Immediately after the arbitration ruling on July 12, 2016, China lashed out at a variety of states and the tribunal for ruling against most of China’s claims in the South China Sea (SCS), including its notorious nine-dashed line claim. China severely tested Japanese resolve in the East China Sea (ECS) in August when its naval vessels held significant live fire exercises and a large number of maritime militia vessels “swarmed” in the vicinity of the Senkaku (Diaoyu) Islands.
Tempers seem to have subsided in Beijing. For the time being, island building at Fiery Cross Reef, Johnson South Reef, Subi, and Mischief Reef by China seems to be on hold. Chinese President Xi Jinping held separate meetings at the November 18 APEC Summit (in Peru) with Philippine President Rodrigo Duterte and most recently proposed a joint development scheme, although there are no details of that proposal. Separately, Xi met with Vietnam’s President Tran Dai Quang. The Chinese president suggested that the two countries resolve their disputes bilaterally by “shelving” their sovereignty claims and pursing a path of joint development.
While it is positive that the military demonstrations seem to have stopped, the world has heard this Chinese folk song before. Bilateral deals are certainly easier for China to negotiate. They create the illusion that China is being peaceful and cooperative. The reality is that the Philippines and perhaps Vietnam understand that they are being “squeezed” and their options are limited. Also, the reality is that the SCS disputes, with some exceptions, are a multinational dispute and fairness demands that China negotiate some of the disputed claims on a multilateral level.
Why Should the US Care?
US President-elect Donald Trump more or less ran on an isolationist platform in which the US plays a much less prominent role unless its interests are directly affected. Because the US has extensive territorial holdings in the Pacific and formal military relationships with Taiwan, the Philippines, Japan, Singapore, South Korea and Thailand, and has trade relations with those countries in which products pass through the SCS, it is hard for the US to argue that activities in the SCS don’t matter.
The US has always asserted that it has an interest in preserving freedom of navigation and overflight in the SCS for military and commercial purposes. Apart from the longstanding disputes between the US and China over US military activities in their Exclusive Economic Zones (EEZs), there isn’t much evidence that China has done anything to restrict the actual movements of ships and aircraft through that region. But, it is not beyond the realm of possibility that China will do so in the future, given China’s past behavior to impose an illegal fishing ban — in territories which it does not own — for most of the SCS. Similarly, if China were to follow through on past threats to establish an Air Defense Identification Zone (ADIZ) in the SCS that imposes restraints on air traffic, or established some sort of mandatory reporting system for air traffic (including military traffic), then the US would have no choice but to oppose those actions. China has yet to take those actions, but prevention is worth a pound of cure.
There are other good reasons why the US should not be hesitant in forcing a fair and balanced deal in the SCS; especially one which does not do violence to the United Nations Convention on the Law of the Sea (UNCLOS) or the principles established in the Philippine v. China arbitration. First, the US must be concerned with the outcome because it globally relies upon UNCLOS for its military and commercial navigation purposes. If there is a deal which is an affront to the arbitration decision or UNCLOS, it is harmful to the US’ global maritime interests. Like international law or not, the US has a strong national interest in having stable maritime boundaries, definitive rights to fish and the extraction of oil and gas, and freedom of passage; and those rights, for better or worse, are internationally contained in UNCLOS.
The US is a Pacific power and has an interest in ensuring that China does not violate the international “rules of the road” relative to the rights of its neighbors.
Second, the US has an interest in Vietnam and the Philippines’ economic development. Both are dependent upon the SCS for fisheries and are net oil importers. Neither can afford to squander their limited dollar reserves to pay for oil imports, especially when there are significant potential oil and gas reserves off their coastlines — particularly Reed Bank — which they need to be able to exploit. If the economy of either country were to collapse because they were squeezed out of SCS resources or squeezed by China on the trade front, it would be costly to the US politically and economically since both are US trading partners and both have been top 10 “origin” states for illegal immigration into the US. Third, denial of access to the SCS could trigger some sort of military reaction by the Philippines and implicate the 1951 Mutual Defense Treaty. China would likely say that they have no intention of economically bullying their neighbors; however, after the Philippines took action to resist Chinese incursions into Scarborough Shoal, China embargoed Philippine bananas, gave the Philippines the paltry sum of USD 100,000 in disaster assistance after Super typhoon Haiyan battered Tacloban city in central Philippines on November 12, 2013, and cut back on other assistance.
In summary, the US is a Pacific power and has an interest in ensuring that China does not violate the international “rules of the road” relative to the rights of its neighbors. The US needs to prevent backsliding in the international law of the sea on which the US is globally dependent. Finally, should China be emboldened to brazenly violate international law — as they have done in the SCS — there is nothing to stop them from sending its hordes of maritime militia vessels into the expansive US EEZ territories around Guam, Midway, Hawaii, and its South Pacific Territories to plunder US fisheries. These militia vessels often masquerade as shipping vessels, but there is extensive evidence that these vessels have been used in the past to lay mines, conduct surveillance, supply logistics to PLAN vessels, and could be used as a “foil” to lure US and Japanese warships into a conflict with vessels that would otherwise be entitled to protections under international law.
