Elements of a South China Sea Deal: Saving Face and Making Money
By Mark E. Rosen

Elements of a South China Sea Deal: Saving Face and Making Money

Oct. 21, 2016  |     |  1 comments

The Permanent Court of Arbitration’s ruling against China on July 12, 2016 drove a stake into the heart of China’s narrative that it had historic rights to nearly all of the South China Sea and could prevent its neighbors from fishing in their EEZs and for drilling for oil and gas in their continental shelf areas. The arbitral tribunal also issued a very strong rebuke of China’s island building activities, prompting China to lash out against a number of countries; most notably, the United States, Australia, Japan and also South Korea (although China is also upset with South Korea for its announcement to deploy THAAD in defense against North Korean missiles).

In early August, it appeared that China was on a collision course with Japan. Both countries have a vigorous dispute over the Diaoyu/Senkaku Islands and China was incensed by Japan’s statements both supporting the arbitral ruling and publicly urging China to comply. On August 1 China held a significant live fire drill in the East China Sea that included the firing of “dozens” of missiles and torpedoes. There were also reports that six Chinese coast guard vessels and over 200 fishing vessels swarmed in the vicinity of the Diaoyu/Senkaku Islands. On August 7, Japan reported that it had issued multiple protests to China after it found that China had installed ocean surveillance radar “facilities” on a number of its offshore gas platforms. Finally, there are continuing reports of China’s deployment of its maritime militia of fishing vessels in contested areas in the East China Sea.

Since the dust up in the first week of August, things seem to have calmed down in both the South China Sea and especially the East China Sea. China continues to exercise in the Sea of Japan and the Bering Sea, but there is nothing to indicate that this is intended as a provocation to Tokyo. China hosted a port visit for the USS Benfold on August 8, and China played host to the G-20 meeting on September 4-5 in the resort city of Hangzhou. Former Philippine President Fidel Ramos has had informal discussions in Hong Kong with Chinese officials; although follow-on talks were placed on hold on September 28 for unspecified reasons. This is significant because shortly after the tribunal ruling, China had indicated that it would not engage in talks that were based on the ruling. And since access to diminished fisheries is at the core of the South China Sea dispute, it is also important that on August 15, China’s Agriculture Minister Han Changfu told China National Radio that China would be trimming its fishing fleet because of the near collapse of fisheries in the East China Sea and South China Sea.

There are multiple reports that China puts a great deal of emphasis on its stature vis-à-vis other G-20 members and for the body to not become a venue to engage in a fractious debate over the South China Sea. During the 10-nation ASEAN summit in Laos which concluded on September 8, President Barack Obama and other leaders gingerly raised the question of compliance with the arbitration ruling and voiced concerns about the presence of new Chinese vessels in the vicinity of Scarborough Shoal; but, at least there was an acknowledgement by China that there was an issue and a willingness to work with the other claimant states. Lastly, and perhaps most importantly, there is extensive reporting of a feud between Philippine President Rodrigo Duterte and President Obama over Duterte’s human’s rights record. This led to a cancellation of a meeting between the two leaders at the margins of the ASEAN Summit in Laos on September 8. There were speculations that Duterte would be visiting Beijing and Moscow to seek inexpensive arms without “strings attached.” There were also talks that Duterte would be discontinuing joint patrols with the US in extended areas of the South China Sea, in the hopes that he could improve relations with China. For its part, Japan has indicated that it will join the US in conducting patrols in the South China Sea as well as to follow through with its plans to supply the Philippines and Vietnam with patrol craft. The Japanese announcement of increased patrols in the South China Sea drew a fresh warning from China that Japanese engagement in US’ freedom of navigation operations (FONOPs) would cross a Chinese “red line.”

The question, then, is whether China is simply on its best behavior to not spoil the afterglows of the G-20 and ASEAN Summits in which it emerged relatively unscathed, or whether their recent conciliatory tone means that they have put the arbitration ruling behind them and are ready to cut a deal with the Philippines and perhaps others.

