July 28th, 2016

How Does the South China Sea Dispute Impact Supply Chains?

Uncertainty has hit the shores of global supply chains. The Permanent Court of Arbitration ruled against China’s claims over the South China Sea and the Spratly Islands in favor of The Philippines, Indonesia, Malaysia, and Vietnam.

The South China Sea Dispute

The South China Sea, regarded as one of the world’s most important trade lanes, connects markets in East Asia with those in the Middle East and Europe. It’s considered one of the globe’s most vital shipping routes. Over half the world’s merchant fleet passes through each year carrying goods. Which means there is major financial interest for many countries.

The waters are disputed, though the UNCLOS ruled in favor of the Philippines (over China).  The ruling, partnered with international political pressure, is creating confusion for the supply chain. The South China Sea dispute will have global implications for the supply chain and logistics and the eCommerce in general. Some 70 percent of the total world trade shipping rely on their passing through the South China Sea.

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Analysts fear that China’s next response could include the creation of an air defense identification zone (ADIZ) over the South China Sea.

In the event of China’s threat becoming reality, all aircraft entering the designated airspace would be required to identify themselves. As a consequence, this would escalate tensions with the U.S. and Japan.

Why is the South China Sea So Important for International Trade?

The United Nations Conference on Trade and Development (UNCTAD) estimates that roughly 80% of global trade by volume, and 70% by value, is transported on our oceans. Of that volume, 60% of maritime trade passes through Asia. If the South China Sea ushers across an estimated one-third of global shipping, then it is no wonder the dispute for this territory is a worthy cause for concern. Taiwan, Japan, China, and South Korea all rely on the waters of the South China Sea to transport their goods. Many of these countries’ economic security is closely tied to the South China Sea.

How Does the South China Sea Conflict Impact U.S. Supply Chains and eCommerce?

An imminent crisis restricting freedom of navigation would represent a catastrophic setback to supply chains and shipping operators that are still struggling to recover from the last recession.

With an annual trade through the South China Sea of $5.3 trillion, of which $1.2 trillion accounts to trade with the U.S, the shipping industry will suffer greatly with the restrictions. Even if shipping is not completely affected, it is likely that insurance companies will skyrocket rates forcing companies to pay much higher costs. Thus affecting the whole supply chain.

According to a Wall Street Journal’s report, shipping companies fear the ruling could embolden The Philippines and other smaller nations to assert their rights to the water. This kind of conflict would disrupt ship-borne trade in the waters between Hong Kong and Indonesia and further impact supply chains on a global level.

For more information on the changes in the supply chain, check out our white paper.

 

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Ajilon

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