東南亞研究中心 Asia Research Centre

Reuben Mondejar, Ming Yang and Lei Xu

Business & Geopolitics: International Business Threatened by South Sea Tensions

Working Paper Series

No. 115 November 2011

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Southeast Asia Research Centre Management Committee Professor Mark R. Thompson, Director Dr Kyaw Yin Hlaing, Associate Director Dr Chiara Formichi Dr Nicholas Thomas Dr Bill Taylor

Editor of the SEARC Working Paper Series Professor Mark R. Thompson

Southeast Asia Research Centre The City University of Hong Kong 83 Tat Chee Avenue Kowloon Tong, Hong Kong SAR Tel: (852 3442 6106 Fax: (852) 3442 0103 http://www.cityu.edi.hk/searc

BUSINESS & GEOPOLITICS: INTERNATIONAL BUSINESS THREATENED BY SOUTH CHINA SEA TENSIONS

Reuben MONDEJAR, PhD, Dept of Management, City University of Hong Kong (corresponding author; [email protected])

Ming YANG, MA, Dept of Management, City University of Hong Kong

Lei XU, PhD cand. , McGill University

Abstract

International commerce and business presumes that the criss-crossing of goods and services are unhindered. Geographical conflicts whether on land, air, or water, impose severe restrictions to the free flow of commerce and investments as has been demonstrated by the consequences of tensions in the Middle East and Africa. China and the ASEAN-member countries have recently shown some potential for increased tension because of overlapping claims of over islands situated in the South China Sea. Up to 85 per cent of energy sources of the three East Asian countries comprising Japan, China, and South pass through the South China Sea. Indeed, this waterway, which is near the U.S.-identified Malacca Straits “choke point”, is a lifeline for commerce and trade in the region. Up to about 30% of total trade between ASEAN countries and the three East Asian countries make use of the navigation access provided by this body of water. Seen from another angle, about 60% of the world’s water-transported oil passes through the South China Sea, mainly coming from the Middle East bound for East Asia.

China every now and then proclaims that its rise in the world stage is characterized by a spirit of openness. When China celebrated in 2005 the 600th anniversary of the first of seven ocean voyages by the 15th century Ming dynasty admiral Zhen He, the message delivered was that China’s rise in economics as well as a military power is aimed at commercial engagement with international parties, exchange of knowledge, commodities, and services, all in the spirit of friendship and goodwill.

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China is the eighth largest investor in ASEAN-Southeast Asia (around US$2.5 billion in 2010). Accumulated ASEAN investment in China is around US$60 billion in 2010. Up to about 7000 items are tariff-free between these countries as a result of a free-trade pact among the countries involved. All told, the intertwining between ASEAN and China is increasing. The recent tensions however caused by China’s insistence that it has sovereignty over the entire South China Sea where several ASEAN countries have littoral island claims has threatened the prospects of continues free flow of international business in the region. This paper studies the various factors that impinge on the overlapping effects of geopolitics, economics, and international business between China and the ASEAN with the South China Sea disputes as the locus of concern.

Revisiting ASEAN - China Relations

There is no doubt in anyone’s mind that China’s attempts to become globally competitive continues to gather momentum at breakneck speed. This paper posits the view that in this globalization process the relationship between China and ASEAN constitutes an important element, ASEAN being right in the heart of China’s own backyard. That being the case however much still has to be done. There is a lingering impression, gaining its own momentum, that the rise of China means that it has taken over the former role of Japan, as the region’s prime growth engine. It is in this light that ASEAN and China have to get their relations right in order for both entities to derive profit from this shifting axis in the region.

Early ASEAN-China Relationship

China’s relationship with Southeast Asia, and in particular with present-day ASEAN states dates back several centuries. It is well known that the Chinese have historically thought of themselves as the center of world order, in other words, that the world was Sino-centric. China was at the center of civilization and everybody else outside its concentric hierarchy was seen as contending for the blessing of a suzerain relationship with the Celestial Empire. The scholar John Fairbank points out in fact, China’s relations with other peoples and countries can be grouped into three main zones.

