Proposed Luzon corridor expected to attract more investments from businesses de-risking from China

An economic corridor that the United States proposes to put up in the Philippine main island of Luzon would help the country attract American and Japanese companies seeking to reduce dependence on China, according to trade experts.

Through the ambitious project that aims to focus on high-impact infrastructure, the Philippines can offer itself as an “alternative investment location” for US and Japanese investments leaving China for friendlier shores, said George N. Manzano, a trade expert at the University of Asia and the Pacific.

“The corridor will likely enhance the ability of the Philippines to participate in the global supply chain by increasing efficiency through better logistics, as well as opening business opportunities for supplier industries,” he said in an e-mail.

The proposed Luzon Economic Corridor is the latest under the US-led G7 Partnership for Global Infrastructure and Investment (PGI) and the first of its kind in the Indo-Pacific region, according to a statement from the US State department, which will oversee the project’s implementation.

The Group of Seven (G7) is a grouping of some of the world’s advanced economies such as the US, Canada, France, Germany, Italy, the United Kingdom, and Japan, with a combined economic output of $46.3 trillion last year.

The proposed corridor seeks to boost connectivity between the capital Manila, the southern Luzon province of Batangas, and two former US military bases Subic Bay and Clark, with a focus on “high-impact” infrastructure such as rails and ports and strategic investments involving semiconductors, clean energy, and supply chains.

The project, which is considered a “key deliverable” under the PGI component of the US-led Indo-Pacific Economic Framework, will be pursued by Washington with the help of Japan, Manila’s largest source of overseas development assistance.

US President Joseph R. Biden, Jr., Philippine President Ferdinand R. Marcos, Jr., and Japanese Prime Minister Fumio Kishida announced the planned Luzon corridor following their trilateral summit, which was held earlier this month in Washington, D.C. amid worsening tensions with China.

China claims the South China Sea almost in its entirety, including areas that are well within the Philippines’ exclusive economic zone, doing dangerous maneuvers and deploying water cannons to block Philippine resupply and rotation missions.

The US, which has vowed to defend Manila in case of an armed attack anywhere in the waterway, has been locked in a years-long trade war with China since 2018, when then-President Donald J. Trump slapped tariffs on Chinese products over alleged unfair trade practices.

“The Philippines can expect through the PGI a vehicle to channel investments from the US and other like-minded countries such as Japan, to develop its infrastructure, subject to international standards,” Mr. Manzano said.

SEMICONDUCTOR INDUSTRY
Mark Bryan Manantan, director of cybersecurity and critical technologies at the Hawaii-based Pacific Forum, said the Philippine semiconductor industry is likely to be among the first sectors to receive foreign investments that would be unlocked by the corridor.

“The country is well poised to absorb investments in the semiconductor industry given regulatory alignment with the US and Japan as far as strategic trade management is concerned, especially on highly sensitive technologies like chips,” he said in an e-mail.

A delegation led by US Commerce Secretary Gina Raimondo in March vowed to help the Philippines set up a wafer fabrication plant, citing the potential for Manila to double the number of its semiconductor plants.

The semiconductor and electronics sector accounts for about 60% of the country’s merchandise exports.

The Philippines is one of seven countries that the US is partnering with to diversify its semiconductor supply chain under the CHIPS and Science Act, which provides $52.7 billion in federal subsidies to encourage chipmakers to relocate from China back to the US or to other friendly countries.

But Mr. Manantan said it would not be easy for the Philippines to pursue the ambitious Luzon corridor project since it still needs to address gaps in infrastructure and produce an adequate and skilled labor force.

“It must also beef up the cybersecurity and resilience of the manufacturing industry that has been increasingly targeted by malicious actors,” he added. “Another challenge is adequate energy supply.”

The Luzon grid has been placed under yellow and red alerts since last week amid outages at several power plants.

The Philippines’ energy security is also threatened by the expected depletion of its sole indigenous source of natural gas by 2027.

“The US and Japan vowed to help the Philippines build its civil-nuclear energy program, but of course this will still take time,” Mr. Manantan said.

Terry L. Ridon, convenor of Philippine infrastructure think tank InfraWatch, warned that China may hinder the passage of vessels in areas that it claims, potentially hampering the corridor’s routes.

“The fact that this corridor faces the West Philippine Sea should be considered a slight risk, as Beijing may implement a policy of containment to deter the free passage of goods and vessels in areas it deems its territory,” he said in an e-mail.

“The success of the economic corridor is contingent on massive foreign support through infrastructure and investments, particularly as bilateral relations with Beijing continue to deteriorate,” he added.

Mr. Manantan said the recent US trade mission and Mr. Marcos’ trilateral summit with his US and Japanese counterparts “aim to signal to China that the US and Japan can coordinate their efforts to help the Philippines buffer any potential economic retaliation from Beijing.”

“For now, it remains to be seen how China will use its economic leverage, but I think the Marcos administration has already taken such a calculation when it entered the trilateral agreement.”

China is the Philippines’ largest source of imports and the second-biggest market of exports. The US, on the other hand, is the largest destination of Philippine products and the fifth-largest source of imports.

Experts have noted efforts by Washington to boost economic partnerships with Manila as they ramp up security ties following the expansion of American military bases in the Philippines.

“While many Filipino policy makers welcome the prospects of deeper economic engagement from Washington, D.C., the reality is that everyone is on a wait-and-see mode given the volatility in American domestic politics, especially with the upcoming US Presidential elections in November,” Mr. Manantan said.

Amid political uncertainties, he noted Manila could always rely on Japan, which has “always been the mediator” for the two countries amid domestic political shifts.

“Like the rest of Southeast Asia, Japan remains to be the trusted partner of choice for the Philippines to avoid too much reliance on China,” he added.

Mr. Manzano, meanwhile, said that despite these developments, China would remain as the Philippines’ top trade partner.

“The comparative advantage of the US is quite different from China.”

The US State department said Washington will partner with multilateral development banks and the private sector “to deploy capital and development and finance tools to support infrastructure projects across the (Luzon) corridor.”

A trilateral event to promote the corridor will be held on the sidelines of the Indo-Pacific Business Forum in Manila in May. — By Kyle Aristophere T. Atienza, Reporter