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South China Sea ruling: ‘Keep Calm and Carry On’

20/07/2016

China, as expected, has said it will ignore findings from an international tribunal that undermine its claims to sovereignty over large parts of the South China Sea.

The Permanent Court of Arbitration in The Hague ruled in July against Beijing in a case brought by the Philippines.

The judgement is unlikely to have a short-term impact on shipping but anxieties about tensions in the region remain. The price of Brent crude jumped by $1 a barrel in the immediate aftermath of the ruling.

China, calling the tribunal a “puppet” of external forces, said that it would take all necessary measures to protect its sovereignty over the South China Sea adding that it had the right to set up an air defence zone.

“Whether we need one in the South China Sea depends on the level of threats we face,” said Vice Foreign Minister Liu Zhenmin.

“We hope that other countries don’t use this opportunity to threaten China, and hope that other countries can work hard with China, meet us halfway, and maintain the South China Sea’s peace and stability and not turn the South China Sea in a source of war.”

We see this latest chapter in the long-running dispute as having little immediate impact on merchant shipping.

The core of the problem is China’s overlapping sovereignty claims with countries on the South China Sea including Vietnam, the Philippines, Malaysia, Brunei and Taiwan.

It is true the disputed waters include shipping lanes between Asia, Europe, the Middle East and Africa and those are used by VLCCs (very large crude carriers), bulk carriers and containerships as well as numerous smaller vessels. (Reuters shipping data suggests that around 25 VLCCs are in the waters at any one time with enough capacity to carry 11 days’ worth of Japan’s crude oil demand.)

But our own analysis shows that the main trade routes bypass the most sensitive areas, such as the Paracel Islands, the Spratly Islands and the Scarborough Shoal.

In the immediate future it is activities by fishing fleets or individual fishing boats that are likely to pose the greatest risk of sparking confrontation. Chinese patrol boats are already active in contested waters, protecting Chinese fishing fleets and driving away fishing vessels from other nations.

A longer term issue might come in the offshore energy sector. One of the drivers of the dispute is access to offshore oil and gas deposits and we could anticipate clashes triggered by the presence of vessels involved in geophysical surveys.

But, barring unforeseen circumstances, it is unlikely such confrontations would have implications for the region’s international trade routes.

In terms of the dispute’s implications for shipping it is important to draw a distinction between merchant shipping, which is simply passing through the region, and fishing and survey vessels which are seeking to exploit the area’s resources.

China would have no interest in disrupting trade routes and the maritime insurance markets have reacted to China’s rejection of the tribunal’s findings with composure.

Neil Roberts, manager of marine underwriting for the Lloyd’s Market Association, speaking to Gray Page in the days after the tribunal’s ruling, said the South China Sea was not listed by the London market’s Joint War Committee.

“Obviously there is a heightened risk, but not to the extent that we want to list the area and cause a stir.”

China had adopted an aggressive stance, he said, but it was not clear how this would play out in terms of actions. Insurance premiums for vessels in the region were unlikely to rise.

The Philippines, meanwhile, which brought the dispute to the Hague tribunal has called for “restraint and sobriety.”

The country’s Defence Secretary Delfin Lorenzana said he had spoken to his U.S. counterpart Ash Carter ahead of the ruling. He said Carter had told him that China had assured the United States it would exercise restraint and that the United States had made the same assurance in return.

Sources close to the Philippines legal team also downplayed the implications for stability in the region saying there “was no timeline for this game”.

The dispute does, nevertheless, play into larger regional and global tensions. Beijing has blamed the United States for stirring up trouble in the area and there is concern that China’s outright rejection of the tribunal’s findings weakens the scope of international dispute arbitration.

The Permanent Court of Arbitration is an intergovernmental body set up at the end of the nineteenth century to resolve disputes between states. Its rulings are meant to be binding but it has no powers of enforcement.

 

This paper is intended as a general summary of issues in the stated field. It is not a substitute for authoritative advice on a specific matter. It is provided for information only and free of charge. Every reasonable effort has been made to make it accurate and up to date but no responsibility for its accuracy or correctness, or for any consequences of reliance on it, is assumed by Gray Page.

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