Assuming a deal is in the making, can China can use trade or economic levers to get other countries to back down and support their territorial claims in the South China Sea or exact concessions in a negotiation process. Can China “peel off” weaker states like the Philippines and wreck the legal and political value of the arbitration ruling? Also, what kind of deal is appropriate? Some US academics suggest that a US-China grand bargain or a “staged process” to establish a US-China balance of power is a precondition for peace in the region. Or, as argued here, will a legal deal establishing a joint development regime and disengagement from illegal maritime assertions solve most of the current problems?

Can the Philippines Do a Deal with China and Ignore the US and Others?

It is much too early to see whether Duerte’s scheme to play off the United States against China will have any staying power. Oh Ei-sun, a senior fellow with the S Rajaratnam School of International Studies in Singapore, suggests that Duerte can afford to be more “severe and colorful” against its longtime ally the United States and that, in the end, Duerte is playing this game to obtain concessions from the US in its foreign aid package. China itself may be reluctant to take the bait since it would be most embarrassing for China to supply arms to the Philippines and have those arms later used against its warships or law enforcement vessels.

Chinese analysts have incorrectly asserted that the US goaded the Philippines in taking the arbitration action against China and that the US left the Philippines “holding the bag” when the decision was rendered. The facts are that the Philippines had been physically prevented from accessing rich fishing areas adjacent to their coast or exploiting potential hydrocarbons in the vicinity of Reed Bank and they needed a way to level the playing field with China since they lacked the economic or military clout to resist Chinese aggression. To be sure, virtually all Western states agree that it is infinitely better for states to pursue remedies in the courts rather than the battlefield; however, the decision to prosecute the action was a Philippine sovereign decision. When the decision was announced in July, a good many countries including the US, Australia, Japan, France, and the EU supported the ruling and more or less urged China to conform to the findings because these states operate their diplomacy and economic relations using the principles of international law.

Eventually, the Philippines will do the math. China is the Philippines’ second largest overall trading partner (valued at 13.6 percent) and its trade with Hong Kong (reported separately) pushes this total to about 20 percent. Japan and the US alone account for 36 percent of the Philippine export economy and this amount gets much higher if countries like Singapore and the EU (which accounted for another 10.7 percent of bilateral trade in 2015) are included in the totals. That does not tell the entire story. Much of the Philippine economy is dependent on USD 26 billion in remittances from land based workers overseas and seafarers. The US is by far the largest source of remittances to the Philippines; however, the UK, Singapore, Japan, Canada, Germany, and Australia are all major remittance sources and were also supporters of the arbitral ruling. Lastly, the Philippines is currently dependent upon development aid from the World Bank, Asian Development Bank, the United States, and Japan; the amount was upwards of USD 5 billion in 2011 and likely much higher today. The US and Japan in particular have stepped up their military and economic aid, in part, to compensate for the Philippines’ loss of economic assistance (mostly in the form of development loans) from China that stopped when the arbitration action was commenced.

While most countries would never retaliate if the Philippines were to negotiate an arrangement with China in which it allowed China, for example, to have a fractional share of its fisheries or offshore hydrocarbons, an agreement that appears either confiscatory or which violates basic UNCLOS norms would likely be met with strong opposition in the US and among other Western countries. More precisely, if the Philippines and China were to jointly agree to simply engage in joint production, that sort of agreement would likely be respected by the US and other Western powers. If, on the other hand, the Philippines conceded key legal points in the arbitral decision and, for example, acknowledged Chinese sovereignty over waterspace in either the Spratlys or Scarborough Shoal, then the US, Japan, Vietnam, Australia, France, EU, and other countries would be unlikely to accept such an outcome and would likely try to put pressure on the Philippines to conform the outcome to international law using foreign aid grants as leverage. More likely than not, most of that pressure would come from Tokyo and Washington to not enter into an agreement with China which either, in the case of the US, puts its Treaty relationship or base access rights at risk or, in the case of both parties, concedes important legal points in the arbitral ruling.

Can China Use Trade to Avoid a Deal or Exact Concessions for the West?

