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The South China Sea 'V-I-P' solution

By Stewart Taggart - posted Monday, 9 March 2015


The 'VIP' Group of Vietnam, Indonesia and the Philippines all share both advantageous relations with and deep disagreements with China in the South China Sea. Working together, they could present a united front.
This would include establishing Joint Development Areas allotted by auction and linked by a common-carrier open-access energy infrastructure.

Each has a serious offshore territorial dispute with China. Meanwhile, each cooperates with China in important ways.

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The disputes revolve around over China's nine-dotted-line maritime territorial claim. How the V-I-P countries respond will determine how peacefully Asia is in coming decades.

None of the three can take on China alone. But together, however, they can create a compelling negotiating counter party.

Start with Vietnam. In 1974, China seized the Paracel Islands from Vietnam. In 1979, China and Vietnam fought a land border war. In 2014 China placed a rig in waters claimed by Vietnam.

Despite this, China and Vietnam now cooperate in the Tonkin Gulf. There, Vietnam and China jointly manage fisheries and are working together to explore for energy resources in the offshore area straddling their offshore equidistance line.

Over at Scarborough Shoal off the Philippine Island of Luzon, the Philippines and China have engaged in water cannon fights.

The Philippines continually warns about China's construction of facilities on disputed reefs, presumably to build up forward military bases for more aggressive action.

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Less reported, however, is that Philippine energy company Philex has been negotiating with with China National Offshore Oil Company (CNOOC) regarding joint development of the disputed Reed Bank.

Meanwhile, State Grid Corp of China is several years into a showcase 25-year contract to operate and upgrade the Philippine electricity grid.

State Grid's Philippine grid upgrade contract is a major international infrastructure showcase. It illustrates China's 'going out' strategy of overseas investment by China's now internationally-competitive infrastructure state champions.

Arguably, the positive potential for China in its global infrastructure outsourcing drive industrial policy is larger than any expansive territory grab in the South China Sea.

Forced to choose, China will almost certainly back down in the South China Sea if it jeopardizes the internal social stability that continued economic growth brings to the Communist Party's political legitimacy.

China's industrial state infrastructure champions' 'going out' strategy is providing this all important economic growth. Without it, destabilizing unemployment in China will rise because infrastructure is a huge employer.

It's only a slight exaggeration to call this China's geopolitical jugular vein.

Consider recent developments with State Grid in the Philippines. This is where China's 'going out' strategy is now colliding with South China Sea tensions. There, the Philippines has flipped a big potential 'kill switch' on this tidy scenario.

In late February, the Philippine government announced it was sending home State Grid's Chinese technicians and replacing them with Filipinos in running the Philippine electricity grid the Chinese expensively revamped.

The Philippine government said the decision was taken because Filipino workers can now do the work performed by the Chinese, but also hinted the move was due to national security concerns.

Regardless of which it was, the move relegates State Grid to being a mere minority shareholder in the National Grid Corp., the Philippine corporate entity that runs the grid.

Bringing in Chinese infrastructure state champions to rebuild national grids, and then booting them out - as the Philippines has done - creates an unattractive precedent for State Grid elsewhere, like in Australia, Portugal and Brazil, to name three.

Ironically, the Philippines is applying a highly-successful strategy used by the Chinese themselves over the past few decades. This has involved inviting inward investment, but limiting foreign companies to minority stakes and requiring technology transfer as a condition of access to the domestic market.

If this playbook is applied in reverse in Southeast Asia (and elsewhere) to offset worries over potential Chinese expansionism, it has major implications for China's economy.

In China, economic growth is the key opiate damping down domestic social discontent over things like corruption, pollution and the dominant role of the Communist Party.

At this point, it's pretty clear that ongoing tension between the Philippines and China over disputed offshore areas like Scarborough Shoal is creating blow back. As a result, it can be argued China now has more to lose than to gain from aggressive tactics in the South China Sea.

