South China Sea – Forecast May 2020

Background 

The South China Sea is a key geopolitical hotspot. Stretching from the Strait of Malacca in the southwest to Taiwan in the north, it is one of the most important trade routes in the world. It connects the West Pacific with the Indian Ocean and is a partially enclosed sea bordered by Vietnam to the west, Malaysia, Singapore and Indonesia to the south, the Philippines and Brunei to the east and China as well as Taiwan to the north. About $3.4 trillion worth of trade passes through the South China Sea every year and it is estimated that it is ground for about 11 billion barrels of untapped oil and 190 trillion cubic feet of natural gas. 

The geopolitical significance of the  South China Sea stems not only from its lucrative fisheries and the vast gas and oil reserves that are believed to lie beneath its seabed, but also from the fact that around 1/3 of the world’s vessels based trade passes through its waters, including up to 80% of China’s oil imports.

China claims sovereignty over the sea. Over the past four decades Beijing has antagonized competing claimants including Brunei, Indonesia, Malaysia, the Philippines, Taiwan, and Vietnam. As early as the 1970s, regional powers began to claim islands and various economic  zones in the South China Sea, such as the Spratly Islands, which possess rich natural resources and fishing areas.

The currently most contentious territorial dispute concerns the Spratly archipelago

whose numerous land features are claimed in full by Vietnam, China and Taiwan,

and partially by the Philippines as well as Malaysia. 

Tensions between Beijing and Washington have recently increased, as China boosted its military activity in the South China Sea by conducting a series of naval maneuvers and exercises. Meanwhile, China continues to construct military and industrial outposts on artificial islands it has built in disputed waters.China has created about 3,200 acres of new land in the Spratly Islands since 2013. 

The US has stepped up its military activity and naval presence in the region in recent years. US President Donald Trump emphasized multiple times  the importance of such operations, and of ensuring free and open access to the South China Sea. 

“Talking about militarization, if you look into it carefully, the advanced aircraft, warships in and out of the South China Sea, aren’t most of them deployed by America? The US is strengthening military deployments with its alliances in the Asia-Pacific region. If we are talking about militarization, what’s this? Isn’t it militarization?” said Fu Ying, spokesperson of China’s National People’s Congress, 4 March, 2016.

On the one hand, Beijing sustains that, under international law, foreign countries are not allowed to conduct Intelligence, surveillance, and reconnaissance (ISR) gathering activities, in its exclusive economic zone (EEZ). On the other hand, the US believes that claimant countries, under the UN Convention of the Law of the Sea (UNCLOS), should enjoy freedom of navigation through EEZs in the sea and should not not be required to notify countries about their military activities. 

In 2016, a ruling by the Permanent Court of Arbitration (PCA) on a legal claim brought against China by the Philippines under UNCLOS, ruled in favor of Manila on almost every count. While Beijing is a signatory to the UNCLOS treaty, which establishes the PCA, the country refused to accept the court’s decision. 

To protect its strategic interests in the region, the US States has been challenging China’s assertive territorial claims and land reclamation efforts by conducting ISR missions over the region and bolstering support to its Southeast Asian partners. 

Japan, a key regional power, in response to Beijing’s assertive presence in the disputed territory, has  increased the sale of military vessels and strategic equipment to the Philippines and Vietnam with the objective to increase their maritime defence capacity and to deter a potential Chinese aggression.

Short-Term Forecast 

Since  the end of World War II,  the  South  China  Sea  and  more broadly the  western  Pacific  has  functioned  as  an  uncontested  global  common patrolled by overwhelming US military power projected from a series of peripheral and over the horizon bases. The rise of China alters this situation and has been transforming the region into a frontier of control as Beijing aims to  morph this maritime theater into a landward extension where it can secure its strategic interests. 

International Insider expects a further military escalation resulting from the territorial dispute in the coming weeks. 

