The China/US Pacific Islands stand-off poses a serious threat to global supply chains

If there was to be a new shooting war in the near future of one scale or another, would your supply chain be able to cope?

When many people conjure up visions of a Pacific island they often think about islands such as Tahiti or Fiji or perhaps Gilligan’s Island. But when it comes down to global supply chains it’s different kinds of islands that need to be taken into consideration.

One important set of islands in the frame is the Spratly Islands in the South China Sea, and coming up closely behind, the artificial islands that are being created. Whatever scenario we consider, the Chinese influence has to be taken into consideration.Spratly Islands

China building artificial islands off the Spratly Islands 

China claims ownership of the Spratly Islands even though they are distant from the Chinese mainland. Both Vietnam and the Philippines are disputing these claims but of course neither have the military might of the Chinese.

In addition China has also put in a claim of ownership with regard to 7 small rock formations in the same vicinity where it is now building a number of artificial islands by bringing in tons of sand in order to create 3,000 acres of new territory which will house airstrips, military facilities, ports, etc. Rather than wait for the international courts to decide legal ownership, the Chinese are just steaming ahead towards what may be considered a fait accompli.

Moreover, this move being a part of China’s rights as it sees, to claim its historical rights, there can be little doubt of the strategy at play. By establishing a strong naval presence in the area China will be able to assert its military authority should a conflict arise in the region.

China bid to control sea and air routes in the region

It means that China will gain commercial control of the sea routes that are busy bearing a large percentage of the world’s container ship traffic. It could lead to China charging a toll for any foreign vessels crossing its territory. They may also be able to claim control of the airspace conveniently located smack-bang in the middle of the South China Sea.

At this point in time China has not stated its intentions but what has been said tends to indicate that they do not recognize article 60 of the UN Convention on the Law of the Sea (UNCLOS) which prohibits building on outcrops that were previously only rocks and low tide elevations.

What this means is that tensions in the area are escalating significantly which could lead to a showdown between the US and China in the very near future.

A number of US analysts have already put in a claim for “Freedom of Navigation Operations” (FONOPS) around of these artificial islands. The FONOP program (which has been in operation since 1969) relates to ships and planes traversing a region and the abolishment of illegal and/or aggressive territorial claims. As one might expect China is opposed to the program.

Back on 25th May the Chinese Foreign Ministry said of FONOPS that it was “highly likely to cause miscalculations and untoward incidents in the waters and airspace and was utterly dangerous and irresponsible.” In a statement issued in the Global Times (a Chinese state owned newspaper) they said, “If the United States bottom line is that China has to halt its land reclamation activities then a US/China war is inevitable in the South China Sea.” The paper also printed a statement saying that China “should be ready to launch countermeasures according to Washington’s level of provocation. If the US adopts an aggressive approach it will be a breach of China’s bottom line and China will not sit idly by.”

A potentially dangerous situation

The bottom line is that this is developing into a potentially dangerous situation, with the US Navy looking as though it is planning to sail into the 12 nautical mile perimeter that defines the territorial limits surrounding the Spratly Islands. Confrontation may be inevitable and could happen at almost any moment.

However it remains to be seen what China is prepared to do. Their options include:

  • Complaining loudly but not taking any significant action
  • The Chinese navy escorting the US vessels through the waters
  • China warning the US and then firing shots at the vessels if they do not exit the zone

All of this is taking place in the wake of the Transpacific Partnership Free Freight Agreement, recently finalised between the US and 11 different Asian countries; an agreement from which China was notably left out.

How this will play out still remains to be seen; after all will China seriously risk alienating its Western export market? But the one thing we can say is that the writing is clearly on the wall for companies that have global supply chains operating in the region.

Much is made today of supply chain risk mitigation but this sort of risk is one that hasn’t been seen for many a long year.


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