Shortly after the tribunal ruling, China’s Deputy Minister of Trade was careful to encourage Chinese citizens to not boycott US and Philippine goods; however, that does not mean that sanctions and boycotts are off the table as a means for China to exact concessions. China has, in the past, threatened sanctions against US companies that sell defense equipment to Taiwan, and forced those companies to choose between Taiwan’s and the PRC’s market which is 20 times larger and which would affect large US companies including Wal-Mart, Apple, MasterCard, and Starbucks. Were China to retaliate, it would probably employ China’s non-tariff barriers to frustrate US, Japanese, and others’ exports to China, or, as has been often suggested, pull its investments out of the US market including its purchases of US treasuries.

China would be foolish to upset bilateral trade and investment patterns with the US or its regional allies because in 2015, China amassed a USD 365 billion merchandise trade surplus with the United States. Chinese businesses have put this cash to good use, investing in new plants and equipment, educating its young people abroad, and investing billions in the US and other safe offshore markets. This is not unique to the US; China has a global trade surplus of USD 600 billion. It continues to have small trade deficits with Japan and South Korea and its principal imports are electrical and industrial machinery (no. 1 and 3), oil (no. 2), and ores (no. 4). These few figures strongly suggest that China is highly dependent on international trade to fuel its economy. China’s offshore investments of its US trade surplus helps China to diversity its holdings outside of Asia. China is also heavily reliant on international supplies of the raw materials which it lacks and risks a great deal by starting a trade war in which it is deprived of access to the US and other foreign markets. According to one excellent analyst at the Carnegie Council:

Unlike the United States, which generally has scant economic relations with the countries it wishes to sanction (Iran, Syria, North Korea), China is dependent upon market access, technological transfer, and capital provision from many of the wealthy nations in Europe and North America that it seeks to sanction.

China has used unilateral sanctions in the past. According to one excellent study, since “1949 China’s leaders have repeatedly politicized economic relations providing aid or refusing trade in support of broader … objectives.” In 2000, China banned all imports of South Korean mobile phones and polyethylene in retaliation for Seoul’s increase of duties on Chinese garlic. In 2010, Chinese customs officials halted the shipments of rare earth minerals destined for Japan (for use in hybrid cards, wind turbines, and guided missiles) as a form of protest against the detention of a Chinese fisherman caught fishing near the Senkakus. The United States has also been victimized by China’s extensive unfair trade practices prompting the US, within the WTO system, to file a record number of suits against China in the WTO on behalf of US poultry producers and is now considering the unilateral institution of a total ban on Chinese steel imports because of price fixing and other illegal actions by Chinese steel producers.

In the short term, China still has legal room to maneuver should it wish to impose national security controls or erect non-tariff barriers to restrict imports from Japan, the United States, or the Philippines; or, as it has done in the past, incite its public to boycott products from certain countries. If China chose to go down this path, it would do as it has done in the past and target individual companies like Boeing or the US movie industry or, in the case of the allies, Philippine fruit and Japanese consumer electronics. China knows that WTO cases are very time consuming to document and litigate. But, that same legal maneuver space can also be exploited by the United States and others to frustrate Chinese exports.

The use of embargoes to restrict its exports or limit its purchases overseas is another area where China might lash out. But, if China were to stop buying Australian ore or Japanese finished products, the world economy is sufficiently diverse to compensate for some of these losses and, if China deprived itself of imported technology from Japan and raw materials from Australia, it would then not be able to supply Walmart’s thirst for their inexpensive products. And, even though the data is not complete, Forbes reported that China’s recent “hardcore diplomacy” is bad news for globalization — which favors China — and investors in Chinese businesses. Of note, the two-year performance of Chinese index funds is in negative territory: -7.43 percent in contrast to positive returns for Japanese and Philippine index funds, which are at 2.41 percent and 4.92 percent respectively.  More hardening of China’s position is likely to push yields in the Chinese economy even lower.