First, there is the so-called “Sinic Zone”, consisting of the most nearby and culturally similar tributaries such as Korea and , parts of which had anciently been ruled within the

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Chinese empire. Included in this category are the Ryukyu Islands (now part of Japan), and even Japan itself. Second, there is the “Inner Asian Zone”, consisting of tributary tribes and states of the nomadic or semi-nomadic peoples of Inner Asia, who were not only ethnically and culturally non-Chinese but were also outside or on the fringe of the Chinese culture area, even though sometimes pressing upon the Great Wall frontier. Third, there is the “Outer Zone”, at a further distance over land or sea. Here is included Southeast Asia . Also included are the countries of South Asia and even beyond such as the Middle East and Europe, that were supposed to send tribute when trading.

In theory, all the non-Chinese states and peoples were expected to be properly tributary to the Son of Heaven (the Chinese emperor), in the Central Country (i.e. China). It was through this ancient tribute system that the Celestial Empire once sought to dominate Asia. As could be expected, that view would not always find coincidence in the minds of the non-Chinese world. The worldview that there is only one world (unipolar in today’s jargon) and that China had the exclusive mandate of its governance did not square with how the others saw it. In the case of Southeast Asians, with the exception of the Vietnamese, who were in the first Sinic Zone, they did not on the whole consider themselves part of the Chinese world system as the Chinese believed them to be. Another scholar, Lucian Pye contends that “from the earliest times the Southeast Asians, living on natural maritime crossroads, conceived of the world as multipolar. Indeed, they were far more sensitive to other civilizations than the Sinic: politically they modeled their after the Hindu concept of the state; in religion they embraced Buddhism, Islam, and Christianity; and culturally they borrowed very little from the Chinese, a fact which has punctured Chinese pretensions of superiority towards Southeast Asians” (Pye, 1981:218).

That, however, did not mean that China had no influence. In fact, several of the principal kingdoms of Southeast Asia at one time or another periodically sent tribute missions to the Han court. Jumping back and forth in a scale, as it were, China had varying degrees of influence over the Southeast Asian kingdoms at different historical epochs.

On the whole, China, with its imperial history and a civilization that dates back earlier than 4,000 B.C., and thus ranks among the world’s oldest, was not unlikely to have a presence of some sort in the surrounding territories of Asia, including Southeast Asia.

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Scholars of ASEAN-China history usually point out that the tributary relationship that lasted many centuries did not necessarily mean subordination by China of the Southeast Asian kingdoms. In fact, many of these kingdoms also harboured self-centered worldviews but did not push them too far as to conflict head-on with China.

When ASEAN was formed in 1967 China interpreted the forging of the association as an immediate threat to its position. ASEAN was in fact accused of being an instrument of U.S. . Only two years earlier, China was announcing its desire to control Southeast Asia and ASEAN’s birth was seen as an obstacle to that scheme. In August 1965, Chairman Mao addressed the Communist Party politburo in Beijing saying: “We must without fail get hold of Southeast Asia, including , Thailand, Burma, Malaysia, Singapore. Southeast Asia is a very rich region, it abounds in minerals. In the future it will be very useful for the development of Chinese industry. After we get hold of Southeast Asia, the wind from the East will prevail over the wind from the West.” (Gahrana, 1984:7) If there is a historical restlessness of the ASEAN states over getting too close to China can be argued that there was some justification for such sentiment.

Changes in Recent Decades

The aftermath of the which impaired China’s image in the ASEAN states, the and China’s involvement in helping Vietnam only to part ways with Vietnam later on, the meteoric economic growth in the ASEAN countries as a whole, --- all of these, inaugurated a new attitude among the ASEAN governments with regard to their relations with China. This attitude, turning positive on the whole, was bolstered by Deng’s reforms and the opening up of China to the world in the late seventies. The decade of the eighties was a time for ASEAN’s re-acquaintance with China.

A new era in China-ASEAN relations was already in practice at the start of the nineties. China was in fact the first ASEAN dialogue partner to sign such a pact with ASEAN.

China was also regarded as a favourable factor for ASEAN during the 1997-1998 financial and economic crises. There was a regional sentiment that China by refusing to devalue its currency has provided an oasis of stability in what was then a sea of financial, economic, and

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political turbulence. In sum, China-ASEAN relations have gone a long way, formalized or not, officially acknowledged or not, since their several centuries of pre-history. The ASEAN states are in the “Sinic Zone” according to China’s historical view, irrespective of whether ASEAN agrees or not.

