, people-to-people, and high-level exchanges, as well as the synergy of the BBB program with China’s BRI, and the anti-pandemic cooperation, have brought tangible benefits on both sides.

All the cooperative projects between China and the Philippines are a testament to their solid relations as well as a compromise to which both countries aspire.

This article was first published on January 5, 2023, and last updated on September 20, 2024.

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