The notion that China can use its foreign investment dollars to intimate states is greatly overblown. Beginning in 2009, China greatly increased its overseas direct investment activity for the simple reason that it had lots of foreign currency (mostly dollars) that it earned as a result of exports and it needed a place to park those funds. The large Chinese stake in US public debt (20 percent foreign owned) is often cited by politicians as the US’ Achilles heel; the notion being that China could cause US interests rates to skyrocket if it stopped buying US debt. In reality China buys US sovereign debt because they need to. US treasury debt is safe, liquid, and can be used by China to finance dollar denominated international transactions (such as oil). China’s central bank also buys US sovereign debt to maintain the exchange rates for the renminbi, help drive down the costs of Chinese exports, and to avoid inflation in its domestic economy. Also, the reality is that US sovereign debt is overwhelmingly held by US domestic entities (66 percent); such that were China to dump its nearly USD 1 trillion in US debt, that debt will simply be purchased by domestic and foreign purchasers, as happened in August 2015 when China reduced its US debt holdings by USD 180 billion. For China, the impact of “a broad scale dump of US Treasuries…would be that China would actually export fewer goods to the United States.” [Scott Miller, CSIS].

Given China’s extreme dependence on international trade to fuel its domestic growth and investment, it would be almost suicidal for China to engage in actions that would result in the closure of its foreign export markets. Likewise, a government-led boycott of foreign products would, apart from the legal repercussions, have extremely destructive impacts on its economy since it relies heavily on imports of agricultural products to feed its people (from the US), modernize its factories (Japan and Korea), medically care for its people (US, Japan) and fuel its manufacturing (Australia). Dumping US debt would cause some angst in the US but, in the long run, US debt instruments would be purchased by investors in the US and other countries. More importantly, dumping US dollars would seriously undermine China’s ability to defend its currency and use those dollars to finance their imports of oil which is priced in dollars.

What About a US-China Grand Bargain as a Precursor?

Writing for the Carnegie Endowment, Michael Swaine argues that much of the current tensions in the South and East China Seas are symptoms of a lack of a stable balance of power between the United States and China. He makes a thoughtful case that Xi Jinping is determined to develop a regional power structure that is more Sino-centric and which will displace the United States’ influence in the overall process. He also discusses the theory that China’s hard-nosed behaviors in the Western Pacific are designed to undermine US and allied resolve and create “no go” zones. In 2016 testimony before the House Foreign Affairs Committee, Prof. Amitai Etzioni similarly argues that the US and China share many interests and, presumably, much of the current tensions would subside if there was the negotiation and conclusion of some sort of “grand bargain” in which the US might, for example, commit to not establishing any new military commitments in countries in the region (read: Vietnam), and begin to “gradually phase out existing commitments.”

These are interesting ideas; however, one must legitimately ask the question of whether the current instability in the South and East China Seas is really about the United States or, to put it another way, whether China has any interest whatsoever in this kind of dialogue. It is not implausible to think that China is much more pragmatic in its thinking and that its tough behavior is designed to weaken the negotiating positions of the Philippines and Japan so that, in the end, it can negotiate an agreement that the Chinese government can take to its people and remain in power. This type of pragmatic approach by China can be gleaned in a recent book by former Treasury Secretary Henry M. Paulsen, the former President and COO of Goldman Sachs who, among other things, was extremely successful, on behalf of Goldman, in launching major privatization efforts and initial private offering of a number of PRC enterprises. Paulson, who had the ear of high PRC officials including Xi Jinping, and was a trusted member of their economic inner circle, had this to say about what is really important to the Chinese leadership in Dealing With China:

Since the 1972 rapproachment our relations with China had been determined by security concerns. That emphasis was a natural by-product of Cold War politics…the world has changed dramatically…Economic concerns were now paramount to the Chinese… [p. 183]

Of equal importance to the primacy of economic concerns, was the method by which China would approach important policy decisions and its negotiations with the outside world (in this case foreign banks and investors). According to Paulsen, the Chinese like to meet prominent Americans because high level meetings confer status among their peers. And, “the point wasn’t to have substantive discussions. As I leaned in China, the meeting itself was the substance.” Once the relationship was established and the parties moved to substance, Paulsen reported that he frequently had to work in gray areas because, once the relationship was established, there was a lot of pressure to conclude the deal (and establish order). He continues:

Deals often had to be completed before the country had put in place laws and regulations that had not been necessary in the days of centrally controlled planning…It was then and remains to a great extent today a nation ruled by men, not laws. Trust and face were uppermost; you had to trust that if the Chinese committed to do something they would deliver… [p. 80].