Progress in Relationship Amidst Transition

Both China and ASEAN are undergoing transitions, --- politically (including state governance), socially, economically, among others. Precisely because of these transitions, windows of opportunities open up that could upgrade and intensify China-ASEAN relations. Witness for example how China, after many years of insisting to deal with the Spratlys and Paracels dispute on a state to state bilateral basis, all of a sudden agreed in 2002 to sign with ASEAN the Declaration on the Conduct of Parties in the South China Sea. This took place in addition to China’s signing of the Framework Agreement on Comprehensive Economic Cooperation with ASEAN, and China’s agreement to work towards China-ASEAN Free Trade Area. In October 2003, China signed with ASEAN in Bali a Treaty of Amity and Cooperation which covers a broad framework that includes renouncing the use of force in settling disputes as well as calls for greater economic and political cooperation.

There is no doubt that Asia’s new regional gravitational center, --- geopolitically, economically, and even militarily --- is China. It is in China’s interest to be seen as the major player in the area, and it is for this reason, among others, that China is interested in gathering the various countries in Asia within its regional geographical vicinity towards a mutually comfortable relationship. It is good for China to be seen as an indirect protector-partner, promoter, and enhancer for all of the neighbouring countries in the region with due respect to the sovereignty of each individual country.

The Way Forward

With China’s historical links with ASEAN, it is just natural that China and ASEAN should have a continuing fruitful relationship and be integrated in some form. Yet, even with that as background, some traditional rules could serve both China and ASEAN: (1) where there is risk, there are returns as well, (2) both entities should find ways of complementation in economics,

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politics, , and security-wise, (3) keeping an eye on opportunities is not enough, opportunities must be created, (4) both ASEAN and China must be ready to learn some things, and to unlearn others, (5) although there could be thorny issues ahead, and either party (or both) can make mistakes, but integrate they must over the long run, and try they must with persistence. Whatever problems there are should be solved through dialogue, , and prudent management.

Herein lies the challenge that is in the heart of China-ASEAN relationship. It should be a boon, rather than a bane.

Cast of Characters in South China Sea (SCS) tensions

Despite the relative calm and improvement in relations between China and the ASEAN countries in the past three decades, the disputes over the islands of the Spratlys and the Paracels have caused concern for many parties. Lots of natural resources are at stake. Estimates of up to 213 billion barrels of oil and natural gas are under its waters. China having been on a shopping spree especially in South America and Africa for natural (especially energy) resources is understandably keen on putting its fingers on these potentially rich reserves.

China claims all of these islands, about 25 in the Paracels located just below Hainan and straddling Vietnam’s east coast (Figures 1 and 2), and about 200 in the Spratlys (Spratly Island itself being one of the 200). All told, apart from the reefs, banks, reeds, seamounts, atolls, sand bars, islets and islands, if all the rock outcrops are included the count could rise up to about 700 features. The UN defines however a geographic item of note as something that is always above water even at high tide. China calls the Spratlys “Nansha” and the Paracels “Xisha”. There are six claimants: China believes it has sovereignty over all of them. Even a mere rock outcrop engages China to plant its flag on it (Figure 3). Vietnam claims all of the Spratlys and some (half) of the Paracels. The Philippines claims a few (eight) of the Spratlys close to its western coast, just off the province of Palawan. ’s claims mirrors those of China but Taiwan occupies the largest island of the Spratlys, Taiping Island (Figure 4). Brunei claims two reefs and one bank. One of the reefs, Louisa Reef, also under Malaysia’s claim, consisting of rock outcrops jutting

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out of the sea. Only two of these rocks are permanently above water; the others disappear at high tide. Malaysia has some form of occupation in six islands out of the 12 islands/islets/reefs they claim close to its coast.

Then there is the UN Law of the Sea where all claimants are signatories to except Taiwan. China refuses to submit the issue to UN arbitration and has insisted on one-on-one talks with the other claimants. UN requires all parties to agree before it accepts any dispute. China wants bilateral negotiations rather than multilateral. It abhors the involvement of international parties in the talks.

