Trade unaffected despite competing claims in South China Sea

Trade unaffected despite competing claims in South China Sea

Despite China’s increasing assertiveness regarding its territorial claims in the South China Sea, trade in the region is still unaffected.

China’s various government agencies, tasked with enforcing Beijing’s claims in the South China Sea have progressively stepped up their actions over the course of 2014 in what has been termed ‘incremental assertiveness’. From eschewing legal challenges at the international tribunal to creating new islands out of dredged sand, China has never seemed more determined to effectively turn the South China Sea into a ‘Chinese Lake’.

International relations scholars and journalists have intensely debated the reasons behind China’s increased assertiveness in the South China Sea. But Beijing’s foreign policy actions in the region have made most countries suspicious if not completely resentful of China.

This has led some to claim that, ‘China today faces the worst regional environment since Tiananmen. Its relations with Japan are at a record low; China-ASEAN ties have similarly deteriorated due to the South China Sea disputes and China’s heavy-handed use of its clout to divide ASEAN.’

South China Sea: Oil and Gas vs. Fishing — Bloomberg TV

Video content courtesy of Bloomberg TV.

Despite this resentment, analysts have largely overlooked the trade dynamics between China and other claimants in the South China Sea dispute. One would naturally assume that deep suspicions or resentment of Beijing would translate into diminishing trade ties, yet the opposite has taken place.

For example, Vietnam recorded an 18.9% increase in Chinese imports in 2014 despite Hanoi’s attempts to broaden its import partners. The issue became particularly relevant following China’s decision to place an oil rig in disputed waters earlier in 2014.

The Philippines, no stranger to Chinese pressure in the South China Sea, also reported 12.4% increase of exports to China during the first nine months of 2014. Coincidentally, China is also the Philippines third largest and Vietnam’s largest trading partner.

While smaller East Asian states continue to hedge their bets against China, there is a resounding pattern in their trade statistics – they all present a strong trade deficit in China’s favour. Vietnam’s trade deficit with China reached a record high in 2014 while the Philippines highest trade deficit is with China, representing 16% of imports, a 35% increase from previous years.

Herein lays the conundrum of the South China Sea dispute: while claimant states rally against Beijing’s nine-dash line, economically, they need China more than China needs them. Access to China’s market has forced foreign companies and their governments to compromise on politics. While European companies have compromised on issues such as internet censorship, Southeast Asia’s governments have been forced to compromise on sovereignty in the South China Sea.

This economic fact of life for Southeast Asian states has produced ripple effects across policy. For example, following the deadly anti-China riots in Vietnam, Hanoi promised to reimburse and rebuild China’s factories damaged by the protests. Similarly, the Philippines economy suffered tremendously in 2012 when China drastically cut banana imports.

China will soon have successfully leveraged its economic power to reach political ends – the consolidation of the South China Sea as Beijing’s core interest. It will not have primarily been through vast military expansion as many had predicted but rather through its economic might. Trade has arguably been China’s most widely used foreign policy tool and as China’s wealth increases, this is only set to continue.

As it should be remembered, the South China Sea dispute is not all about potential energy deposits in the region. It is a dispute over competing visions of the South China Sea and a weary China who sees itself surrounded. Heightened trade flows between China and the claimant states can assure a certain amount of stability in the region.

And although many are quick to remind us that trade cannot serve as a deterrent to conflict, today’s globalised world stands in stark contrast to the beginning of the 20th century. Even the Philippine president, Aquino, argued that territorial disputes in the South China Sea were unlikely to lead to conflict because no one was willing to sacrifice the huge trade flows in the region.

Therefore, despite the issues over sovereignty and the occasional flare ups between various claimants, peace, no matter how precarious, will prevail – no country is ready, particularly China, to sacrifice trade at the expense of stability.

Categories: Asia Pacific, Economics

About Author

Nicolas Jenny

Nicolas Jenny specialises in European and Asian political risk analysis. He has lived extensively throughout the region and speaks English, French and Mandarin. He holds a double master’s from Sciences Po Paris and Fudan University and a BSc in politics from the University of Bristol.