The point to be gleaned from Paulsen’s valuable experiences at Goldman Sachs is that China is probably less concerned with the precise outcome of a negotiation between itself and its neighbors but places more value on how it will be perceived internally and by its trading parties. Paulsen suggests that China places value in reestablishing economic order in the region and resuming normal trading patterns given that China is very much an export driven economy and maintaining full employment and relative prosperity is foremost on the minds of China’s leaders. Therefore, for a South China Sea deal to work, it must make economic sense and China must not lose face vis-à-vis its past positions on the Nine-Dash Line and its assertions of sovereignty over many South and East China Seas features. These specific attributes are necessary:

The arrangement would need to make good economic sense for China so that President Xi Jinping can “sell it” to the Communist Party Central Committee and the public at large i.e., the deal would guarantee China access to fisheries and potential hydrocarbon areas;

If another country, like the Philippines, receives an advantage in terms of access to fisheries or hydrocarbons, that advantage needs to be structured in such a way so that China can argue that it is retaining a strong equity position in the resulting deal and that benefits to its regional neighbors will strengthen its regional trading relations and overall regional goodwill;

The deal needs to be delinked from the arbitration decision so that China can essentially argue that this is their own joint development proposal versus an outgrowth of the court decision;

The deal should not directly assault Chinese assertions of sovereignty over any of the features on which it is currently occupying.

The Elements of a South China Sea Deal that the Philippines, Vietnam, and Their Western Supporters Could Support

Even though Paulsen makes the point that Chinese negotiators like to work on the basis of good faith and trust, any sort of joint development scheme would have to take into account the specific territories in dispute and the fish in the water. That is not to imply that the scheme would endeavor to determine sovereignty. Determining sovereignty would be a fool’s errand given that virtually all of the claims in the South China Sea are based on slim historic evidence and limited periods of post-WWII occupation. Besides, many fail to appreciate that the features in the South China Sea themselves are mostly meaningless; legally. The importance of the features comes from the size of the maritime entitlement that the feature creates. Thus, the key to the deal is to render moot the question of sovereignty over the rocks, shoals, reefs, and islets and focus instead on blocks of waterspace and the resources therein.

Addressing the contested territories that were affected by the tribunal decision is a logical first step; particularly from the standpoint of the United States and the Philippines because it addresses physical areas in which there are potential military tensions, takes the US-Philippines Mutual Defense Agreement out of play, and helps the Philippines to regain access to important natural resources. It is proposed that this be done in two phases and which results in the establishment of two Joint Development Zones: the Spratly Island and Scarborough Shoal development zones. When and if these zones are successful, additional zone agreements which encompass territories claimed by Malaysia in the Southern Spratlys and the Paracels could be attempted between the PRC and other claimant states.

Phase I, Part 1: Central Spratly Development Zone

After the South China Sea Arbitration” urged that China enter into immediate negotiations with the Philippines, Taiwan, and Vietnam (in exchange for suspension of the arbitral proceedings) to establish a joint development zone with Taipang/Itu Aba at the center because it was the largest feature in the Spratlys. Affording Itu Aba special status no longer makes any sense given that the arbitral panel ruled that that Itu Aba (Taiwan) and other large features like Thitu/Pagasa (occupied by the Philippines) are not considered islands within the meaning of Article 121 of UNCLOS. This actually makes the task of creating a zone much easier since it equates Itu Aba and Pagasa with the less robust high tide elevations within the Spratlys, including Cuarteron Reef, Fiery Cross Reef, Johnson Reef, and McKennan Reef. Given that none of the features rate an EEZ, there is no reason to given precedence to one feature over the other; all are either rocks or low tide elevations. It logically follows that a first step would be to establish a Central Spratly Development Zone (CSDZ) which encompasses most of the contested high tide or low tide elevation features inside much of what the Philippines claims as the Kaliman Island Group (KIG — depicted by the line PD 1596). This methodology of including only contested features inside the KIG claim is to ensure that negotiators only have to deal with resource sharing among four parties, the Philippines, Vietnam, Taiwan, and China, through the full extent of the Zone.

