A standoff between the Philippines and China at Scarborough Shoal has brought tensions in the South China Sea to their highest level since the 1994 Mischief Reef incident.
The dispute arose on 8 April when the Philippines sent its navy to search Chinese fishing vessels operating in the disputed area. Chinese Maritime Surveillance Forces vessels subsequently arrived, provoking the Philippines to deploy its only warship, the BRP Gregorio del Pilar. Manila later withdrew the Gregorio del Pilar, but China sent out two Fishery Law Enforcement Command vessels. A standoff has ensued, with the Philippines requesting a diplomatic resolution to the crisis but refusing to retreat. Bilateral relations have quickly deteriorated, with China introducing restrictions on imports of Philippine bananas and calling on tour groups to leave, dealing a severe blow to the Philippine economy. The Chinese media is talking of war, although a fishing ban implemented by both sides may let tensions subside.
The Aquino government’s determination in this case is in contrast with its own decision to accept Chinese built ‘fishermen’s shelters’ on Mischief Reef in 1994. President Aquino’s stance, though, belies the Philippine navy’s weakness when compared with China’s Maritime Surveillance Forces and People’s Liberation Army Navy (PLAN). Manila seems to be counting on assurances of US support. Indeed, the Philippines and the US drew attention to their military ties on 1 May, two weeks after launching long-planned ‘Balikatan’ exercises, which included beach landings on the Philippine island of Palawan. In recent months, Washington has raised its annual military support to the Philippines to a (still-meagre) US$30 million, and stated that freedom of navigation in the South China Sea is a matter of US national interest.
Those fearing a major war, though, should consider that US support for Manila has its limits. There are two aspects to this. First, the US relationship with China is strategically important. The two states’ economies are so deeply interwoven and the implications of a breach in relations so significant that maintaining a working relationship is a priority for both capitals. Worth noting, too, are the Chinese government agencies engaged in the Sea: the Maritime Surveillance Forces; the Fishery Law Enforcement Command; the governments of Hainan and Guangdong Provinces; and the People’s Liberation Army Navy (PLAN); as well as customs and coast guard. In theory, China’s Ministry of Foreign Affairs has authority over them all, but the reality is that its sway is limited. Judging whether China’s aggressive stance derives from central government policy or from inter-agency competition is difficult, and the lack of clarity in this may limit President Obama’s willingness to face Beijing down. Second, the Philippines and the US have a conflicted relationship, rooted in their colonial history. The US withdrew from Clark airbase and Subic Bay naval facility in 1992 after the Philippine Senate rejected a treaty to extend US basing rights (and after a volcanic eruption destroyed Clark). The two countries have since relied on ad hoc defence cooperation, such as anti-terrorist training for Armed Forces of the Philippines (AFP) Special Forces in Mindanao, but their defence ties lack the intensity of the pre-1992 era.
The US also has room to step back from its ‘security guarantee’, as the 1951 Mutual Defence Treaty between Washington and Manila on which it is based is equivocal in its provisions. Article IV states: ‘Each party recognises that an attack in the Pacific Area on either of the parties would be dangerous to its own peace and safety and declares that it would act to meet the common dangers in accordance with its constitutional processes.’ Article V also deals with an attack on island territories or forces ‘in the Pacific’. Washington may thus limit offers of support to the Philippines to funds or materiel ‘in accordance with constitutional processes’, or could even assert that the South China Sea lies outside the ‘Pacific area’.
Of course, failing to support the Philippines raises risks for Washington. The San Francisco ‘hub and spoke’ system is strong but brittle; a loss of faith in the US hub may weaken all the treaty partner spokes. On top of this general point are the specific threats that Chinese control of the South China Sea could pose to maritime supply lanes for the Japanese, South Korean and Taiwanese economies, or to the aspirations of the Association of South East Asian Nations (ASEAN) states, which require the fisheries to feed their populations and aspire to unlock the Sea’s latent energy reserves. From an operational perspective, Chinese dominance of the sea would also hinder US maritime and airborne intelligence collection activities. However, it is not clear how much Chinese control of Scarborough Shoal would threaten these interests. Manila has no choice but to turn to the US, as do most regional powers, all regional powers trade extensively with China already and so policymakers may not fear interdiction by PLAN vessels, and operational formulae can always change.
Resolving the dispute will be difficult, though, notwithstanding the mutual fishing ban implemented in mid-May. China has accepted the Guidelines on the Implementation of the Declaration on the Conduct of Parties in the South China Sea, a non-binding statement of intent, but the adoption of a binding Code of Conduct looks very difficult to achieve. Broader multilateral negotiations seem unlikely; the driving force between existing (if limited) agreements was ASEAN, and Chinese client Cambodia is holding the ASEAN presidency in 2012. China also seems to believe that regional states have become more assertive thanks to US support, contributing to the already significant strategic distrust between Washington and Beijing. Furthermore, the Communist Party leadership will want to avoid any appearance of weakness as the economy slows and the leadership transition takes place. In this context, even a diplomatic solution to the spat may not ease broader tensions.
The dispute, then, may be most important as a signal of Chinese geopolitical aspirations, and any reading that Beijing is becoming more aggressive could have significant economic consequences. A perceived rise in regional tensions could provoke investors to reappraise their political risk, as fears of conflict become more accurately priced into ancillary costs such as insurance or financial derivatives. Any such repricing would arguably more closely match the reality of contemporary Asia, characterised sometimes as a region of hot economics and cold politics, than does the current market bullishness. It could also benefit other markets, as the differential on investment returns between regions may narrow, particularly if a concurrent Korean crisis broke out. A severe rise in tensions or small war in the South China Sea could thus induce some capital to move to seemingly safer regions, perhaps Latin America, perhaps back to the US.
Normal Angell wrote The Great Illusion in 1910, arguing that the economic interdependence of Europe’s economies made war inherently futile, only to have his thesis founder in August 1914. Contemporary Asia recalls Angell’s Europe in that its economies are similarly interlinked, but its governmental systems are mutually suspicious and subject to capture by nationalism. This latest spike in tensions in the South China Sea is a good illustration of the risks of not taking that concern into account. Investors should take note.
 International Crisis Group, ‘Stirring up the South China Sea’ (23 April 2012); Linda Jackobsen, ‘New Foreign Policy Actors in China,’ SIPRI Policy Paper (26 September 2010).
 Carlyle A Thayer, ‘Is the Philippines an Orphan?’ The Diplomat (2 May 2012).
 Brookings Institute, Addressing US-China Strategic Distrust (30 March 2012). URL: http://www.brookings.edu/~/media/research/files/papers/2012/3/30%20us%20china%20lieberthal/0330_china_lieberthal.pdf
About the Author: Kit Dawnay is an analyst of international relations, politics and economics. He has worked as a newspaper journalist, for the House of Commons Foreign Affairs Committee, and for a defence services company analysing economic crime. He has undergraduate degrees in law and history, and an MPhil in international relations from Cambridge University. He lives in Hong Kong.
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