THE ECONOMIC IMPACT OF THE SOUTH CHINA SEA CONFLICT
Whether it will escalate into a shooting war or just remain a potential flashpoint over freedom of navigation issues between two superpowers, China and the United States of America (USA), the economic impact of the territorial dispute at the South China Sea involving several Asian nations will be disastrous.
Already, aside from its declared Exclusive Economic Zone (EEZ) which is being contested by other Asian countries, China’s imposition of a 12-nautical mile navigation restriction radius for non-Chinese vessels from all its claimed islands and reefs in the disputed South China Sea has prompted the US to challenge China. US naval vessels sailed through South China Sea and breached China’s declared 12-nautical mile no sail zone. Claiming that China’s declared no sail zone is illegal, US officials say that, while they will keep their hands off the territorial dispute and let the contesting claimants of South China settle their respective issues, it will, however, protect freedom of navigation in international waters such as the disputed South China Sea. And while no incident happened during the first US Navy pass, it’s hard to guess how China’s navy would respond to a second pass by the US Navy. The US is planning to make a second pass soon.
Important Energy Trade Route
A maritime chokepoint that stretches all the way from Singapore and the Strait of Malacca in the southwest to the Strait of Taiwan in the northeast, the vast expanse of South China Sea which has an area of about 3.5 million square kilometers (1.4 million square miles) is considered the gorge of the Pacific and Indian Oceans. Located west of the Philippines, east of Vietnam and Cambodia and south of mainland China, South China Sea is very strategic and important, not only because it is proven to have oil reserves of about seven billion barrels and an estimated 900 trillion cubic feet of natural gas, but also because it is a major trade route between the east and west.
About US$ 5.3 trillion worth of trade pass through the disputed South China Sea each year with the US accounting for about US$ 1.2 trillion of this total trade. Moreover, South China Sea is also one of the most important energy trade routes of the world with about 33% of the world’s crude oil and more than 50% of global liquefied natural gas passing through this crucial maritime chokepoint each year.
In 1993 for instance, of the 7 million barrels of crude oil that passed through the Strait of Malacca on its way to Singapore and Malaysian oil refineries each day, refined petroleum products like gasoline and jet fuel from these two nations were shipped to other Asian countries through the South China Sea.
The South China Sea is also a major liquefied natural gas (LNG) trade route. In 2011, about 6 trillion cubic feet of LGN were shipped to various Asian countries by LGN exporting nations like Qatar, Malaysia, Indonesia and Australia through the South China Sea.
Such is the importance of South China Sea that oil transported through the Strait of Malacca from the Indian Ocean to East Asia is triple the amount that passes through the Suez Canal and fifteen times more than the amount shipped through the Panama Canal.
Impact on International Trade
As the shortest route between the Pacific and Indian Oceans, the rising tension at the South China Sea would raise the cost of transporting goods between the east and west. Already maritime insurance premiums for ships sailing through South China Sea have risen and these could push up further depending on the level of tension in the area.
And should South China Sea be closed to civilian navigation for security reasons, going through the longer route of transporting vital goods such as oil between the east and west outside of the Strait of Malacca and South China Sea would even be more expensive. And should the current tension in the disputed South China escalate into a full blown regional war, many Asian economies, including the Philippines would be wiped out, outside of the millions of lives that would be lost in the war.
Without doubt, the Philippines’ armed forces of about 650,000 from both active and reserve military personnel are no match to China’s military arsenal and over 2.3 million active soldiers and 2.3 million more on reserve status. We can only rely on our American ally to help us in war that would perhaps, be triggered not because of territorial disputes, but rather of trade interests.