The CSDZ is predicated on the notion that inside the zone each state would be legally considered a condominium wherein each would have an undivided interest in the zone’s fisheries and hydrocarbons (if applicable). Inasmuch as the arbitral panel has determined that none of the features in the Spratlys are considered islands within the meaning of Article 121 of the UNCLOS, it is far easier for the claimant states to agree to forgo, for the time being, any maritime zones — including territorial seas — associated with any of the features since none are sufficiently robust to qualify for an Exclusive Economic Zone (EEZ). However, all features would get a 500M safety zone for navigational safety purposes.

Development within the CSDZ would be frozen. All states would continue to “sit” on the features that they are currently occupying but no unilateral enhancements are permitted to any of the current outposts if the enhancements could impact the marine environment or increase the footprint of the existing installations. China would, for example, be allowed to remain on the low tide elevations (such as Mischief Reef) and the Philippines on Second Thomas Shoal but both would not be permitted to expand or improve these “outposts” and both would have to subscribe to a “do no harm” environmental protection code. Moreover, the documents establishing the CSDZ would explicitly state that no aspect of the CSDZ arrangement either confers title on any one of the parties or enhances a country’s claim to sovereignty over any of the features based on a theory of prescription. One last point: all countries would agree that after a short transitional period of a few years, all military forces would be removed from the outposts and the facilities would be repurposed as marine resource protection installations which would be open to legitimate researchers and personnel involved in the administration of the CSDZ.

Perhaps the most difficult aspect of the CSDZ arrangement is to determine the size of each party’s share and who would enforce the agreement. As previously recommended, a third party should be selected to act as the Administrator of the CSDZ. That party needs to have sufficient capacity to put ships into the area to monitor fishing and oil and gas activities and has credibility with the various states. Both Singapore or Indonesia have sufficient maritime capacity to act as the administrator of this arrangement since neither has a national stake in any of the claims yet both have sufficient professional maritime forces to monitor activities in the zone.

Various methodologies could be used to determine the shares among the various states. The relative size of each country’s coastline bordering the South China Sea is one approach; however, that would seriously disadvantage Taiwan which has the largest feature (Itu Aba) in the zone. An allocation based on the amount of territory actually occupied would unduly favor Taiwan and the Philippines and disadvantage both Vietnam and especially China. Finally, an allocation based on population or some economic measure would greatly favor China and especially harm Taiwan. In the end, the most equitable methodology would be to simply allocate access to fisheries based on an ¼ pro-rata basis. In other words, each country would be licensed to fish in any of the waters in the CSDZ beyond each feature’s 500-meter safety zone up to ¼ of the catch. Catch amounts would be monitored by the administrator.

The contested areas in the South China Sea are not projected by the U.S. Department of Energy to be endowed with substantive oil and gas resources. This projection is based on unspecified “industry sources” versus cited seismic studies. Since the possibility of hydrocarbons cannot be excluded, the CSDZ arrangement should permit any one, or group of claimants, to undertake seismic activities anywhere within the CSDZ after securing a permit from the administrator to ensure there is monitoring of the exploratory drilling activities and no damage to the marine environment. To incentivize states to engage in this prospecting, the state that finances the prospecting and drilling is entitled to a development fee of 50 percent of the total take from any drilling and the remaining 50 percent would be split among the CSDZ zone states. (This sharing arrangement is modeled after the system in place for deep seabed mining).

