APEC-Manila and South China Sea Joint Development Areas

At the Asia-Pacific Economic Cooperation (APEC) meeting later this month , the elephant in the room will be the South China Sea.

Ambiguities over China's nine-dotted line is hindering development of South China Sea oil and gas supplies. Joint Development Zones connected to multilateral infrastructure could solve this problem.
Source: US EIA, Klaudia & Sandler, 2005, Grenatec

And while it's not on the official agenda, it'll be very hard to sweep under the rug.

For proof of the sensitivity, look no further than China.

With the meeting just weeks away (Nov 18-19), China still hasn't confirmed whether Chinese President Xi Jinping will attend.

Despite assurances the South China Sea won't be discussed officially, it may be hard for China to avoid having the issue come up in bilateral meetings.

That's because 'energy resiliency' IS on APEC's agenda, and this includes things like deepening cross-border energy infrastructure connectivity. China, of course, supports this.

The reason is that international infrastructure projects now offer a crucial outlet for China's world-class industrial state champions like State Grid Corp of China.

Now that China's big internal infrastructure needs are largely met, these huge and politically connected companies face domestically destabilizing mass layoffs without new projects overseas.

In China, overseas infrastructure investment is being called, in various ways, the 'going out' strategy. It provides much of the rationale behind China's 'One Belt, One Road' slogan. The slogan is aimed at encouraging deeper economic integration in Asia through expanded cross-border infrastructure.

This would be largely built by Chinese companies and funded in whole or part through funding from China's newly-created $100 billion Asian Infrastructure Investment Bank (AIIB).

The problem with the 'One Belt, One Road' slogan is that it tends to include vague infrastructure pathways through the disputed South China Sea.

To date, there's been little or no explanation of how China's 'One Belt, One Road' pan-regional infrastructure concept fits into China's territorial claims to the entire South China Sea under its 'Nine-Dotted Line.'

It's all looks terribly sticky for China at APEC. since discussion of one naturally segues into discussion of the other. This, in turn, could explain China's dawdling in confirming Xi's attendance.

No other APEC member to date has publicly supported China's Nine Dotted Line claim. Worse, APEC host the Philippines has a pending appeal before a United Nations Convention on the Law of the Sea (UNCLOS) tribunal over the matter.

But if Xi doesn't attend the Manila APEC meeting, it sends a terrible signal regarding China's commitment to multilateralism.

As a result, Xi will almost certainly attend. But confirmation will likely come only at the last minute in order to discourage grandstanding by others once the commitment is locked in.

Looking at the big picture, none of Asia's countries benefit from fighting over the South China Sea.

Therefore, a solution lies in exploiting synergies between the needs and capabilities of China and her stroppiest South China Sea neighbors: Vietnam and the Philippines. To see the solution, consider what each side has and what it needs:

China has the capital and the technology to develop new South China Sea energy resources, like deep water methane hydrates. What China needs is a neighborhood (and global) 'social license' to do so.

China has the military potential to control the South China Sea, but it needs to avoid conflict with the United States. China also needs access to the Straits of Malacca, which Singapore and Malaysia could deny if China gets too aggressive.

In a 'worst case' scenario, Singapore and Malaysia could stymie access to the Malacca Straits to Chinese commercial vessels. This could be done by imposing endless 'random' inspections and administrative procedures over Chinese merchant traffic.

Vietnam and the Philippines, meanwhile, have legitimate claims to portions of the South China Sea as strong (or stronger) than any China's put forward to date. However, both need foreign capital to develop the resources.

Given this, look for use of creative syntax at the APEC meeting that might represent diplomatic code for discussion of Joint Development Areas (JDAs). JDAs exist all over the world. Two exist in the adjacent Gulf of Thailand just west of the South China Sea.

Under a Joint Development Area agreement, disputing national claimants to an offshore area agree to shelve their territorial differences indefinitely while they jointly develop the energy resources. Final territorial determination is postponed until the stakes are lower because the resources have been developed.

Given this, Joint Development Areas agreed between China and her South China Sea neighbors that link offshore oil and gas developments to downstream energy markets gas pipelines and electricity power lines solves several problems at once.

Doing so will increase 'energy resilience' through expanding supply. It will create delivery efficiencies though deepening networks. And it will provide a cooperation framework reducing the risk of military conflict.

To date, uncertainty over South China Sea territorial issues has hindered systematic exploration and development of potential new oil and gas in the South China Sea. It's also hindered efforts to create deeply interconnected energy markets, a consensus goal of APEC members.

Were China to move toward acquiescence to joint development areas, it could open the way for using AIIB funding to build the Association of Southeaste Asian Nations (ASEAN)'s highly promising but long moribund ideas of a Trans-ASEAN Gas Pipeline and Trans-ASEAN Electricity Grid.

Both aim to create an Southeast Asian integrated electricity and natural gas infrastructure in a region with a population larger than the European Union and with a collective GDP that - were it a country - would be the world's seventh largest.

China's already has hinted Southeast Asia may be where the AIIB makes its first loan. As such, these Southeast Asian projects would be ideal for building 'energy resiliency' and opening the way for deeper China-ASEAN cooperation.

And bedding down all of this would be highly desirable to achieve before next year's anticipated ruling by a UN tribunal over the Philippines' assertion that China's claims to the entire South China Sea violate provisions of the United Nations Law of the Sea.