BMI View: The Philippines' decision to seek international arbitration in its maritime dispute with China will raise tensions between the two countries, and could accelerate US efforts to 'pivot' towards Asia. The dispute also increases the risk of Beijing imposing economic sanctions on the Philippines, which would pose downside risks for our 6.3% real GDP growth forecast in 2014.
We see no end in sight to the ongoing maritime dispute between China and the Philippines over their claims to the Scarborough Shoal and Spratly Islands (including the Second Thomas Shoal [also known as the Ayungin Shoal]) in the South China Sea. While Beijing has called for bilateral negotiations, Manila has sought arbitration at the United Nations (UN) to resolve the rift. In the latest development, Manila submitted a nearly 4,000-page long Memorial to the UN arbitral tribunal (which comprises five judicial members appointed by the Secretary-General of the UN) on March 30. Even though the Memorial has not been disclosed, it will likely document Manila's legal arguments for its rightful claims to the islands, including challenging the legitimacy of Beijing's 'nine-dash line' that places the majority of the South China Sea (including the contested islands) under Chinese jurisdiction. With the Philippines going ahead with the international arbitration, tensions look set to escalate further, which will sour the already fragile nature of Philippine-Chinese relations.
|Map Of South China Sea|
China Maintaining A Firm Stance On Its Maritime Policy
China has thus far maintained a hardline stance against international arbitration, stating that it will not participate in any of the tribunal's legal proceedings. Meanwhile, Beijing continues to assert its growing influence in the South China Sea by building up its military presence and intensifying its surveillance operations in disputed waters. We believe that these activities greatly unsettle regional countries which have overlapping territorial claims to parts of the South China Sea. Most recently, Chinese coast guards attempted to block a small Philippine vessel from supplying basic necessities to soldiers who stand guard at the Second Thomas Shoal, leading to a dramatic two-hour standoff. The Chinese Navy has also had control of the Scarborough Shoal, and is restricting the Philippines' access to the disputed island. In January, China introduced new legislation restricting fishing activities in disputed waters. There is also a lingering possibility that China will declare an Air Defense Identification Zone (ADIZ) in the South China Sea, which would greatly threaten regional peace and stability. Beijing's declaration of an ADIZ in North East Asia last November raised tensions with Japan and South Korea ( see 'China's New Air Defence Zone: Seven Crucial Factors', December 4, 2013). The larger South China Sea dispute between China, the Philippines, Vietnam, Taiwan, Brunei, and Malaysia therefore represents a major geopolitical flashpoint for the region. Given the heightened tensions in the South China Sea, military skirmishes remain a salient risk in our view.
Chance For The US To Accelerate Its 'Pivot' Towards Asia
While other countries embroiled in the South China Sea territorial rows have not joined the Philippines in its pursuit for arbitration, Manila is not fighting a lone battle. The United States has lent its support to the Philippines, challenging Beijing to clarify or adjust its 'nine-dash line' claims in accordance with international laws. We believe that ongoing maritime territorial disputes in the region present an opportunity for the US to forge stronger ties with the Philippines and accelerate its geopolitical rebalancing efforts towards Asia. The enhanced defence pact negotiation with Manila, which has already entered into the seventh round, will likely allow the US to boost its pre-existing troop presence in the Philippines and gain greater access to the latter's military bases. In turn, this will also shore up the Philippines' fragile military capabilities, enabling the country to more effectively deal with external security threats that could arise from the territorial rift.
Increasing Risk Of Economic Sanctions By China
From an economic perspective, we believe that the Philippines is facing an increasing risk of economic sanctions by China following the submission of its Memorial to the UN. Indeed, Beijing has recently warned Manila that it would face consequences should it continue with its international arbitration case, further raising the prospect of an economic backlash. While China receives approximately 10% of Philippine merchandise exports, which is less than that of the US (15%) and Japan (25%), economic sanctions would nevertheless have a significant impact on the Philippine economy. China could also restrict foreign direct investment to the Philippines. Should there be sanctions, this would pose clear downside risks to our real GDP growth forecast for the country, which currently stands at 6.3% in 2014 and 6.0% in 2015.