South China Sea: Uncertain Times for Shipping and Trade | Global Trade Magazine
Ocean Carriers
  July 21st, 2016 | Written by

South China Sea: Uncertain Times for Shipping and Trade

Hague Ruling Against China Does Little to Ease Concerns

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  • As long as disputes result in more losers than winners, cargo should continue to flow in the South China Sea.
  • $5.3 trillion in annual trade, $1.2 trillion of which begins or ends at U.S ports, passes through the South China Sea.
  • For many nations on the western rim of the Pacific, the South China Sea is the only bulk trading route with key markets.

Tension and uncertainty are nothing new in the South China Sea.

From Chinese skirmishes with Vietnamese forces in 1974, to the sinking of three Vietnamese ships in 1988, to U.S Navy ships sailing past the artificial islands built by China to house military bases, conflict has seemingly always been a part of this area’s history.

Some hoped, perhaps naively, that the recent United Nations court ruling at The Hague, supporting the Philippines and rejecting China’s claim of exclusive territorial rights, would (following three years of deliberation) inaugurate a new era.

But China rejected the ruling, and continues to cite various historical maps and documents as proof of ownership. At least publicly, however, representatives have remained committed to more negotiations.

In addition to the Philippines, Vietnam, Malaysia, Taiwan and Brunei also have territorial claims in the South China Sea.

$5 Trillion in Trade At Risk

Thousands of ships transit the waters of the South China Sea every day, connecting markets and goods in East Asia with the Middle East and Europe. The numbers are staggering: $5.3 trillion in annual trade, $1.2 trillion of which begins or ends at U.S ports. For many nations on the western rim of the Pacific, this is the only bulk trading route with key markets in Europe and the Americas.

Since one-third of the world’s liquefied natural gas passes through the Straits of Malacca and into the South China Sea, bound for Japan and South Korea, a disruption to ship-borne trade could have a significant impact on energy supplies as well as global commerce.

There are alternate routes, but any attempt to circumnavigate the disputed waterway would require a lot of extra fuel, and wind up driving up the costs of goods in transport. Esben Poulsson, president of the Singapore Shipping Association, has said that it is “vital” that merchant ships be allowed to traverse the South China Sea “without diversion or delay.”

What Happens Next?

While China may feel obliged to ignore The Hague, the ruling could embolden other nations to assert their regional rights. That increases the likelihood of conflict and more shipping disruptions.

Such uncertainty often results in higher insurance rates, though fortunately that has not happened yet.

A more dire possibility would be a blocking of the sea by China, perhaps in conjunction with the completion of its artificial island project sometime next year. Should tensions continue to escalate, Russia may be called upon to play a key role in maintaining peace in the region.

For the moment, there have been no restrictions on merchant ships passing through the area, or any trade disruptions. Arthur Bowring, managing director of the Hong Kong Ship Owners’ Association, has asserted that it would be “extremely unlikely” that maritime trade will be affected, given its importance to every nation in the region, including China.

Perhaps the area has become so accustomed to geopolitical tension that nothing short of shots fired will deter commercial shipping. As long as disputes result in more losers than winners, cargo should continue to flow. As economist Rob Subbaraman summed up the situation, “Because the region is so integrated…(conflict) would be negative for all countries that are linked to this very tight web of trade and investment.”

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