Why Is Tension Rising In The South China Sea?

On October 10th 2017, the USS Chafee, a Navy Destroyer, sailed within 12 miles of the disputed Paracel Islands in the South China Sea. This was the fourth “freedom of operation” mission since President Trump was inaugurated. The U.S. air force also flew two bombers over the Korean peninsula simultaneously, in another maneuver designed to demonstrate its military might.

These moves were not routine patrols or exercises, but the latest activity in a multi-dimensional chess game in one of the world’s most contested and sensitive regions. The smallest miscalculation from either side could have huge consequences for trillions of dollars in trade and billions of lives, not just in the immediate vicinity but around the globe too.

Encircled by Malaysia to the south, the Philippines to the east and Vietnam to the west, the South China Sea is one of the most resource-rich regions on earth and hosts one third of the world’s shipping traffic. It holds a projected 28 billion barrels of oil, 260 trillion cubic feet of natural gas, and 10% of the world’s fisheries.

As the most direct sea-route between Asia and Europe, it is absolutely critical for the export and import economies of regional giants China, Japan and South Korea.

Aside from trade and economics, its geopolitical importance is also striking. China has claimed  a massive cut of the region, threatening conflict with several other nations, who look to the  U.S. to safeguard their own territorial claims.

The Philippines, Taiwan, Malaysia, Brunei, Indonesia, Vietnam and China all lay claims on parts of the South China Sea that often overlap with each other. The situation is so sensitive that some don’t even call it the ‘South China Sea’ as that might imply it all belongs to China.

How did this happen?

According to international law, nations can claim territory up to 200 nautical miles from their coastline. Since a central section of water in the sea is more than 200 miles from any surrounding nation, it is considered international and not under the exclusive jurisdiction of anyone.

However, being the regional superpower it is, the Chinese government makes a historical claim over 90% of the region, which it has defined with a “Nine Dash Line.”

These overlapping claims of sovereignty have led to a long list of incidents in which the countries involved each try to assert their control over parts of the region they view as their own, creating a highly tense situation that could easily boil over to armed confrontation.

In 2014, China stationed an oil rig in the contested Paracel Islands, which they have claimed since a short battle with Vietnam in 1974.

The move significantly ratcheted up tension between the two historic adversaries, and China has since constructed a battery of rocket launchers on a disputed reef in the area to deter any Vietnamese naval maneuvers.

As we have written before, conflict in this area is nothing new. What is new however, is the impact any military action will have on global trade.

There are more than 250 landmasses in the South China Sea, from small, sparsely populated islands to submerged reefs or small slivers of sand.

Nevertheless, technology and assertive aspirations have combined, with China undertaking reclamation work that has expanded reefs and sandbars into man-made islands that can serve as naval bases throughout the area.

These moves have obviously worried many of China’s neighbors, who view increasingly assertive Beijing as fully determined in taking full control of the sea, including its resources and trade routes.

Their concerns are not without basis. Beyond the so-called ‘militarization’ of reefs, China has also mentioned establishing an “air identification zone” above the region, effectively forcing any aircraft seeking to pass over the area to ask its permission for doing so first.

These moves haven’t been met with silence. In 2016 the Permanent Court of Arbitration (an international body tasked with mediating territorial claims) ruled in favor of The Philippines against China’s claim to a section of the sea.

There is no way of enforcing the ruling and China has ignored it, but the markets sensed danger and Brent crude oil futures rose $1 per barrel in light of the news.

Obama’s “Asian pivot”

China’s expanding assertiveness ­in this crucial zone has forced the U.S. to take note and expend more time and resources on the area.

Obama identified the need for an increased U.S. presence in the Asia-Pacific region, and made it a cornerstone of his foreign policy. He oversaw a big increase in U.S. Navy patrols aimed at reinforcing freedom of navigation in the area, which it sees China as attempting to manage or block unilaterally.

For its part, China claims the U.S. is blowing the crisis out of proportion in order to attempt to curb China’s rising – and "legitimate" – influence in the region and beyond. Ultimately, the dispute may be regionally focused, but it is part of the wider geopolitical struggle being waged between the two superpowers.

A continued U.S. focus in the region can therefore be expected under President Trump.

Chess in the Sea

The current situation effectively pits China on one side against the U.S. and smaller regional nations on the other, with few signs of anyone wanting to back down.

China hasn’t ruled out diplomacy, but insists on dealing with each claimant country individually – which gives it more bargaining power – and not as a group, which the U.S. has tried to push for.

This is not an easy situation to manage for smaller claimant countries. While many look to the U.S. for defense, the economic weight of China can be felt everywhere in the region, as the chart below demonstrates.

At US$39 billion (16%), China imports more Malaysian goods and services than any other country. China also buys more goods from the Philippines than the U.S. does, accounting for US$16.2 billion (21%) of exports. At US$38 billion (21%) the U.S. still leads the pack for Vietnamese exports, but China is expected to overtake this by 2030.

Chinese companies will also benefit from this increased interconnection, as the following chart below demonstrates.

BIGGEST CHINESE EXPORTERS IN THE SHANGHAI COMPOSITE INDEX

Nations like Vietnam, Malaysia, Taiwan and the Philippines, which have territorial disputes with the northern superpower, are therefore forced to take a close look at just how far they can push their claims without hurting their economies.