Turbulence in the South China Sea: Assessing the Risks for the Maritime Industry
In the last decade, following the economic and military development of China, the South China Sea (SCS) has become a major flashpoint for potential conflict. Other than China, six South East Asian countries, have claimed sovereignty over the two main island chains in the region; the Paracel islands, located in the northern part of the SCS and the Spratly Islands in the south-central region. The antagonism has been multisided so far, ranging from low-level military conflicts between the interested countries, to political and legal disputes. One of the most well-known legal battles was the Arbitration Ruling of the International Court of Justice between China and the Philippines in 2016. The Tribunal showcased the illegality of the Chinese position, which claims almost the entire maritime region in violation of the internationally-established rules.
Nonetheless, the ruling had no practical effect on the long-term conflict. China declined to abide by the rules and continued to extend its claims, consolidating its position in the area. Chinese efforts include the illegal construction of artificial islands (to be used as bases or observatory posts), militarization of the region and frequent incidents with its neighbours’ navies and coast guards. These incidents include a range of actions including harassment of rival assets, detainment of crews or even ramming of vessels (see fig. 1). Major maritime incidents are continuously reported and the trend is speculated to continue to advance in the future, as the dispute will probably remain unsolved. In the meantime, more international and regional actors are engaging, including France, the United States and Australia, contributing to the internationalization of the dispute.
(Figure 1)
Importance of the Region
The stakes are high for all interested parties in economic and geopolitical terms. First, significant, retrievable potential energy resources have been discovered at the seabed around the aforementioned islands, especially in oil and gas reserves. Second, the southern part of the SCS witnesses an immense volume of maritime trade passing through vital chokepoints. More than 60% of maritime trade is reported to pass through the East Asian region with the SCS accounting for approximately 33% of global trade (CSIS). Indeed, in 2016, the trade volume passing through the SCS was estimated at USD 3.37trn. The flow of goods occurs mainly through the Straits of Malacca (the most widely used) Sunda and Lombok, and the variety of cargo throughout the regional ports is indicative of the importance of the region for global shipping (see fig. 2).
(Figure 2)
It is worth dwelling on the strategic importance of the Malacca Strait. This sea passage is one of the most widely used and busiest shipping routes in the world, connecting the Indian Ocean with the Asia Pacific. It is also the shortest route to be taken and it is extremely important for the socio-economic development of the littoral states (Evers, 2006). It is also characterized as a dangerous “choke-point” being less than 3km wide in its narrowest point. This trading passage is also vital for larger economies in East Asia, namely China, Japan and Korea being, thus, at the centre of their geostrategic calculations.
Potential Risks and Implications
In this case, the risks seem to be proportionate with the vast importance of the SCS and the Straits under discussion. Disruption of the Malacca Straits or of the sea lanes travelling through the Paracel or Spratly islands could cause enormous losses, especially for the maritime industry. The worst-case scenario in the long-term would be the blockade of the Malacca Strait or all of the three main Straits at once, due to high-level conflicts between China and its neighbors. The implications for the shipping industry, supply chains and businesses trading large volumes of goods and supplies to South East Asia would be significant. According to the CSIS report of 2016, using alternative routes from the Malacca Strait could incur additional costs of up to USD 64.5mn per week. In the case of total disruption of all three main Straits, the shipping lanes would be rerouted around the coasts of Australia. That means that the fuel, and of course, insurance costs, will multiply, especially when combined with the many more hours added to each journey. The estimates of the same report mention that the losses could reach USD 2.8bn per month (China Power, 2016).
The scenarios outlined in this report are realistic and it seems that the shipping industry is well aware of the implications. Indeed, ship-tracking data from recent years has shown that commercial shipping companies are starting to avoid passing through the Spratly or Paracel islands due to the militarization of the area and the relatively frequent incidents (Long, 2020). The risks of an accident or harassment are worth being noted as both have happened more than twice in the previous two years. China’s frequent military exercises, along with anti-ship ballistic missile-testing in the nearby waters are pushing commercial shipping to an obligatory rerouting around the flashpoints. Hence, it is no great leap to suggest a larger rerouting could take place if the low-level conflicts develop into more serious confrontations and naval blockades.
Nonetheless, it is highly unlikely at the moment. Military exercises, harassments and the risk of accidents will continue to exist, provoking small “routine” rerouting around the flashpoints in the island chains. However, total disruption of the Sea Lines of Communication (SLOCs) or blockades of the vital straits, is improbable at the near future. The pre-eminence of Chinese economic interests and its heavy energy dependence on the Middle East do not allow them to take such actions given the threat of endangering transported commodities which are vital for the Chinese economy.
