July 28th, 2016

The South China Sea and the Effect on Global Supply Chains

Uncertainty has hit the shores of global supply chains as 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.

What happened?

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. Disputes over the South China Sea 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.

#SouthChinaSea arbitration and the effects on the #supplychain: http://ajilon.co/2a4TFwA via @ajilon

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.

Implications for U.S. supply chains, logistics, 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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