Although China and Taiwan have similar claims, China itself claims Taiwan as its own. After all, Taiwan is not recognized internationally as a sovereign entity that can claim anything. China claims practically all of the South China Sea from Hainan down to as far as Malaysia and Brunei extending 1,600 kilometers almost reaching the shores of the large Kalimantan Island (formerly Borneo) which is shared by Indonesia, Malaysia, and Brunei. It was in 1947 that just before the Communist victory in that Chiang Kai Shek’s declared in maps they drew that the so-called “nine-dashed-lines” mark China’s claim over the islands (Figure 5). The map makers claim that the South China Sea was China’s from time immemorial. When the Kuomintang government fled to Taiwan, they continued to hold to the “everything is ours” view and in fact established a garrison complete with an airstrip in the largest of the islands. Taiwan continues to maintain this garrison to this day.

70% of Japan’s oil passes through the South China Sea. 60% of sea-transported oil passes through this sea supplying China, , and Japan (Figures 6 and 7). Also,the South China Sea is marked by three of the world’s busiest sea ports in its extremities,--- Singapore in the south and Hong Kong in the north, and Kaoshiung, a little farther at the southmost tip of Taiwan. This body of water connects with the US-defined “choke point” of the Malacca Straits. A choke point is one which the US considers as an extremely important and vital sea lane for maintaining peace and unimpeded global trade. There are 16 of these choke points which were defined during the Reagan-era as it grappled with the geopolitics in the context of the now defunct former (Figure 8).

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The US is keen that the South China Sea remains an international freeway, not under the sovereignty of any one. For them, this is important for military purposes as well, apart from international commercial navigation purposes. The U.S. insists that despite their withdrawal from Vietnam in 1975, it never left Southeast Asia and continues its presence economically, diplomatically, technologically, and militarily. The US does not accept the proposition that international commercial navigation is simply permitted by someone who claims sovereignty over that body of water. Obviously, it does not recognize China’s sovereignty claim over it.

Indonesia is not a claimant but has joined in Malaysia’s protest against China lodged with the U.N. in 2009. Singapore too is not a claimant but has declared in July 2011 that it wants China to clarify its sovereignty claims for the sake of peace in the region.

Thailand, also not a claimant, but has some other issues with China (Mekong River squabbles). It is the only ASEAN country with an aircraft carrier (purchased second hand from Spain in 1997). It might be requested by ASEAN to deploy it in the SCS to display ASEAN sea- power, a possibility not to be ignored.

The remaining three other ASEAN countries have ties with China in one way or another. Myanmar/Burma enjoys the highest China FDI among all ASEAN countries. and Laos are both beholden to China for other reasons (FDI and political support). They have no reason to dwell on the disputes over SCS being non-littoral states as far as the SCS is concerned.

The Front Line ASEAN Countries vis-à-vis China in the SCS Dispute

Vietnam, the Philippines, and Malaysia (in that order of intensity) have been the most active parties in engaging China in the SCS disputes. This is easy to understand since these three countries flank the SCS with Vietnam to the left, the Philippines to the right, and Malaysia south- bottom. It is also worth noting that Vietnam and the Philippines are the two countries in ASEAN with the most intimate familiarity with the U.S. especially in military terms due to historical circumstances. This is significant since China is especially irked by the possibility of US involvement in the disputes over the SCS.

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The Vietnamese have their own name for the Paracels, “Hoang Sa”. They call the Spratlys “Troung Sa”. Of all the ASEAN countries, only Vietnam had the experience of actually going to war with China. In past centuries, there were minor battles and skirmishes. The recent serious one was in 1979 over border issues with China. In that battle which lasted just a few days it is thought by regional watchers that Vietnam actually was the victor; China withdrew with a bloodied nose. Like China, Vietnam claims history on its side in claiming ownership and sovereignty over the Paracels. When the post-colonial era dawned, Vietnam found itself a divided country. About half of the Paracel reefs, islets, sand bars, and islands, --- about 25 in all, were split between China and the then South Vietnam. Then came the Vietnam War debacle with China a friend and supporter of . It was in 1974 that in the waning days of South Vietnam, as North Vietnam was inching its way to take over the South, China engaged the South Vietnam – occupied islands in a brief but bloody battle. When the Vietnam War finally ended in 1975, all the Paracel Islands were fully taken over and occupied by China. Every major island in the group, nine in all (Figure 9), was installed with some form of military presence. Unified Vietnam remained under the sway of China in the immediate succeeding years and Vietnam was busy with reconstructing the war- torn country. That cozy relationship however did not last long as evidenced by the China-Vietnam border war in 1979, just four years later. Then in 1982 Vietnam laid claim to the continental shelf along its coast and declared in its Exclusive Economic Zone (EEZ). It was perhaps the first sign that Vietnam felt it was now a secure country and thus is in a better position to assert its position on the SCS and that China should return the islands they took over by force in 1974 from erstwhile South Vietnam.

