Global trade at risk as tensions escalate in South China Sea

Some of the world’s busiest shipping lanes are at risk due to rising tensions in the South China Sea, experts warn. 

In recent months, skirmishes have escalated in the highly-contested South China Sea – a marginal sea in the Western Pacific ocean that’s a crucial trade route for China, Japan and India, three of the world’s biggest economies. 

With Beijing claiming virtually all of the sea and a handful of other countries having overlapping claims, a number of clashes have broken out between China, the Philippines and Vietnam that have sparked concerns of an incident that could disrupt global trade.

These developments in the South China Sea should be on the radar of global markets and supply chains due to the importance of these waterways to international trade, according to Marko Papic, chief global geo-macro strategist at BCA Research.

“The South China Sea is the most valuable shipping lane in the world in terms of the value of trade that transits through it,” Papic told CNBC, noting that conflict there poses obvious risks to global shipping. 

Papic added that the seaway is particularly essential for commodity and input goods that travel through it to reach China, with Chinese manufactured goods then traveling via the route to other parts of the world.

Conflicts in the region have progressively grabbed the attention of governments worldwide including the U.S., which is locked in a mutual defense treaty with the Philippines.

CNBC was unable to track down data on the exact scale of trade traveling through the South China Sea. However, the CSIS China Power Project estimates that $3.4 trillion in trade passed through the South China Sea in 2016, constituting 21% of global trade. 

Meanwhile, the United Nations Conference on Trade and Development estimated that 60% of maritime trade passed through Asia that same year, with the South China Sea carrying an estimated one-third of global shipping. 

Located in the western Pacific Ocean, the South China Sea lies between China, Taiwan, the Philippines, Vietnam, Indonesia, Thailand, Malaysia, and Cambodia, many of which have disputed claims in the waters. 

However, China, in particular, claims almost all of the South China Sea as its own under its “nine-dash-line,” which rejects a 2016 ruling by an international arbitration court in The Hague, Netherlands, that found no legal or historical basis for Beijing’s claims. 

This has led to escalating friction with many of China’s neighbors who believe that the country’s coast guard has intruded into their exclusive economic zones. 

Earlier this month, the Philippines accused Chinese missile boats of pursuing Philippine vessels and directing lasers at patrolling aircrafts near the contested Half Moon Shoal. It follows other clashes which have involved boat collisions, water cannons and injuries to Filipino sailors, according to Filipino officials.

Philippine President Ferdinand Marcos Jr. pressed the issue at a regional summit on Thursday, requesting a speed up of negotiations on a code of conduct for the South China Sea, while accusing Beijing of harassment and intimidation.

Meanwhile, Vietnam’s foreign ministry also recently condemned China’s actions in the South China Sea, accusing Chinese vessels of carrying out a “violent attack” on Vietnamese fishing boats. 

“We have seen in the past few weeks that tensions are not just rising between China and the Philippines, but also with Vietnam,” said Richard Heydarian, policy adviser and senior lecturer of international affairs at the University of the Philippines.

“I think it’s only a matter of time before more and more ASEAN countries speak out, and a matter of time before we see even more troubling clashes,” he added.  

Still, while experts say geopolitical risks in the South China Sea are increasing, they add that there are still a lot of reasons for all the involved parties to avoid greater conflict. 

In asserting its claims, China has allegedly used what analysts refer to as “gray zone” tactics, commonly known as coercive actions that fall short of an armed conflict but go beyond normal diplomatic activities.

“Gray zone tactics, troubling as they are, are an example of China’s desire to salami slice its way through the South China Sea, not bulldoze through,” Heydarian said.

Meanwhile, shipping through the South China Sea is also mutually beneficial to the economies of countries involved in the clashes. 

According to Abdul Yaacob, a Southeast Asia research fellow at the Lowy Institute, if China started to conduct activities affecting freedom of navigation, such as declaring parts of the South China Sea off limits to civilian shipping, the U.S. may become more involved. 

“But, at this point in time, all parties including China do not want to escalate the situation into a full-blown military conflict,” he said. 

The Chinese embassy in Singapore did not immediately respond to a request for comment.