Duterte Visit To China: Obama’s Pivot Has Failed

Posted: October 19, 2016 in Uncategorized
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Philippine President Rodrigo Duterte arrived in China to meet with Chinese Premier Xi Xinping. Duterte has become a very controversial figure in Asian politics as he has publicly excoriated U.S. President Barack Obama’s treatment of him and his country.

Duterte has pursued a frank and brutal policy to clean up drug trafficking and crime in the Philippines while at the same time backing away from U.S. influence over the former U.S. colony.

His meeting with Xinping comes after multiple public clashes with Obama which has led to ending joint sea patrols with the U.S. Seventh Fleet in the disputed South China Sea.

These increased patrols and diplomatic overtures in Southeast Asia, particularly with Vietnam are all part of the ‘Asian Pivot’ of which Hillary Clinton was the architect during her reign as Secretary of State.

That Duterte is looking to mend fences with China after the ruling by the Permanent Court of Arbitration in The Hague, Netherlands back in June which denied China’s historical claims to much of the South China Sea is telling.

Because the Philippines has been the loudest opponent of China’s territorial claims.

Vietnamese Waffling

Across the way, Vietnam, on the other hand, has been vocal and taken steps to make substantive claims in the Paracels, it has also been willing to negotiate with China on this issue.

Tensions in the region are always high given the historical backdrop of past Chinese invasions. Vietnamese political moves, in particular, are largely built based on fear of future Chinese colonization, either de facto or through economic means.

This is why, in particular, Vietnam is willing to green light the reopening of Cold War Era Russian military bases there and invite Russian investment in industries normally closed to significant foreign investment like oil production, including offshore exploration and refining.

Talks between Gazprom Neft and state-owned PetroVietnam broke down over the sale of 49% of the refinery at Dun Quat in January, but the fact that Russia got that far in negotiations for that big a stake is itself significant. Vietnam has been desperate to get Dun Quat sold to expand its capacity for three years now but has been unsuccessful in getting a deal done.

This is likely due to a mix of pressures behind the scenes as the U.S. continues to put pressure on the country to not make ties between it and the emerging Russia/China alliance too strong. And Prime Minister Dung has played his poor hand well to get Vietnam concessions from everyone while remaining, at least nominally, independent.

Don’t be surprised in the near future if Vietnam’s terms on Dung Quat become acceptable to Gazprom Neft if the Russians go through with reopening those bases mentioned above.

Russia is seen as a calming influence on any imperial ambitions of the Chinese by regional actors. It has little to do with Russian territorial imperialism. Vietnam is an important strategic and commercial hub in the region historically and it will be difficult for the U.S.’s pivot there to do anything but delay the inevitable.

Flipping the Philippines

The Philippines understands this as well and Duterte’s breaking with the U.S. leadership publicly hands China a grand opening to firm up support within ASEAN – the Association of Southeast Asian Nations. Ties with Thailand, Myanmar, Malaysia and Singapore are strong thanks to strong trade relations.

Xinping just made a deal with Cambodia to help modernize its military.

Once Obama leaves office, U.S. support for Indonesia will drop off a cliff. His personal ties there have ensured a flood of money into that country. It will now have to make deals without that crutch in its back pocket.

While for China, with its soft-peg to the strengthening U.S. dollar, they have very smartly deepened the market for clearing trade directly in local currencies, bypassing the U.S. dollar and insulating these countries from the worst of a dollar bull market, which is again underway, as I discussed last week.

It is also why China is devaluing the Yuan slowly in order to protect its ASEAN trading partners by keeping its real effective exchange rate from rising further and gutting two-way trade.

None of this is lost on Duterte. The resistance to China’s influence over ASEAN is crumbling as China, smartly, has pivoted a larger portion of its trade towards its regional neighbors. With the depression in Europe and the weakness of the Euro, trade between the regions no longer makes sense.

The Philippines cannot be a hold out against the tide of waning U.S. influence in the region lest all the work he’s done to clean up the corruption and violence – regardless of what you may think of his methods – will come to naught.

His trip to China this week is very bad news for Clinton and Obama and it is very likely that the Asian Pivot policy will unravel in short order.

 

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