Phase I, Part 2: The Reed Bank/Scarborough Shoal Development Areas

The second major unsettled issue is the status of Philippine access to Reed Tablemount/Bank which is a submerged feature northwest of the proposed CSDZ. This is an area of great interest to both countries and has been a site of past oil and gas exploration activities in the 1970s and 2011. Most recently, PRC patrol boats threatened to ram seismic survey vessels belonging to the UK firm Forum Energy that had received a license from the Philippine government to engage in offshore seismic surveys. The PRC allegedly claimed that the seismic activities were illegal since Reed Tablemount (only 80 miles west of Palawan Island) was within the claimed 9 Dash Line region. In any event, no exploratory oil and gas actions have taken place since then. The tribunal effectively ruled that Reed Bank is part of the Philippine Continental shelf and that China was unlawfully interfering with the Philippine’s rights to exploit the living and non-living resources in that large (8866 Sq. KMs) and shallow area.

Scarborough Shoal (a large triangular shaped atoll 120 miles West of Luzon) is another feature that is claimed by both countries because of rich fisheries. The tribunal ruled that Scarborough Shoal is a high tide elevation that is enclaved within the Philippine continental shelf/EEZ and that China is unlawfully preventing the Philippines from fishing nearby. The tribunal did not decide which country had the better claim to title over Scarborough Shoal. Nor did the tribunal address Taiwan’s perfunctory claim on the features which are derivative of the PRC’s and which Taiwan has never prosecuted.

China’s claims to these features (Huangyan Island) are based on its Nine-Dash Line (9DL) and some evidence of Chinese fishing in the area. The 9DL aspect of their claim was thoroughly repudiated by the arbitral panel as both unrecognized by and incompatible with UNCLOS. And, while historic fishing in the vicinity of Scarborough might give rise to China to argue that it has a claim to fish in the vicinity of Scarborough under the concept of historic rights (See, Article 15 and 62 and 123 of UNCLOS), none of these provisions would result in China gaining title to Scarborough Shoal’s features. At most, these provisions in UNCLOS and the case law (Tunisia/Libya ICJ (1982)] could support a claim by the PRC to be entitled to fish inside of the Philippine EEZ near Scarborough Shoal.

Assuming China sooner or later wants to end up at a place where it is nominally within the bounds of international law, China could quietly retreat from its current position of excluding Philippine fisherman from the waters around Scarborough Shoal and move instead to negotiate a joint fisheries management and use agreement governing fishing inside of the Atoll and twelve nautical miles seaward of the rocks. The two parties would agree to joint fisheries patrols or, in the alternative, the embarkation of officials from the other state on their fisheries enforcement vessels and commit to take action to eject any unlicensed fishing vessels from the area. Additionally, the Philippines would publish coordinates that licensed Chinese fishing vessels could use to enter the Philippine EEZ to transit to the fishing areas. The two parties would each have the right to 50 percent of the catch and both would commit to modern fisheries management schemes to ensure that fish stocks remain viable.

Reed Bank

The second portion of the Reed Bank Scarborough Shoal Development scheme would involve China acquiescing to the right of the Philippines to develop the offshore hydrocarbon resources in the vicinity of Reed Bank. Since the Philippines currently lacks indigenous capability to develop these offshore resources, then China would be given the right of first refusal to bid on the exploration and exploitation of these offshore tracts and use Chinese oil companies (with the participation of Philippine oil and gas companies in joint venture) to develop the tracts. While the Philippines would, in the end, be able to realize the royalties from the development of these resources; the right of first refusal scheme would enable China to be able to have the primary right, after the Philippines, to gain access to this resource and also have meaningful participatory rights in the development of this important resource. Obviously, if Chinese oil companies have, in combination with a Philippine partner, exclusive development rights, it still stands to realize significant profits when market conditions are favorable.

This joint development approach forces both parties to concede small portions of their legal positions. As was seen in the landmark legal case between Myanmar and Bangladesh, the practical effect of the decision was that Myanmar gained surety of title as a result of the legal proceedings and was able to then entice Western oil and gas producers to enter the Myanmar market (mostly closed before to oil and gas development) and make the investments needed to develop the resources. Even though neither state got 100 percent of what they wanted, each got enough to be able to claim victory to their public and, more importantly, attract investment capital to their countries. The exact same thing can be said about the above arrangement. The Philippines is trading some fish and offshore development rights in exchange for stability and a management scheme that will assure the long term sustainable management of the resources. China, on the other hand, is gaining access to sources of hydrocarbons and protein.


