Nine-dash line threatens Japan, South Korea trade

The following comment is from Kevin Klowden, chief global strategist of the Milken Institute.

Media coverage of the weekend’s Group of Seven meetings focused on Ukraine, but China’s growing global presence was the other big topic on the G7 agenda. For two of East Asia’s largest economies, in particular, the implications of this rise are critically important.

China wants to be the major military and political power in East Asia. Nowhere is this more evident than in President Xi Jinping’s “nine-dash” declaration, in which Beijing claims sovereignty over nearly all of the South China Sea. And of all the countries that have reason to be concerned about this claim, perhaps none have more at stake than Japan and South Korea.

Much of the world is focused on the resources and military implications of Chinese claims to islands in the region, and Beijing’s development of what is becoming the world’s largest navy. For Japan and South Korea, the threat to their energy supply chains and imports is a much more real and current issue.

In particular, Japan and South Korea are concerned about Chinese statements that invoke not only the right to inspect shipments, but also the possibility of restricting traffic. Neither Japan nor South Korea has any political interest in ownership of the Spratly Islands, or in China replacing the United States as the dominant naval power. However, they have a strong economic interest in moving their energy imports and manufacturing components without fear of restriction. Even in a non-war situation, China has taken the position that the South China Sea is controlled territory rather than open international waters under Chinese trusteeship.

So far, China has not acted aggressively towards shipping, but the very potential for action creates a clear threat to the economies of Japan and South Korea. China wouldn’t even have to stop ships directly – it could just electronically track a specific cargo, or carry out inspections or diversions. Such actions would raise the specter of unpredictability and significantly increased costs.

For Japan and South Korea, the role played by the United States in the post-World War II era was much less disruptive, not only because of their alliance but, more importantly, because the states States acted as a guarantor of free trade and protected movement in the corridor.

Few people outside of Japan or South Korea focus on or understand how important the South China Sea is to regional and even global energy supplies. Significantly, the sea is estimated to carry 30% of the world’s crude oil, supplying China and providing a vital lifeline for the energy-dependent economies of South Korea and Japan.

For Japan, the 2011 Tohoku earthquake and subsequent nuclear accident in Fukushima only exacerbated this dependency. The resulting reduction in Japan’s nuclear program made the country dependent on energy imports, with 98% of Japan’s oil coming from the Middle East.

In many ways, South Korea is even more dependent on energy imports than Japan, which makes oil and natural gas imports particularly important.

The South China Sea is not only important for energy. It also serves as a key passage for global supply chains from Japan and South Korea. Estimates suggest that the sea carries between 20% and 33% of world trade; for Japan, this figure reaches up to 40%.

As global supply chains become regionalized, the role of the South China Sea in the Japanese and South Korean economies will only grow. Linking the two countries to trading partners in Southeast Asia, India and beyond will increase rather than decrease in importance.

Japan and South Korea have been able to rely on the stability of the South China Sea to boost their economic growth, even as the global political situation has changed over the decades. Significant changes, including the Vietnam War and the end of the Cold War, did not prevent maritime trade from becoming increasingly important.

As the United States balances its commitments in Europe, Asia and elsewhere, the three strongest economies in East Asia – China included – all have a stake in ensuring the stability of trade, supply chains and energy flows.

For South Korea and Japan, trade remains stable in the South China Sea for now. But as China increasingly seeks to assert itself and change the status quo in its favour, it is essential that both countries ask themselves: how much are they willing and able to concede to China in the region before that it becomes untenable? And are they prepared with alternatives that will allow them to be economically competitive?

Knowing the answers to these questions and preparing for a more Chinese future in the South China Sea is important for all three countries, even if the status quo is maintained for now.