The Independent Market Observer

U.S. Power and the South China Sea

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jun 3, 2015 12:17:00 PM

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South China SeaI planned to write more about sources of economic growth today, but I’m out of the office without easy access to data, so we’ll postpone that conversation to tomorrow. Instead, let’s discuss the situation in the South China Sea.

Essentially, China has been building islands there, with about 2,000 acres created so far, and installing military and economic facilities on them in an attempt to cement its control of those seas. Countries that also claim the seas—and the fish, oil and gas, and other resources that go with them—are fighting back as best they can. The U.S. is now sending both planes and ships through the contested area to make the point that we do not recognize China’s control.

A military confrontation, quite possibly accidental, is a very real possibility.

Why does the U.S. care?

What business do we have with reefs thousands of miles away? Why not let China take them? From an immediate economic point of view, we don’t really care. But from a geopolitical and geoeconomic standpoint, we have to.

A matter of control. For the past several hundred years, the country that has controlled the seasfirst Britain and now the U.S.has been the dominant global power. Most countries depend, more or less, on trade and on access to resources outside themselves, much of which is shipped by sea.

Control of the oceans is control of the economy of every country in the world. Ceding control of the seas would be an implicit surrender of the dominant role of the U.S.

A matter of security. Control of the oceans is also control of a country’s security. If the U.S. dominates the oceans, no one can get close enough to really threaten us. No other country can deny us the ability to supply our own needs from elsewhere in the world. Pulling back from the oceans would significantly damage U.S. security, not just in Asia but worldwide.

To see how this can play out in real terms, consider Japan before World War II. One of the key factors precipitating the attack on Pearl Harbor was U.S. naval actions against Japanese imports necessary to its economy. Japan's strike on the U.S. was, in part, a move to free up shipping. U.S. control of the oceans allowed us to cut off Japan, and it had to respond.

China’s moves are driven, in large part, by fear of being cut off from essential needs in a time of trouble. While it looks like aggression—and that’s no doubt part of it—fear is probably a bigger factor.

Conflicting motives

A desire for security and control on both sides means the situation is likely to get worse, not better. China cannot give up trying to control its surroundings. The U.S. cannot give up control of the oceans. The costs on both sides would simply be too high. Similarly, the surrounding countries (Vietnam, the Philippines, Indonesia, and others) can’t ignore their own interests, either. The security question guarantees future conflict, even before we get to the very real economic resources at stake.

This doesn’t necessarily mean the U.S. has to keep forces there. Japan, for example, has a very real interest in containing China, as do the countries I just mentioned. The U.S. role should probably evolve to help them defend themselves, along the lines of the European model during the Cold War. Gentle containment worked there and could work here.

When we look at future risks, though, the South China Seawith its high population density, rapid economic growth, and many trade routescould be the flash point over the next decade. Europe is still a concern, but Greece is likely to remain a slow-motion crash.

The South China Sea is where we may well see some very sudden fireworks. 

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