Chinese naval push could affect global trade

Jeffrey Jones, The Globe and Mail
August 17, 2014
Energy & ResourcesCNBC.com

Tensions in the South China Sea—scene of naval standoffs in the past year as China has pressed its smaller neighbors on the open sea—may seem far off to many Western investors, but any conflict in the region could affect the global economy.

Hoang Dinh Nam | AFP | Getty Images

Coast guard vessels from China (rear) and Vietnam in a disputed part of the South China Sea near China's oil drilling rig, May 14, 2014.

There are no definitive government estimates about the amount of global trade passing through the South China Sea, but the United Nations Conference on Trade and Development estimated that 8.4 billion tons—or about half of the world's annual merchant fleet tonnage—passed through the region in 2010.

The U.S. Commerce Department estimated that the United States exported $79 billion in goods to the countries around the South China Sea in 2013, and imported $127 billion from them that year. Including goods simply passing through, Navy Adm. Robert Willard estimated in 2011 that the region accounts for $5.3 trillion in bilateral annual trade—of which $1.2 trillion is U.S. trade.

Read MoreWhy we need to boost US-Asia trade

Whatever the actual trade figure, tensions in the South China Sea pose an economic security risk to the entire globe, said Peter Dutton, professor of strategic studies and director of the China Maritime Studies Institute at the U.S. Naval War College.

One such risk is that if a flare-up were to arise between China and one of its smaller neighbors, those global trade routes could be affected, hurting the world economy, Dutton said.

"The impact of a disruption for even a period of three weeks would be substantial," he said, adding that he did not consider any outright conflict in the region to be especially likely, although the possibility remains.

But even if shipping companies still attempted to pass through the area during a conflict—whether to access the resources there, or to cut transit times—the insurance costs "would be prohibitive," Dutton said.

Another economic security concern could arise not from conflict, but from an outright Chinese takeover of the region.

Over the years, Dutton said, China has demonstrated a desire to control all of the passage through what it considers its sphere of naval power. This predilection is in direct opposition to the U.S.-backed global standard of free passage through the high seas, he added.

Read MoreWhat's really behind China's clash with Vietnam

"Our concern becomes that China, because it defines its rights broadly to control areas under its maritime jurisdiction, reserves for itself the right to ban foreign military movement," Dutton said. If this were to occur, other countries may begin to enforce similar principles.

The entire system of global trade would consequently become more costly because the presence of strong, oftentimes Western, navies "tends to dampen disruption," and China's navy isn't strong enough to police the region on its own, Dutton said.

Still, Dutton noted, any conflict is unlikely at this point because all parties involved would have so much to lose.

Read MoreUS concerned about incident in South China Sea

In fact, some don't think trade routes will ever become a point of contention in the region. Gary Li, a senior analyst with IHS Maritime, told CNBC in an email that disruption of the shipping lanes is not even on the table given that "everyone needs them to function, most of all China."

Southeast Asians may be 'egg-sucking'

Each regional country is conducting a distinct calculus in determining how to act—or not act.

This calculus was particularly evident during the standoff between China and Vietnam earlier this year.

When China parked an oil rig in waters that Vietnam considers its territory, international tensions rose, and Vietnamese civilians rioted in the streets. Ultimately, Hanoi did nothing to stop the Chinese rig and its accompanying vessels from conducting oil exploration. When the Chinese left the area two months later, they effectively announced that they would be back with four rigs, said Zachary Abuza, a Southeast Asian security affairs analyst.

Read MoreVietnamese riot in industrial zones in anti-China protest

Many in Vietnam saw "caving into China as a disaster," Abuza said, in part because they worry that China will steal its much-needed energy. But others in the Vietnamese government want to maintain good relations with China as a nod to the "fraternal socialist" community, he said.

Those Vietnamese officials "have this very naive belief" that if they reach an accommodation with China in certain matters, then the Chinese will cut them a deal with something else, such as the disputed Spratly Islands, he said. This outlook is definitely "folly," as the Chinese have become "more aggressive" in asserting their territorial claims in recent years, and they have discovered that "this has all come at very little cost to Beijing," he said.

Additionally, recent conflicts have altered the Southeast Asian countries' calculus in dealing with China because the United States has not "come out looking like a very reliable ally a lot of the time."

Malaysia is another neighbor considering the calculus of exerting its maritime claims in the face of Chinese counterclaims, Dutton said. But, along with Vietnam, they have "at this point implicitly decided that their economic relationship with China is more important."

The only country that has done more than "let off popular steam" with protests is the Philippines, according to Dutton. In January 2013, Manila filed for international arbitration against China under the United Nations Convention on the Law of the Sea. China has rejected the arbitration, but the U.N.'s Permanent Court of Arbitration at The Hague considers the case ongoing.

While this strategy may ultimately afford the Philippines some bargaining power against its more powerful neighbor, no other nation will be able to implement the same strategy, according to Dutton.

Read MoreWhat is China's end-game in South China Sea?

"The Philippines surprised China—there is no more surprising China. It's done," he said. Instead, China "has made it known there will be costs to any country that litigates."

The one country that remains a "wildcard" in the South China Sea is Indonesia, Abuza said, as it holds significant sway in the Association of Southeast Asian Nations (ASEAN), and so could rally the region against China. It's unclear whether China claims oil fields that Indonesia considers its own, he said, but if that were the case, the dynamics could change significantly.

Still, Indonesia would be unlikely to take direct action against China, as its "heart might be in the right place for the South China Sea, but it might not have the resources" to do much, Abuza said.

Read MoreUS pushes plan to ease South China Sea tensions

Ultimately, this may be the case for all of the smaller countries that have conflicting claims with China.

"I'm increasingly beginning to think there is going to be a lot of egg-sucking going on if you're a Southeast Asian," Dutton said. But the increasing enforcement of China's maritime claims will most likely not happen all at once, he said.

"It's not going to happen quickly—it's going to be piecemeal," Abuza said. "The Chinese operate by salami slices: atoll by atoll. It's just going to happen and no one is going to stop that."