BUSINESS OPERATIONS IN THE SOUTH CHINA SEA: the consequences of an increasingly polarised and militarised neighbourhood

The South China Sea (SCS) is a hotly disputed region of strategic significance to many countries, none more so than China.

China has territorial disputes with its regional neighbours regarding the demarcation of territorial waters, which in recent years has led China to become increasingly assertive and aggressive in advancing its territorial claims in the SCS, not least because of its economic criticality to Chinese prosperity.

$3.5 trillion of global trade pass through the SCS, via the Straits of Malacca and Singapore (SOMS) every year, comprising two-thirds of China’s maritime trade volume, 40 percent of Japan’s, one-third of all global trade, and one-third of globally traded liquified natural gas to China and Japan. Moreover, each relies on Iran and Arab states for 80 percent of all oil imports. When understanding the criticality of the SCS and the SOMS to China, it is understandable that China will seek to ensure that these straits remain open, which Beijing interpret as requiring increased militarisation. Interestingly, it appears counterproductive for China to continue such destabilising aggression in an effort to stabilise and ensure the openness of globally critical trading lanes. Such aggression has led to tensions and military standoffs with SCS nations, particularly Vietnam, the Philippines, Malaysia, and Japan. What furthers such regional tensions is the increasing polarisation seen amongst SCS nations with their chosen respective superpower partners. Naturally, Chinese economic relationships benefit recipient nations immensely. Notably, China is the Philippines’ largest trading partner, with $29.1bn worth of bilateral trade in the first nine months of 2022.

However, China’s aggression in seeking to secure natural resources has created a tense imbalance in the region, one which many nations have sought to restore by allying with the US.

SCS nations are increasingly having to walk a tightrope between Chinese economic cooperation and US military partnership. Such a dispute requires businesses to understand the impacts of SCS developments in order to successfully navigate the fluid security environment and ensure business continuity.

WHAT? 

SO WHAT?

WHAT IF?

The aforementioned timeline has portrayed an image of the state of the maritime conflict between China and the SCS states in recent years. This serves as the starting point for the development of scenarios of possible future trajectories of the SCS maritime conflict. Hence, the most likely scenario and the most dangerous scenario are offered.

 

Most likely

Short-medium term

Maintenance of the status quo is highly likely in the SCS throughout 2023. The SCS remaining obstruction-free facilitates economic prosperity, not only for SCS nations but also for China. This scenario assumes no increased involvement from international actors, although confrontations between SCS nations occur often. Therefore, incidental supply chain disruptions are expected.

 

Long term

As long as regional nations’ economies do not suffer from the CCP’s regional aggression in the SCS, regional relations are likely to remain stable but tense. However, Southeast Asian countries’ economies have become increasingly reliant on their economic ties with China. In the long term, this might be used as leverage by China in competing for SCS territory.

 

Most dangerous

Short-medium term

In the short term, China will continue carrying out aggressive actions in the SCS. China is facing a number of internal future challenges, such as population decline. Additionally, the current war in Ukraine could function as a diversion for China. Such events could result in more frequent disruptions of the SCS shipping lanes, realising product scarcity, price inflation, and welfare losses in nations.

 

Long term

The abovementioned events could motivate Western countries, particularly the US, to militarily protect their regional allies. The US has allies in Japan, South Korea, the Philippines, Australia and Thailand. The involvement of other international stakeholders could escalate the SCS conflict even further; see, for instance, the recent China-mediated diplomatic rapprochement between Saudi Arabia and Iran.

 

WHAT NOW?

Many SCS nations have stepped up oil and gas development in the SCS, with China, Vietnam, Malaysia and Indonesia all having announced or started new offshore projects. As such, and given the continued CCG presence in the region, future confrontations are all but inevitable.

It is increasingly likely that within the coming years, with the continuation of military stand-offs, the economically vital region for the global economy will become increasingly polarised, resulting in elongated maritime shipping routes, increasingly perilous transit for crews and cargoes, and significantly more expensive to navigate, not only requiring increased economic capital but political.

In order to successfully navigate developments in the SCS, business leaders should adopt comprehensive and continuously analytical approaches to SCS developments, some of which are:

• Continuous re-evaluations of acceptable risk when assets transit the region, bearing in mind the potential Chinese sequestering of assets.
• Near/Friend-shoring, (relocating business critical infrastructure to friendly or geographically closure nations) in order to reduce the risk posed to product flow by an obstruction.
• Conducting comprehensive due diligence measures, including focused screening checks, regarding potential business partners and their employees. Particularly as many western nations will seek to implement tighter export controls on Chinese companies, their associates, or those located in the vicinity of the SCS.
• Explore alternative transport methods that limit the potential of serious business disruption, especially in markets of mining and raw material export.
• Explore alternative sourcing for manufacturing materials as China holds a significant share of the world’s rare earth deposits.
• Frequent comprehensive monitoring and reporting on regional developments by experienced risk consultancy companies in order to accurately interpret developments regional developments.

 

Proximities can help you gain these key insights and turn them into tangible material. Using our ‘What?’, ‘So What?’, ‘What if?’ and ‘What Now?’ narratives, we help partners and clients not only understand the importance of trends and events but, more specifically, to understand what it means for you and your business from strategic to operational consequences. Curious and interested to see how we could help you? Don’t hesitate to contact us, we will be happy to support you.