Nine-dash line threatens Japan, South Korea’s trade

The following commentary is from Kevin Klöden, Chief Global Strategist at the Milken Institute.

News coverage of the weekend’s Group of Seven meetings focused on Ukraine, but China’s growing global presence was the other big topic on the G7 agenda. For East Asia’s two largest economies, in particular, the implications of that growth are critically important.

China wants to become the great military and political power of East Asia. Nowhere is this more evident than President Xi Jinping’s “nine-dash” declaration, through which Beijing claims sovereignty over almost the entire South China Sea. And of all the countries that have reason to be concerned about that claim, perhaps none more so than Japan and South Korea.

Much of the world is focused on the resource and military implications of Chinese claims on islands in the region and Beijing’s development of what would become the world’s largest navy. For Japan and South Korea, the threat to their supply chains and energy imports is a far more real and present issue.

In particular, Japan and South Korea are concerned about Chinese announcements that invoke not only the right to inspect cargo, but also the ability to restrict traffic. Neither Japan nor South Korea has any political interest in owning the Spratly Islands, or in replacing the United States as a major naval power in China. However, they have a strong economic stake in moving their energy imports and manufacturing components without fear of sanctions. Even in a non-wartime situation, China has taken the position that the South China Sea is a controlled territory rather than open international waters under Chinese tutelage.

China has so far not acted aggressively towards shipping in the ocean, but the very possibility of action poses a clear threat to the economies of Japan and South Korea. China wouldn’t even need to stop ships directly – it could just electronically track specific cargoes, or conduct inspections or diversions. Such actions would increase the risk of unpredictability and significantly increase costs.

For Japan and South Korea, the role taken by the United States in the post-World War II period was far less disruptive, not only because of their alliance but, more importantly, because the United States acted as the guarantor of free trade. Acted as and protected. Movement through the corridor.

Very few people outside of Japan or South Korea focus on or understand how important the South China Sea is when it comes to regional and even global energy supplies. Significantly, the sea is estimated to hold 30% of the world’s crude oil, which supplies China and provides a vital lifeline for the energy-dependent economies of South Korea and Japan.

For Japan, the 2011 Tōhoku earthquake and subsequent nuclear accident at Fukushima further increased that dependence. The resulting curtailment of Japan’s nuclear program has left the country dependent on energy imports, with 98% of Japanese oil coming from the Middle East.

In many ways, South Korea is even more dependent on energy imports than Japan, making oil and natural gas imports particularly important.

The South China Sea is more important than energy. It also serves as a major route for the global supply chains of Japan and South Korea. Estimates suggest that the sea carries between 20% and 33% of global trade; For Japan, this figure reaches 40%.

As global supply chains become regionalized, the South China Sea will play an increasingly important role in the Japanese and South Korean economies. The importance of connecting the two countries to trading partners in Southeast Asia, India and beyond is about to grow rather than decrease.

Japan and South Korea have been able to rely on the stability of the South China Sea as a vehicle to drive their economic growth, even as the global political situation has changed over the decades. Significant changes, including the Vietnam War and the end of the Cold War, have not stopped trade at sea from becoming more and more important.

As the United States balances commitments in Europe, Asia and elsewhere, East Asia’s three strongest economies — China included — all have a vested interest in ensuring the stability of trade, supply chains and energy flows.

For South Korea and Japan, trade in the South China Sea remains stagnant. But with China increasingly seeking to assert itself and change the status quo in its favor, it is imperative that both countries ask themselves: how much are they willing and able to contain China in the region before it becomes destabilizing? And are they prepared with options that will allow them to compete economically?

It is important for all three countries to know the answers to those questions and prepare for a more Chinese-dominated future in the South China Sea – even if the status quo remains.