As to the Spratlys, Vietnam maintains some form of military presence in over 20 islets, reefs, islands and other “features” in the SCS. Meanwhile, fast forward to 2011 and we find Vietnam in progress in upgrading its naval capabilities under the so-called government ordinance ”2020 Vietnam Ocean Strategy” which aims at a fleet by 2020 consisting of up to 40 warships (400 tons). The commercial-industrial seaport of Haiphong in the north is also the site of a new military port being built which would eventually be equipped to accommodate 40K-ton naval vessels with facilities for submarines. Vietnam in 2020 would thus have two very respectable naval military outposts, Cam-Ranh Bay and Haiphong.

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The Philippines calls the island reefs and islets it claims as “Kalaya-an” (Figure 9) which is Tagalog vernacular for freedom. A year after independence in 1946, a Philippine businessman named Tomas Cloma and his brother claimed that they discovered some islets/island/reefs 450 kilometers off the most western island province of the Philippines, Palawan. It consisted of five islands, two sandbars, and two reefs. It seemed to be a private affair until he transferred the rights to the islands to the Philippine government in 1974, a full 25 years later. Twice, in 1971 and 1978, then Philippine president Ferdinand Marcos declared that the island- group forms part of the Philippine archipelago. By presidential decree in 1978 Marcos also declared the surrounding waters as part of the country’s Exclusive Economic Zone (EEZ). It has occupation in some form in eight of the island-group. The biggest of them is 37-hectare Thitu Island where the government established a colony-town-municipality complete with a mayor elected by 200 registered voters. A 1300-meter airstrip was built and the Philippines renamed Thitu to Pag-asa Island, which means hope in Tagalog. Some 100 soldiers are stationed in Pag-asa and about another 300 -350 soldiers take part in taking turns in patrolling and occupying the other claimed islands and reefs (Figure 10). Apart from some fishermen, most residents are provided with government jobs with free food provisions. It has a functioning fresh water supply system. The island has satellite television facilities and electricity is provided by solar-powered generators. A mobile phone company operates but is continuously striving to deal with unstable communication signals. The island group is patrolled by the government using World-War-II vintage vessels. Until 2011 when the US provided the Philippines with a decommissioned coast guard cutter, the naval flag ship of the country was a warship named Rajah Humabon, which is about 70 years old. To say the vessel is obsolete is perhaps a charitable description of it.

The Philippines however, being a former colony of the U.S. could seek support through the Visiting Forces Agreement it maintains with the U.S. The country was host to Subic Bay, a deep water naval military facility which in its heyday accommodated submarines, aircraft carriers, and even unconfirmed stockpiles of nuclear weapons. Nearby is Clark Air Base, now a commercial airport, but which was a U.S. standard-bearer air base in the days of the Vietnam War. Thus, whatever deficiencies the Philippines may have in its naval military capabilities, there is this window of possible support it could have from the U.S. which would be a convenient excuse for why the U.S. may get easily involved in the SCS disputes.

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In the case of Malaysia, its main case for its claims is its continental shelf definition following the Geneva Convention of 1958. It claims 12 islands and reefs but only has some form of occupation in six of them. It has built a 600-meter airstrip in the largest island it occupies, Terembu Layang Layang. Its continental shelf demarcation however overlaps with that of Indonesia and Brunei, all three countries sharing the gigantic island of Kalimantan (Borneo). Since the 1990s Malaysia has been upgrading its naval military capabilities, after all, it is an important part of the vital “choke point” of the Malacca Straits. It obtained its first French-made submarine in 2009, to be followed by two more. It has a relatively modern fleet of naval patrol crafts circling around their claimed islands and reefs. It has lodged a protest to the UN against China over the disputed islands in 2009. This protest was joined in by Indonesia.

What Is At Stake

Apart from the freedom in navigation in the SCS, with all its consequences for military/security operations, marine research, fishing, over-flight rights, one of the obvious motivations to get a hold of the sovereignty is the potential of natural gas and oil reserves suspected to be lurking under the seabed of the SCS. Some scholars have pointed out that the estimates resemble those of the Persian Gulf.

