The risk of international conflict that could spread to other regions is growing in the South China Sea. A recent ruling by an international tribunal complicates the situation by making recent actions by China illegal.
The situation in the region is highly dangerous because it involves the People’s Republic of China and a key United States ally – the Philippines. The Chinese claim that they have the historic right to occupy the Spratly Islands; a series of reefs and landmasses northwest of the Philippines’ capital Manilla, because their fishermen have been visiting the archipelago for centuries.
The dispute that might spark international conflict
The current dispute involves Scarborough Shoal; a reef that Chinese forces seized in 2013. The Philippines; which also claims the Shoal, brought suit in the Permanent Court of Arbitration in The Hague.
On 12 July, 2016, the Permanent Court ruled that China has no legal claim to the islands under the United Nations Convention on the Law of The Sea. The court also ruled that China had violated the Philippines’ sovereign rights which can serve as a pretext for war.
The Chinese refused to participate in the hearing and rejected the claim that the Court has any legal authority over the matter. China’s President Xi Jinping responded to the ruling by reasserting claims to sovereignty over the region.
The United States is involved because it maintains bases in the Philippines; a former American colony, and its navy regularly patrols the South China Sea. Other nations like Vietnam; which has its own claims to the Spratly Islands, voiced approval of the Permanent Court’s ruling.
Vietnam’s neighbour Cambodia seems to be siding with China, its diplomats blocked the Association of Southeast Asian Nations or ASEAN; a regional alliance similar to NATO, from becoming involved in the matter.
Potential risks from the South China Sea conflict
The potential risks from a South China Sea Conflict are vast and need to be considered by all insurers. Some of the risks include:
Disruption of international shipping and trade. Goods and materials worth $5.3 trillion (£3.98 trillion) pass through the South China Sea each year. If such trade ceased it would lead to economic collapse in a number of countries including the People’s Republic, Australia and even the United States.
Conflict between the United States Navy; the world’s largest, and China’s growing People’s Liberation Army Navy. Both forces are equipped with the latest weaponry; including nuclear submarines, aircraft carriers and guided missile frigates.
Military defeat; or diplomatic humiliation, that might bring down the Chinese government. This is a likely scenario because the Chinese are heavily outnumbered and outgunned by the Americans. China only has one aircraft carrier; the United States has 10 Nimitz class supercarriers and 10 other carriers in its fleet, and two new carriers under construction. Such a defeat might lead to a totally new political order in China with worldwide consequences.
A long term dispute between the United States and China; including a massive military build-up. The situation would be similar to the chain of events that led to World War I. Those events included growing hostility between Britain and Germany and a massive naval build up.
Increasing hostility between the United States and China driven by jingoism and xenophobia. The BBC reported that anti-American protests took place at Kentucky Fried Chicken (KFC) franchises in China following the Permanent Court ruling. Even China’s state media rejected the protests as xenophobic and jingoistic.
In the United States Donald Trump; who has publicly called for a trade war with China, has captured the Republican Presidential nomination. Trump has attracted large crowds with speeches blaming China for average Americans’ economic problems.
The involvement of Russia in the conflict. Any potential dispute might be complicated by the involvement of two other major powers; Russia and China. An increasingly poor and weak Russia is becoming highly dependent on China as a market for its raw materials.
China is dependent on Russia for high tech weaponry; its only aircraft carrier was built there. Russian president Vladimir Putin has used the term “strategic partnership” to describe his relationship with China. World War I began because Germany came to the aid of its’ weak “strategic partner” Austria-Hungary in a conflict with Russia.
The potential involvement of India. Troops from the Indian Army and the People’s Liberation Army are facing off in the Himalayas. The Times of India reported that there was actually a scuffle between Indian soldiers and aggressive Chinese troops there on 15 June, 2016. China and India are deploying more troops and weapons to a border region both nations claim. China has a growing relationship with India’s historic enemy; Pakistan, and India seems to back the Philippines in the Spratly Islands dispute.
Potential conflict between nuclear powers. The United States, China, Russia, India and Pakistan all possess nuclear weapons. Russia maintains the world’s nuclear arsenal with 7,300 weapons, while United States possesses 7,300 according the Arms Control Association. In contrast China has just 260 nuclear devices.
The breakdown of international institutions that might lead to new conflicts and alliances. In a 6 July essay in The New York Review of Books financier George Soros wrote: “The world may break up into rival camps both financially and politically. China has begun to build a parallel set of financial institutions, including the Asian Infrastructure Investment Bank (AIIB); the Asian Bond Fund Initiative; the New Development Bank (formerly the BRICS Bank); and the Chiang Mai Initiative, which is an Asian regional multilateral arrangement to swap currencies.”
Soros believes new international cooperation is needed now to prevent world war.
The risks from the dispute in the South China Sea are mostly long term ones, but the dangers are real. The greatest risk is a long term political and military rivalry between the United States and China. If it is not contained such a rivalry has the potential to increase the risks of international conflict including war.
Insurers need to take note of these developments because of the vastly increased risks of military conflict and economic chaos that might result. A conflict or dispute that would dramatically change the world’s geopolitical landscape might be developing.