In view of global economic prospects, the Philippines has opted for policies that support its economic goals the least. What happened to Philippine diplomacy?
IN the past 3 to 4 years, the Philippines has opted for a kind of foreign economic policy that is most likely to undermine its emerging market future.
How should we assess such risks? To keep the perspective neutral, let’s use comparative international frameworks.
Amid geoeconomic fragmentation and Cold War 2
Since the first Trump administration, global economic prospects have been drastically constrained by trade wars. In the early 2020s, the International Monetary Fund (IMF) adopted the term “geoeconomic fragmentation” to describe the policy-driven reversal of global economic integration.
In this new status quo, trade and investment are increasingly redirected along geopolitical lines rather than economic efficiency.
As this fragmentation became worse, the IMF analysts adopted the term “Cold War 2” to refer to the accelerating, intense rivalry between evolving blocs.
In the Duterte era, the country sought to recalibrate its foreign policy between the US and China to benefit from both. In the Marcos Jr. era, Manila has aligned its future with US military. What are the costs and benefits of such ties?
Let’s focus on three more probable scenarios:
– Aligning with the US against China;
– Asean-focused alignment;
– multi-alignment.
I have stress-tested each scenario from different perspectives. Interestingly, the outcome is the same in each case.
Multi-alignment
Theoretically, this neutrality scenario makes it possible for the Philippines to gain significant economic benefits. Manila may access both the US and China markets and garner diverse foreign investment. The scenario allows the country to serve as a trade bridge and connector. It mitigates the worst losses from bloc fragmentation.
Such alignment could have substantial economic costs, however. Political uncertainty may reduce its credibility. The country could face potential retaliation from both sides. Moreover, complexity in policy execution increases transaction costs.
In this scenario, diversified trade could maintain GDP growth stability at about 3 to 4 percent, but without dramatic upside. Fragmentation could still impose 1 to 2 percent downside if world trade slows. The balanced approach may cushion up to 0.5 to 1 percent of GDP losses relative to extreme fragmentation, though.
This scenario would achieve optimal GDP growth stability and work against fragmentation. Along with Asean integration, it is what President Duterte was after in 2016–2022. But as a challenging balancing act, it requires great diplomatic ability, which has recently been absent.
Officially, the president is the chief architect of the country’s “independent” foreign policy, which the Department of Foreign Affairs advises and implements. Yet, after the deeper US military ties, maritime and defense officials often seem to define how that policy is practically executed.
Asean-focused alignment
This scenario makes possible regional trade and investment diversification. Thanks to Asean integration, the Philippines has greater growth potential. As an Asean member, it will enjoy “connector” benefits with both the US and China-led blocs. And relying on the Asean’s collective muscle, it will benefit from optimal resilience.
In this scenario, economic costs would accrue with the risk of being squeezed by both powers, if Asean position is pressured. By the same token, it could mean less preferential access to US subsidies or Chinese funding.
In this scenario, the Philippines would enjoy relatively resilient growth with diversified risk exposure. Regional trade expansion could raise GDP by 1 to 2 percent over the long term via deeper Asean interdependence. Diversified FDI flows reduce volatility but have smaller immediate tariff-transfer benefits.
The Asean option does not ensure the ideal benefits of neutrality, but those are difficult to realize. In pragmatic terms, the Asean-focused alignment would ensure resilient growth with diversified risk exposure. It is an optimal stance for the Philippines. Yet, Manila’s commitment seems ambivalent.
As the country assumed the 2026 Asean chairmanship, President Marcos Jr. prioritized the expansion of trade, investment and regional supply chains. Yet, US alignment against China precludes a full Asean-focused alignment because it is premised on bloc-based trade, investment and supply chains.
US alignment against China
Initially, the Marcos Jr. government touted US alignment as the greatest way to ensure both prosperity and security. Yet, stress tests suggest that the US alignment scenario, essentially a military effort to counter China, is undermining both Philippine prosperity and security.
In terms of economic benefits, this scenario is said to provide deepened access to US markets and technology, with boosted security cooperation, boosting investor confidence in select sectors, especially in security.
Yet, in the tariff wars, the country was slapped with 19 percent tariffs, except for coconuts and a few other products. If adopted, new US legislative acts could severely tax Philippine trade. Also, BPO offshoring is at risk as US tech giants have embraced AI and prepare for mass layoffs. Finally, Filipino migrants in the US live amid ICE (immigration and customs enforcement) anxiety.
In this scenario, economic costs surge due to reduced trade and investment with China, Manila’s largest trading partner. Chinese tourism has already collapsed. As assertive military rhetoric has become the new norm in the Philippines, a possible supply-chain exclusion could loom on the horizon. Export growth could stagnate and diversification costs climb.
The economic magnitude of disadvantages is alarming. Trade loss could amount to 2 to 4 percent of GDP, if Chinese export demand declines sharply. At best, the US scenario might achieve a slightly positive impact (0.5 to 1.5 percent GDP from deeper US linkages, over a decade), but only if US trade and investment will offset possible Chinese losses — and that looks unlikely.
A self-induced fall?
After the stress tests of geoeconomic fragmentation and Cold War 2, US military alignment seems to ensure the least benefits and likely major losses.
Multi-alignment is technically an ideal option in economic terms. In practice, it is almost impossible to realize without alienating either the US or China, or both.
Asean-focused alignment brings substantial tangible benefits and cushions from losses better than other scenarios.
Ultimately, Manila must choose between an Asean-focused alignment with its economic benefits, or the US-aligned military alignment with its military costs. You cannot have your cake and eat it too.
Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net
