By WallStreetDaily.com

The biggest flashpoint, outside of the Middle East, is in the South China Sea where China has made incredibly broad territorial claims. Not only that, but China has also built artificial islands in an effort to substantiate those claims and encroach upon the Philippines.

Yesterday, however, China suffered a major setback, as a United Nations tribunal ruled unanimously in favor of the Philippines in its case against China’s attempts in the South China Sea.

But why is the South China Sea such a big deal?

The region is the sweet spot and the cockpit of the Pacific century.

The amount of oil that passes through its chokepoints is fifteen times larger than that which passes through the Panama Canal and three times the Suez Canal.

It represents the most important shipping lanes and fishing areas in the world, not to mention it’s the home of proven oil reserves of seven billion barrels and 900 trillion cubic feet of natural gas.

Water Turf War

The Philippines first brought the case to the International Tribunal for the Law of the Sea at The Hague in 2013.

The tribunal’s decision doesn’t apply to sovereignty claims – which are still under dispute – but to the maritime rights attached to such claims.

Among the issues raised by the Philippines were the validity of China’s “Nine-dash line” (see below chart) which supports its claim of sovereignty over as much as 90% of the region’s water.

This is a crowded neighborhood. There are six other claimants to territory in the South China Sea, as well as other Southeast Asian countries like Japan, Taiwan, South Korea, and even the United States with a vital stake in keeping this region open to commerce.

Divide and Conquer

Despite their egregious efforts to take over the waterway, China seems to have expected the UN decision. It’s been busy denouncing the Philippines’ case, as well as stepping up its efforts to buttress its claims.

China’s leadership refuses to back off its claims to the South China Sea, seeing it as an unacceptable risk, and believes the only card to play is more debt and a steep increase in defense spending to spur a lagging economy – as well as to stoke nationalist support and cohesion.

For some years, as their offensive military capabilities have rapidly grown, a powerful group of hawks in the People’s Liberation Army have been pressing for offensive action in the South and East China Seas. As are listed below, the points of contention and overlapping claims of contention are numerous. China certainly has the projection capabilities to successfully intervene.

Unless the situation de-escalates soon, it may be necessary for the U.S. to approach this dispute.

Ideally, the principle should be to keep the region open to all.

Secretary of State John Hay first articulated the concept of the “Open Door” in China in a series of notes in 1899–1900. These notes led to an international agreement to the U.S. policy of promoting equal opportunity for international trade and commerce in China, as well as respect for China’s territorial integrity. This principle has been used within American foreign policy to keep the Asia-Pacific region’s waterways and skies open to all nations.

An Open Door Initiative supports guidelines that foster the free flow of capital, trade, and ideas, as well as free navigation in the air and on the high seas.

Here are five principles that the U.S. ought to advocate to increase the probability that the twenty-first century remains peaceful and prosperous:

• Urge the immediate ratification by the U.S. Senate of the United Nations Convention of the Law of the Sea (UNCLOS) signed by the United States in 1994.

• Embrace the principle of freedom of navigation in the airways above international waters, beyond a state’s territorial seas, and oppose any unilaterally declared Air Defense Identification Zones (ADIZ), including those above disputed territories.

• Support the free trade of goods and services throughout the region, and the prohibition on using trade restrictions or sanctions, as a means of settling disputes. This applies in particular to rare strategic minerals and other natural resources.

• Firmly oppose the use of intimidation and coercion – or force – to assert a territorial claim by anyone in the region and encourage peaceful negotiation, due process and international arbitration in settling territorial disputes.

• Improve crisis management protocols. In particular, Chinese and Japanese maritime and aerial forces in the East China Sea need to agree on clear rules of engagement and crisis protocols.

Instead of building barriers and restricting trade and shipping, it is crucial that the international community pursue openness and growth. This way, the benefits will be global rather than local.

Good investing,

Carl Delfeld

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