What Sort of Deals Would be OK?
In the Elements of the SCS Deal, the author endorsed specific bilateral negotiations between the Philippines and China as they relate to access to Scarborough Shoal and Reed Bank since, unquestionably, the rights in those features were more or less decided by the arbitration. The idea that the Philippines would establish the areas inside of Scarborough Shoal as a marine protected area has a great deal of merit in advancing the fisheries for the entire region, provided that China recognizes that the Philippines had the authority to do this, and provided that Chinese fishing would only be limited to within a 12NM circle around Scarborough Shoal. No other entitlements exist — outside of a Philippine licensing scheme — since the tribunal very clearly held that Scarborough Shoal is enclaved within the larger Philippine EEZ.
A similar arrangement wherein the Philippines licenses China’s National Offshore Oil Corporation to do prospecting in Reed Bank would be a face saving way for this important resource to be developed. Both China and Vietnam have an interest in exploring the hydrocarbon resources in the Paracel Islands; however, China has been “sitting” on these features since 1974 and is unlikely to concede very much anything concerning these features. Regardless, if China were to reach a bilateral agreement with Vietnam regarding the exploitation of these resources (without addressing sovereignty), it would not do violence to either UNCLOS or the arbitral ruling.
But, beyond the few areas mentioned, the situation is far more complex since most of the Spratly Islands are claimed by the Philippines, Vietnam, China, and also Malaysia and Taiwan. Very frankly, China only sits on a handful of high tide elevations in the Spratlys and is in a poor legal position to dictate terms to others. But, as suggested by the author, a Spratly joint development zone in which sovereignty claims are shelved and each country receives a pro-rata share to exploit the fisheries and/or oil and gas resources — under a form of outside supervision — is a good approach. Unfortunately, discussion of multilateral approaches is missing from President Xi’s recent meetings at the APEC summit or his verbiage. To pretend that other countries don’t have an interest is a fatally flawed approach and will lead to more discord and mismanagement of the SCS fisheries.
What Are Trump’s Next Moves?
Trump’s pragmatism and overall desire to get things done is likely to appeal to Xi. Even though Chinese news sources threaten retaliation if Trump violates trade agreements and castigate his break with tradition for speaking with the Taiwanese President, the Chinese press reports that he is still “oddly popular,” likely because he is pragmatic and a successful international businessman. Whatever the cause, Trump will have a short honeymoon period that can be exploited and this is worth an investment of his political capital.
Both leaders know from their experiences in politics and business that lobbing rhetorical stink bombs is counterproductive. As former Treasury Secretary Henry Paulsen (highly successful in past dealings with China) said in his book Dealing with China (1995), you frequently have to work in the gray areas and China, to this day, is a “nation ruled by men, not laws. Trust and face are uppermost,” and that a deal is more important than the fine print in the early stages, but a concrete deal — versus some bilateral expression of diplo-babble — needs to be the outcome.
Trump and Xi need to establish two points: (a) that China has to negotiate with its neighbors both bilaterally and multilaterally, and (b) the US has legitimate interests (regional stability) in a deal being made and can’t simply be told to butt out. Trump should also realize that while face is an important part of the equation, at the end of the day, Xi needs to walk away with a deal that will assure them reasonable access to the resources in the SCS because such access — versus whether the US Navy conducts peaceful transits in the SCS — will determine his success or failure in the eyes of the Central Committee or with important constituencies like the highly vocal fishing industry. If necessary, Trump might promise Chinese fisherman licensed and regulated access to some of the extensive EEZs of the US in and around Guam and Midway Island to compensate for relinquishing its current monopoly over much of the SCS’s fisheries. Alternatively, to politically compensate for the perceived loss of access to hydrocarbon resources, Trump could offer to export US oil and gas to China from the West Coast and perhaps the Arctic once those offshore fields are developed.
Trump should afford Xi a great deal of deference and provide positive encouragement if China begins to negotiate bilaterally and multilaterally in good faith. However, China has been saying it wishes to resolve the SCS disputes through negotiation and nothing has been done. Therefore, Trump must establish very clear deadlines for the negotiations to be completed and gain advance agreement, if the negotiations become stalled, to insert the US as an impartial mediator. Even though China will likely bristle at the thought of having the US serve in some sort of brokering role, it does have certain advantages for China because the US has leverage with the two main claimants: Vietnam and the Philippines.
Should it be necessary, the US can tell the Philippines what it will/will not do under the 1951 Mutual Defense Treaty and with its assistance programs. The US also has considerable economic leverage with Vietnam. Vietnam, in many respects, has become an offshore manufacturer venue of choice for US companies such that the US now has a trade deficit with Vietnam that has grown from roughly USD 11 billion in 2010 to nearly USD 24 billion today. Vietnam’s merchandise trade surplus is now the fifth largest after Japan, China, Germany, and Mexico (about USD 9 billion in 2015) and it is not beyond the realm of possibility that Trump will not use that trade to exact concessions if that was required to reach a peaceful and durable settlement in the SCS.