From the business point of view however, any hostility in the SCS will affect the current dynamics of trade and commerce. At first tier are would of course be the ASEAN countries and China. In 2004 trade volume between China and ASEAN stood at US$55 billion. In 2011 this is estimated to be about $250 billion and growing. In 2010 the ASEAN Free Trade Agreement (AFTA) came into full effect. As a result, 7000 tariff-free items enjoy inter-trade among the various members in the pact.

Another issue to consider is the complementarity between ASEAN and China that could be affected by any hostilities in the region. It is a fact that China has had the distinction of being the so-called factory of the world. It is also observed that this title may have already begun its

Southeast Asia Research Centre Working Paper Series, No. 115, 2011 11 sell-by date as initiated by the events in 2010 which China watchers call the “Foxcon effect” . That incident when workers from the computer technology company named Foxcon demanded higher wages triggered the rise in labour costs across all manufacturing in China. It is in this light that several countries in ASEAN will be the beneficiaries of those factories that would move out of China by looking for cheaper labour.

A second tier business and trade concern would be other user of the SCS. All commodities going to China, Japan, Taiwan, Korea coming from Europe, Africa, India, and the Middle East would be normally also passing through this sea lane (Figure 6). Hostilities would disrupt this trade.

It would have been simpler if we can regard ASEAN as one single player in the SCS dispute with China. One scholar in the subject has subjected the matter to a rudimentary Game Theory exercise (Figure 11). The study figures out various possibilities of ASEAN-China interaction within the context of the many strategic priorities of China, specifically in the field of international relations. Incorporated as well are the priorities that ASEAN may want to take at each juncture. The fact is that ASEAN is not one, and even among the various ASEAN members there are overlaps in their respective vested interests. There are overlapping and conflicting claims. The problem of one ASEAN country pitted against each other has not yet appeared since at the moment the overwhelming claims of China drowns out all other talks of interspersed-intertwining claims. For example, the prospect of Vietnam meeting the Philippines head on is not an unrealistic scenario. Malaysia against Brunei, Malaysia against Indonesia are other scenarios. At this point in the disputes, it is easier and tempting to think of one-ASEAN against China. This is not the case. Finally, China is willing to talk to Vietnam over the Spratlys, but China is adamant that the Paracels are not for discussion. This in fact can be a doorway to hostilities since as history as shown, Vietnam is not the ASEAN country that will shy away from a war or battle.

It is well known, and China repeats it often, that it wants a bilateral form of talks to deal with the disputes. In July 2011 however, at an ASEAN in Bali, China and the ASEAN agreed on a document that would push to implement the guidelines of the 2002 document called Declaration of Conduct (DOC) in the South China Sea. Again, after China being viewed by ASEAN members as having abandoned the 2002 DOC, it is now back to talking to ASEAN.

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In these days that China is seen as a prime economic engine of the world, while Europe and Japan languish, and the U.S. is in a form of auto-pilot economic nowhere, China is at pains to explain that its rise is a peaceful one. China tries hard to demonstrate that it does not want to impose its values on others as they have displayed in their dealings with South America and Africa. Yet, its behavior in the dispute with ASEAN countries over the South China Sea will be looked at with interest by everyone, in Asia and around the globe. It will show what China will do when its interests collide with those of others, and not just any normal “others”. In this case the “others” is a host of countries in its own backyard. Whatever China and ASEAN can come up with, it will reflect the China in an era of 21st century characterized by globalization and challenged by competing interests.

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Fig. 1. The General Area of the South China Sea with the Paracel and Spratly Islands

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Fig. 2. The South China Sea with Different Archipelagoes Within It

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Fig. 3. A Rock Outcrop in the South China Sea

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Fig. 4. Taiwan Claims One Island in the Spratlys, the Taiping Island

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Fig. 5. China’s Nine-Dash Line Map drawn in 1947 by Kuomingtang

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Fig. 6. Major Shipping Routes Passing Through The South China Sea

Source: Energy Information Administration

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Fig. 7. Normal Commercial Navigation Route From Europe, Africa, Middle East to Far East

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Fig.8. U.S. President Reagan Identified 16 Vital Sea Lanes He Called “Choke Points”