This argues for a deal. The best possibility is for China and the V-I-P countries (for instance) to agree to create Joint Development Areas in the South China Sea linked by common infrastructure. This infrastructure could be built by - yes - China's state infrastructure champions under a revitalized 'social license' with her neighbors.

Creating Joint Development Areas postpones indefinitely resolution of the hard territorial issues. Meanwhile, creation of Joint Development Areas offers huge opportunities for China's big infrastructure companies - which now enjoy economies of scale that can benefit everyone.

The littoral nations, meanwhile, gain from the economic multiplier effect of various subsidiary service contracts.

The above also provides a means for China to reduce her multi-trillion dollar, globally-destabilizing dollar hoard through recycling it into infrastructure via the Asian Development Bank or China's own Asian Infrastructure Investment Bank - to name just two financial intermediaries.

Those investments will raise regional living standards. This will occur due to the economic multiplier effect as the initial investment dollars are progressively spent and respent in the regional economy.

Increased energy security, deeper economic connectivity, market-arbitrated access to new oil and gas developments and super-charged economic growth and multi-decade postponement of hot-button territorial issues until the stakes are lower.

There's a lot to like here.

Strategically, the coming year favors the Philippines. It will enjoy two big megaphones. It will almost certainly use them.

As early as later this year, a United Nations Convention on the Law of the Sea (UNCLOS) appeals tribunal may rule on the Philippines' appeal of its South China Sea maritime dispute with China.

China says it will refuse to recognize the tribunal, and won't abide by any judgment that goes against it.

Doing so, however, holds huge political and economic risks for China and her large infrastructure companies due the ugly unilateralism it will spotlight.

As a result, new host countries for Chinese inward investment in infrastructure upgrades may hesitate. They'll worry they're on their own if China controls their internal infrastructure and plays only by its own rules.

Forced to choose between territorial expansion and domestic unemployment, China almost certainly will back down on the South China Sea. Given this, expect Chinese pragmatism to prevail.

Given this, expect Chinese pragmatism to prevail over principle in the South China Sea.

This will be particularly so if the UN appeals tribunal ruling occurs while the Philippines holds this year's rotating leadership (following China last year) of the Asia-Pacific Economic Cooperation Group.

As a result, look some accommodation between China and the Philippines. Monitoring developments in the Philippines with State Grid are a good place to detect signals.

Another place to watch will be developments between Philex and CNOOC regarding Reed Bank, where a template-creating joint exploration and potential development agreement could be reached.

That, in turn, leaves Indonesia: the newcomer to strife with China.

Indonesia's been dragged into South China Sea territorial disputes due to new versions of China's vague Nine-Dotted Line.

This now implies China claims oil and gas rich waters near Indonesia's Natuna Islands. In response to this, Indonesia's beefing up its military presence in the islands. It's also taking a harder line toward illegal fishing.

Indonesia is Southeast Asia's most populous country and largest economy. Indonesia also is the Association of Southeast Asian Nation (ASEAN) states undisputed diplomatic heavyweight.

Indonesia advocates the development of a 21st Century Blue Economy.((21))

By this, Indonesia means greater ocean protection and sustainable economic development of its riches. Movement between China and her southern littoral neighbors toward agreeing on Joint Development Areas linked to common infrastructure can help develop and protect the Blue Economy.

This also represents a major opportunity for China's infrastructure state champions.

Between now and the major COP21 meeting in Paris in December in which the world's nations must agree binding greenhouse gas reduction targets, China and her South China Sea neighbors have an ideal opportunity to postpone their offshore territorial disagreements while they cooperate to reap the gains.

The V-I-P countries are the ones to watch.

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This article was first published on the Grenatec website.



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About the Author

Stewart Taggart is principal of Grenatec, a non-profit research organizing studying the viability of a Pan-Asian Energy Infrastructure. A former journalist, he is co-founder of the DESERTEC Foundation, which advocates a similar network to bring North African solar energy to Europe.

Other articles by this Author

All articles by Stewart Taggart

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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