Will South China Sea exacerbate Asia’s slowdown?

Will South China Sea exacerbate Asia’s slowdown?

With rising regional tensions, speculation is rampant as to whether the situation in the South China Sea will hasten Asia’s economic slowdown.

The global community has recently been confronted by a heavy cocktail of challenges, including the confirmation of chemical weapons use in Syria, the management of an Iranian charm offensive, and the shutdown of the United States federal government. Amidst these developments, the continued challenges of the world’s most dynamic region, Asia, have gone comparatively unnoticed.

Of these challenges, it is the growing potential for conflict in the South China Sea that represents the greatest ongoing source of risk, with Secretary of State John Kerry recently emphasizing the importance of preventing conflict and prioritizing resolution. Over the past several years a resurgence in tensions in the South China Sea has shaken relations between several regional actors, including China, the Philippines, Vietnam, Taiwan, Malaysia, and Brunei. A multiplicity of variables have proven difficult to manage, and multiply the potentially negative results. Although recent developments in the South China Sea may seem like par for the already troubled course, they point to a less stable future.

The material cause of the South China Sea’s political risk is economic, with the region serving as host to a wealth of natural resources and trade routes. Declining local stocks have driven fishermen into the richly populated waters of the South China Sea, with small-scale fishing incidents having become the hub of maritime confrontation. This resource draw is boosted by the South China Sea’s promise of energy security, with the region holding proven oil reserves of at least seven billion barrels and an estimated 900 trillion cubic feet of natural gas, and potentially up to 30 billion barrels of oil and over 200 trillion cubic feet of natural gas. Half of global ship-borne trade by volume passes through the South China Sea, which serves as an additional vital source of growth and opportunity for the region’s the emerging markets and nascent powers alike.

Although economics underlies the region’s risk, it is the politics of the China Seas — both international and domestic — that has amplified this risk through a political feedback loop. In particular, China’s political transition, growing internal pressure, and the United States’ strategic pivot to Asia have formed the perfect storm to rock the relationships of the South China Sea. Hemmed internally and externally, it is almost impossible for China’s new leaders to yield on territorial or diplomatic disputes. China’s inflexibility has inspired further nationalist posturing among its neighbors and, in turn, closer strategic engagement with the United States. This strategic engagement encourages the efforts of Washington while provoking Beijing, completing the feedback loop and feeding the South China Sea’s increased tensions.

These tensions have actively swelled in recent months and show no signs of calming. In late August, Beijing requested that Philippines President Benigno Aquino cancel an upcoming trip to China, and in early September the Philippines’ defense ministry provided evidence that China is preparing to build a structure on the disputed Scarborough Shoal. In return, the Philippines announced at the beginning of October that it was building a new naval base in the South China Sea, while progressing with its plans to fight an unprecedented arbitration case under the UN Convention on the Law of the Sea. Taiwan, which like China has seen a downturn in its relations with Manila this year, announced plans to build a new wharf on Taiping Island, the largest of the disputed Spratlys. Vietnam has also actively upped its ante, renaming its maritime police the Vietnam Coast Guard while acquiring more patrol boats, upgrading its air force, and increasing fines on illegal energy surveying by foreign entities in Vietnam’s claimed territorial waters.

While ASEAN states have long sought to jointly negotiate with Beijing to establish a Code of Conduct (CoC) for civilian and military operations in jointly claimed territorial waters, there appears to be no end in sight. A September 15th meeting between Chinese and ASEAN ministers led to an agreement to seek “gradual progress and consensus through consultations,” but no deadlines or details about the joint working group that will carry out the task have been made available. Chinese Foreign Minister Wang Yi has stated that “there should be no rush” to create a CoC, and an October 3rd address by Chinese President Xi Jingping to Indonesian MPs sidestepped the regional disputes. With China accelerating its plan to become a top maritime superpower, which President Xi has repeatedly vowed to achieve, the possibility of comparatively weak ASEAN states to leverage a settlement drifts further and further away.

Ultimately, these rising tensions serve as a serious threat to the region and global economy, with the potential to limit economic cooperation, threaten currency swaps, and damage trade. For example, China’s embargo on bananas, a response to the diplomatic flare-up over the South China Sea, stifled demand and led to the lowest banana prices since 1979 – a trade nightmare that could play out among many of the increasingly connected South China Sea states. Investment bank Brown Brothers Harriman notes that growing threats to the web of bilateral and multilateral swap agreements may diminish the protection of smaller Asian countries during funding freezesUnchecked, the region’s tensions could ultimately produce economic conflict and repercussions on the scale of, or worse than, 2012’s flare-up over the Senkaku/Diaoyu Islands – a dispute that, according to J.P. Morgan, was ultimately directly responsible for a 0.8 percentage-point hit to Japans GDP in the fourth quarter of 2012.

Emerging markets have been a boon for investors over the past several years during the global economic downturn. However, as Eurasia Group warns, the emerging markets of the present promise “much more volatility and instability than the advanced industrial democracies.” This is certainly true for those states actively engaged and dependent on the South China Sea. President Barack Obama’s cancellation of his trip to take part in the ASEAN and APEC Summits has provoked much concern about the future of American commitment to the Asia-Pacific and the potential for further instability in the South China Sea. As the peace that has held in Asia for the past three decades continues to slip away at an alarming rate, government and business leaders would be wise to prioritize South China Sea stability or risk losing hard-won gains.

Categories: Asia Pacific, Security

About Author

Taylor Wettach

Taylor is a participant in the Government of Japan-administered Japan Exchange and Teaching (JET) Program. Previously, Taylor worked for the Office of the Senior Vice President for Asia and Japan Chair at the Center for Strategic and International Studies (CSIS). He graduated magna cum laude graduate of Georgetown University’s Edmund A. Walsh School of Foreign Service.