Prepare to Play Hard Ball — Taiwan
Trump’s telephone call with Taiwan’s President Tsai Ing-wen on December 2 rattled Beijing. Tsai’s Democratic Progressive Party (DPP) supports Taiwan’s formal independence and Tsai herself has been far less solicitous towards Beijing than her predecessor. Either by accident or design, Trump, by taking the call, has likely gained leverage with Xi. The fact that Trump knowingly had the telephone conversation sends an important signal to Beijing that it won’t be business as usual and they are left to wonder whether Trump will restrain Taiwan or stimulate their independence movement.
Making foreign direct investment a national priority is a method of complementing US military power and curbing China’s ability to strong-arm smaller countries.
That leverage should be applied in the context of the SCS dispute since nothing else has worked to date. Yes, there is always the risk that Beijing will do something to intimidate Taipei, but the electorate made a deliberate decision to put a DPP candidate in office and the population is well aware of the risks of moving further away from or angering Beijing. Yes, there is the risk that Beijing will rattle sabers in the direction of Taiwan but it is hard to fathom — if one follows the money — that Beijing will attack a place with which it concluded an Economic Cooperation Framework Agreement (2010), has bilateral trade that is probably worth over USD 130 billion per year, and remains a destination of choice for much of Chinese foreign direct investment, especially in the Taipei real estate market. There are limits on how much Beijing can and will be pushed but it is hard to conceive that Beijing will cavalierly lob missiles into commercial office buildings in Taipei which it owns.
Become a Supplier of Energy and Capital
Trump has made no secret of the fact that he wants to unleash the US oil and gas industry and to make the US energy independent and possibly even an energy exporter to help solve the US trade deficit. If the US were to unleash its full production capability and become the supplier of choice to countries that have been intimidated by Beijing, it could make those countries less susceptible to bullying. Oil demand in Asia is expected to grow by nearly USD 1 million barrels per day, even though current regional output is dropping by about a third due to exhaustion of wells — especially in Indonesia. A simple announcement that the US is seeking to counterbalance OPEC with its own program of exports would cause China to think twice in its dealings.
The final area where Trump can use leverage to blunt Chinese aggression in the SCS and elsewhere is to return the US to its expeditionary roots. This is not a suggestion that the US resurrect Teddy Roosevelt’s Great White Fleet; rather, the US would do well to emulate what China has done in the area of international business and project finance in Africa, South Asia, South America, and now the Arctic. China’s foreign investment has “grown nearly tenfold from 2005 to 2013 helping it win new allies, increase trade, and secure oil and other natural resources.” Because China is now becoming a “go to” source for investment capital and know-how — especially in developing countries — institutions like the World Bank are becoming increasing irrelevant. This cannot be ignored since the strings associated with World Bank lending have been helpful in the past in curbing graft, corruption, poor environmental practices, etc. Chinese investment in Southeast Asia, especially Indonesia, Papua New Guinea, Malaysia, Cambodia, and the Philippines, is especially significant. China’s “Silk Road” investments in South Asia (nearly USD 13 billion in 2016) are causing especially high levels of concern in India because of the political strings which often accompany Chinese investments.
China is basically within its rights to make these investments and to use these “soft power” investments to secure access to raw materials and to buy friends. The question for Trump is whether the US wants to cede this space to China and risk a decline in US power and influence abroad. US military power is both expensive to project and finite and, in the long run, expeditionary business investment in foreign infrastructure, oil and gas, mining, and manufacturing is an approach which both benefits the recipients of these activities and helps employment at home. This won’t happen overnight, but making foreign direct investment a national priority is a method of complementing US military power and curbing China’s ability to strong-arm smaller countries.
A combination of tax incentives, and the full enlistment of the US diplomatic community in creating business opportunities in large projects, is a first step. But, above and beyond that, Trump should enlist the aid of a few other wealthy countries such as Japan that are concerned with China’s economic expansion, and create an new international development bank to fund large projects at rates which are better than those offered by China. This is hardly a new concept. China did just the same thing in 2014 when it established the Asian Infrastructure Investment Bank (AIIB) to increase its political influence in international project finance.
If China is not forced to the bargaining table, it is hard to see why it will pursue constructive solutions with its neighbors. Even though the SCS dispute is taking place many miles away from Washington, the outcome of this dispute will have consequences for US global interests. Since China’s political thinking is heavily influenced by its business interests, it may be time for Trump to use his business acumen and harness the US’ latent economic strength to increase the economic opportunity costs for China to stay outside of the bounds of international law. China can’t say that it wishes the protections of international trade law when it comes to its export economy while it thumbs its nose at UNCLOS. Both sets of laws have to be followed by China and Trump may now have the leverage he needs to fix that problem.
(The views expressed in this paper are those of the author alone and do not represent the views of CNA Corporation, George Washington School of Law or any of their sponsors.)