Source: U.S. CIA

Military Installations in the Various Islands of the Spratlys

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Fig. 9 The Paracels and the Spratlys With Demarcated Claim Lines

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Fig. 10. Occupation by Various Countries in the Different Islands in the Spratlys

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Fig. 11. Rudimentary Game Theory Applied to a “one-country” ASEAN vis-à-vis China

S: ASEAN signals R: ASEAN resists NS: ASEAN does not signal NR: ASEAN does not resist C: China challenges P: China presses a threat NA: China does not challenge but negotiates BD: China backs down

Source: Extracted from “Proactive Initiatives & Dynamic Status Quo: China’s Policy Toward S.E.Asia”, Yi-hung Chiou, Southern Political Science Association Meeting, New Orleans, Jan’08

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Fig. 11 (cont’d). Notes of Yi-hung Chiou to the diagram.

The purpose of this game attempts to simulate China’s decision-making in the South China Sea disputes, aiming at the possibility that China initiates military aggressions in the disputed area. Since this is a two-player game, the other party is assumed as some ASEAN countries that have territorial disputes with China in that region, like Vietnam and the Philippines. For the sake of convenience, I use ASEAN to simply represent those countries as a whole, which does not imply that all ASEAN members will get involved in conflict with China if armed clash occurs.15 This game is portrayed by the extensive form (game tree), for it can catch the sequence of action, which the formal form cannot express. The beginning of this game starts with the probability that China’s belief about whether ASEAN is resolute or not resolute in terms of its determination to defend its sovereignty claim. It is indicated by a chance (node 0). The probability that ASEAN is resolute is indicated by γ; otherwise, it is 1- γ. Second, before taking any action, the factor that China needs to take into account is whether ASEAN sends a signal of its resolve or not. If ASEAN sends a signal to show its resolution, it implies that these ASEAN states may improve their military capabilities, increase naval patrols in their claimed area, or facilitate civil tourism to strengthen the occupation.16 All of these will impose costs on these countries (denoted by –c). The factor could be critical since it could signal whether ASEAN’s sovereignty claim is credible or not credible. Hence, ASEAN could choose between sending (indicated by S) and not sending a signal of its resolve (indicated by NS), followed by China’s choice between initiating military action to challenge the status quo (indicated by C) and not initiating any military action and continuing negotiation (indicated by NC). If China chooses not to challenge, the result will be the status quo (denoted by SQ). If China chooses to challenge, ASEAN needs to choose whether to resist or not to resist. If ASEAN chooses not to resist (denoted by NR), the outcome is ASEAN’s concessions in China’s terms. If ASEAN chooses to resist (denoted by R), China needs to decide whether to press a threat or back down. If China decides to press a threat (denoted by P), the consequence will be a war. If China finally chooses to back down (denoted by BD), there will be no war, but China will suffer the loss of credibility. Based on the preceding strategic interactions by two players, the possible outcomes and the payoffs for each player are as follows. 1) The status quo occurs when China does not challenge. 2) NR represents the outcome that China challenges and ASEAN chooses not to resist. 3) BD indicates the outcome that China chooses to

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back down after ASEAN’s resistance to China’s challenge. 4) War happens when China decides to press a threat after ASEAN’s resistance to China’s challenge. In terms of payoffs for China, China will prefer ASEAN’s concessions without war than the status quo, which is preferred than backing down (Unr > 0 > Ubd). The payoff of pressing a threat for China is less than ASEAN’s concession, but more than backing down (Unr > Up > Ubd). But, we do not know how China values the payoff of war compared with that of the status quo. For ASEAN, if ASEAN is resolute, it prefers China’s backing down as it does not send a signal than China’s backing down when ASEAN sends a signal (ubd > ubd-c ). These payoffs are better than the payoffs of the status quo and war, no matter ASEAN sends a signal or not (0 > - c > up > up-c). The worse payoffs than war are the payoffs of non-resistance since ASEAN is resolute to defend its sovereign right (up > up-c > unr > unr-c). On the other hand, if ASEAN is irresolute, ASEAN will prefer not to resist in the first place. I mark these payoffs with asterisk to distinguish them from the payoffs that ASEAN is resolute. When ASEAN is irresolute, ASEAN’s complete preference is ubd* > ubd*-c > 0 > -c > unr* > unr*-c > up* > up*-c.

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