Home Politics & Government Growing Geopolitical Risks From South China Sea Disputes, Says Fitch Ratings

Growing Geopolitical Risks From South China Sea Disputes, Says Fitch Ratings

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Last week, Fitch Ratings said that maritime disputes in the South China Sea underscore the growing importance of geopolitics in shaping the international policy agenda of countries in the Asia Pacific region. The credit ratings agency added that “shifts in the regional and global balance of power means that geopolitical risks will remain prevalent in the long term, [which] have the potential to cause significant economic and political instability.”

Fitch’s analysis came just one day after the Permanent Court of Arbitration at The Hague, in a scathing rebuke to Beijing, ruled that there was no legal basis to China’s claim to sovereignty over much of the South China Sea.

The Court also ruled largely in favor of the Philippines’ over oil and gas exploration issues in disputed areas, rights of Philippine fishermen, and China’s land reclamation activities and its construction of artificial islands at seven features in the Spratly Islands. Beijing, for its part, strongly denounced the Court’s ruling and has in the past several days increased naval and aerial activities in the disputed areas.

Diminishing US influence

“Diminishing U.S. geopolitical influence and strength in Asia in the past decade, concurrent with China’s efforts to expand its presence, are fundamentally changing the region’s security paradigm,” Fitch said.

“Recurring frictions among states are likely to be a consequence of the changing geopolitical dynamics. Recent territorial disputes involving China, Philippines and Vietnam in the South China Sea are a case in point; a UN tribunal’s ruling regarding maritime claims on 12 July highlights ongoing tensions over control and sovereignty in the area.”

Fitch also provided analysis of developments in the East China Sea, the Taiwan Strait and North Korea’s missile development ambitions. “More long-standing issues, including from North Korea, territorial disputes over uninhabited islands in the East China Sea between Japan and China, and cross-strait relations between Taiwan and the mainland have the potential to flare up,” it said.

“In the case of Korea, North Korea-related issues have been a long-standing risk factor that has weighed on South Korea’s credit profile.”

However, in one of its most poignant statements, Fitch said that “major geopolitical risks have largely been contained in Asia in recent years, but the potential economic implications could be severe in the event of a sudden escalation.”

Miscalculation – a clear and present danger

It’s the possibility of sudden escalation that provides the most dangerous aspect of South China Sea tensions. As one academic and former defense official told me recently: “With many Southeast Asian nations rearming in light of China’s increased South China Sea activities, and with the U.S. increasing freedom of navigation patrols to challenge Beijing’s claims, the potential for escalation and even the potential for conflict due to miscalculation of a young pilot or sailor is very real.”

Some Association of Southeast Asian Nations (ASEAN) have already mapped out potential conflict scenarios (particularly if hostilities between the U.S. and China break out), and how it would not only impact trade in the South China Sea, which sees more than $5 trillion pass through it each year, but also what would happen if the Strait of Malacca was shut down for various periods of time.

The threat to the energy security of countries that rely on both oil and liquefied natural gas (LNG) shipments that must pass through the Strait of Malacca is conspicuous.

In 2013, around 15.2 million barrels of oil per day and other petroleum products passed through the Strait of Malacca. A conflict in or near this vital choke point, even for a short duration, would cause global oil prices to escalate and have an adverse impact on global oil markets and consequently financial markets, creating severe energy security problems for countries that rely too heavily on imported oil and gas – particularly South Korea, Japan, Taiwan and Singapore, which is 100% dependent on oil/gas imports.

Japan and South Korea are the world’s top two LNG importers, respectively. Japan is also the world’s third largest oil importer, after the U.S. and China.

 

This article was written by Tim Daiss from Forbes and was legally licensed through the NewsCred publisher network.

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