On 21 April, the Haiyang Dizhi 8, a Chinese research vessel, was spotted last week conducting natural resources survey operations near an exploration vessel operated by Malaysia’s state oil company Petronas, months after it undertook a similar patrol off Vietnam. The episode prompted the US to call on China to stop its “bullying behaviour” in the disputed waters, expressing its concern over Beijing’s actions towards offshore oil and gas developments in the region.  As a result the US deployed to the region an amphibious assault ship USS America (LHA 6) and the USS Bunker Hill (CG-52) a Ticonderoga-class guided missile cruiser.  

Washington has a defense treaty with Manila. This could draw the US into a potential China-Philippines conflict over the substantial natural resources deposits or lucrative fishing grounds in the disputed region. 

International Insider believes that the US will be more eager to reassure its allies and reinforce its military alliances in the region. Apart from the recent US-Philippine agreement on the EDCA framework, Washington has also been refurbishing its long-standing alliances with Australia, South Korea and Japan in the recent past. Washington has also been very busy, not only shoring up its existing strategic partnerships in the region, notably with Singapore and Thailand, but also cultivating new partnerships with, among others, Malaysia, Indonesia and in particular Vietnam. Such foreign relations have been facilitated by joint military exercises, US weapon sales, frequent high-level exchanges of senior state representatives and US assistance for improving the ISR capabilities of partner states. 

The US ability to build a coalition based on former British Colonies (ex. India and Australia) along with its alliance with Japan will prove a more  tenable and perhaps sustainable force operating to limit  Beijing and exact higher costs upon China, should it attempt to further extend  its hegemon  beyond its Near Seas (i.e. the Yellow Sea, the East China Sea and South China Sea). 

The US growing strategic presence in the region on the one hand will reassure regional US partners and will be instrumental in checking Beijing’s assertiveness in the South China Sea, on the other hand, it will exacerbate existing tensions and lessen the chances of resolving the underlying disputes. 

A failure of Chinese and Southeast Asian leaders to address the disputes by diplomatic means could significantly undermine international regulations governing maritime disputes and encourage destabilizing arms buildups in the region. 

Long-Term Forecast 

Since the beginning of the present decade China has embarked on a new, more self-assertive strategy with respect to its territorial and maritime claims in the South China Sea.

China’s hegemony over the disputed region and the potential extraction of these key natural resources in the near future, is expected to create a new energy balance in the region and the world as a result.  

Beijing is a major importer of crude oil and natural gas. China’s annual crude oil imports in 2019 increased to an average of 10.1 million barrels per day (b/d), an increase of 0.9 million b/d from the 2018 average. China remains the world’s top crude oil importer, surpassing the US in 2017. China’s new refinery capacity and strategic inventory stockpiling, combined with flat domestic oil production, were the major factors contributing to the increase in China’s crude oil imports in 2019. 

An annexation of the parcels in the South China Sea is likely to increase the country’s domestic energy output. Such a change in the domestic output and import balance will create a direct effect on the energy net trade-balance of the region, since Beijing most likely will decrease its dependence on imports coming from its neighboring countries.

In 2019, 55% of China’s crude oil imports came from countries within the Organization of the Petroleum Exporting Countries (OPEC), the smallest share since at least 2005. Russia remained the largest non-OPEC source of China’s crude oil imports in 2019, averaging 1.6 million b/d, or 15% of total crude oil imports. China’s crude oil imports from the US declined in 2019, primarily as a result of trade negotiations that imposed tariffs on many US goods, including crude oil. 

The The US Energy Information Administration (EIA) estimates China’s domestic petroleum and other liquids consumption averaged 13.9 million b/d in the first quarter of 2020, a decline of 0.6 million b/d from the 2019 annual average, primarily as a result of the Chinese government’s containment measures related to the COVID-19 outbreak. 

The economic and transportation effects from this outbreak are still developing and will likely affect China’s crude oil imports, refinery runs, and domestic consumption through the second quarter of 2020.