In June 2014, Chinese President Xi Jinping made a number of speeches before domestic and international audiences commemorating China’s “Five Principles of Peaceful Coexistence” that were conceived by India’s President Jawaharlal Nehru and Chinese Premier Zhou Enlai. These principles later became the intellectual foundation for the so-called Non-Aligned or G-77 movement. The principles include:

Mutual Respect for Territorial Integrity and Sovereignty

Mutual Non-Aggression

Mutual Non-Interference in Each Other’s internal affairs

Equality and cooperation for Mutual Benefit

Peaceful Co-existence

It is extremely difficult for China to square its current behavior vis-a-vis its neighbors with these five pillars of its foreign policy. Its relations with Vietnam, Singapore, Korea and Indonesia can best be characterized as strained and the security situation with Japan and the United States could spiral out of control if there is a serious incident at sea involving military units. The recent upbeat talk by Philippine President Duterte of being able to cut a deal with China doesn’t mask the fact that there is a great deal of “bad blood” between the two countries. It is because China, in effect, established an economic blockade of the Philippines including such items as foreign aid, bilateral trade, and physical access to important economic areas on the Philippine continental shelf. This latter point is not lost on the world community who view China as the clear aggressor because the Philippines is geographically disadvantaged in terms of natural resources as well as lacking in economic or military capacity to confront China on an equal footing.

The proposed zonal arrangements conform to all of these principles. First, since sovereignty is neither acknowledged nor conceded and the principle of mutual recognition is upheld. Besides, those policy analysts who argue that China, and other countries, have a great connection to the South China Sea features ignores the fact that for centuries the features were plotted on maps so that mariners could avoid them. No native residents or farmers are being displaced. None of these features, until very recently, were regarded as home to anyone except fish and sea birds and these arguments of historical connection are mostly after the fact rationalizations to justify the seizure of property. Second, the zone arrangement — especially the provisions dealing with demilitarization of the features — upholds the principle of non-aggression and peaceful coexistence which is also, parenthetically, a founding principle of ASEAN. Third, the zone arrangement is something which is completely offshore. Some Chinese workers might participate in fishing or oil and gas activities and some Chinese consumers will benefit from the fish that are caught, but essentially there is nothing in this agreement which impacts the internal affairs of China or its internal legislation. Fourth, showing respect for Philippine access to the resources off their coast will demonstrate, to the outside world and Chinese population, that the PRC can “walk the walk” when it comes to treating small, less powerful states, with respect and equality. In the long run, this will benefit the public perception of China among smaller ASEAN states and should work to their advantage, politically and economically. Fifth, establishing joint development zones should result in a lessening of the risk of a military incident in the South China Sea and promote the goal of peaceful co-existence. Obviously, if the results of the zone were generalized to the East China Sea, and China and Japan made an agreement regarding the Diaoyu/Senkaku Islands, it would lessen tensions even more.

In closing, it useful to draw again from the relevant observations from Hank Paulsen who was incredibly successful in dealing with China as both a leader of Goldman Sachs and the United States Treasury Secretary. Paulsen forcefully makes the case that China usually has the same goals as the United States when it comes to their economy and foreign policy: reform, political stability, and economic development. Yet, the two countries have a “stunning ability” to misunderstand one another in part because the US does not follow the mandate of “equality and trust” in its dealings with the Chinese leaders. For these zone proposals to make sense, the United States needs to engage China’s leadership as the highest levels and convince China that the US is only interested in a durable arrangement that addresses the political and economic interests of all the South China Sea claimants while at the same time help to advance China’s highest domestic priority of continued economic growth. That will only come from stable political and economic relations in the Western Pacific.

(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.)

1 Comments To This Article

  • dragonboat99

    on Oct 21, 2016 at 09:04 PM - Reply


    the author discussed that Philippines can make a deal with China and ignore the US and others. The Philippines president announced to separate from US that makes people scratch head.

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