Economic and Military Significance of South China Sea to China

The United Nations Conference on Trade and Development (UNCTAD) estimates that 48% of maritime trade passes
through Asia, with the South China Sea carrying an estimated one-third of global shipping. Over 64 percent of
China’s maritime trade transited the waterway in 2016, making China’s vulnerable to maritime trade disruptions 1.
Similarly, according to the U.S. Energy Information Administration, the South China Sea’s has an estimated 11
billion barrels2 of untapped oil and 190 trillion cubic feet of natural gas.

In terms of strategic significance from a military navigation standpoint, China’s control over the sea would likely
limit the military navigation of foreign countries. Moreover, according to the latest Pentagon report 3 on China’s
military, there is evidence that China is expanding a corps of nuclear submarines based in Hainan, an island at
China’s southern tip, and that the growing military buildup on its artificial islands in the South China Sea, appears to
be reaching a peak. Since 2013, China has constructed more than 3,000 dredged-up acres across seven features that
are now studded with long-range sensor arrays, port facilities, runways, and reinforced bunkers for fuel and
weapons4.

Key Events surrounding China and Philippines’ claim over Sovereignty over the South China Sea

China’s sweeping claims of sovereignty over the sea have antagonized competing claimants Brunei, Indonesia,
Malaysia, the Philippines, Taiwan, and Vietnam. As early as the 1970s, countries began to claim islands and various
zones in the South China Sea, such as the Spratly Islands, which possess rich natural resources and fishing areas.

In 1994, China’s occupation of the Mischief Reef in the Spratly Islands in 1994 caused tension between the
Philippines and China Relations. After rounds of consultations, both sides agreed to strive for a solution through
bilateral friendly consultation. However, bilateral relations between the Philippines and China have significantly
progressed in the following years and the Relations between the two countries peaked during the Arroyo
administration. By May 2000, the two countries signed a Joint Statement defining the framework of bilateral
relations in the 21st century. The growing bilateral relations were highlighted by the state visit to China of the then
Philippine President Gloria Macapagal-Arroyo in October 2001. By October 2004, Chinese Maritime Safety
Administration and Philippine Coast Guard conducted a joint sand table rescue exercise for the first time. China
National Offshore Oil Corp. and Philippine National Oil Company signed the "Agreement for Joint Marine Seismic
Undertaking on Certain Areas in the South China Sea" on September 1, 2004. In May 2005, Vietnam agreed to join
the Sino-Philippine cooperation. Oil companies from three countries signed the "Agreement for Joint Marine
Seismic Undertaking on Certain Areas in the South China Sea" in March 2005.

In April 2012, the Philippines dispatched a naval vessel to the waters surrounding the Scarborough Shoal, in
response to Chinese fishing vessels operating in the region. China responded by sending in its Marine Surveil- lance
vessels, resulting in a standoff. The Philippines withdrew its warship, and replaced it with a coast guard vessel,
while China dispatched its Fisheries Law Enforcement vessels. Barely one month later, it was reported that China
had imposed strict phytosanitary restrictions on Philippine bananas and Chinese travel agencies also suspended
travel to the Philippines. The Philippines later came to an agreement with China that entailed a simultaneous
withdrawal of both countries’ vessels from the area. The Chinese government and the Philippine embassy in China
denied that there was a connection between the trade restrictions to the standoff.

1
China Power Team. "How Much Trade Transits the South China Sea?" China Power. August 2, 2017. Updated January 25, 2021.
https://chinapower.csis.org/much-trade-transits-south-china-sea/
2
U.S. Energy Information Administration. http://www.eia.gov/countries/regions-topics.cfm?fips=SCS
3
Annual Report to Congress Military and Security Developments Involving the People’s Republic of China 2019, Pentagon,
Department of Defense. https://media.defense.gov/2019/May/02/2002127082/-1/-
1/1/2019_CHINA_MILITARY_POWER_REPORT.pdf
4
China’s South China Sea Militarization Has Peaked Artificial islands are becoming more trouble than they’re worth, Foreign
Policy, by Steven Stashwick, August 19, 2019. https://foreignpolicy.com/2019/08/19/chinas-south-china-sea-militarization-has-
peaked/
In July 2016 the Philippines won a landmark arbitration over certain marital claims in the South China Sea. The
special arbitral tribunal ruled in favor of the Philippines on most of her submissions. The tribunal also concluded
that China's historic rights claims over the maritime areas (as opposed to land territories and territorial waters) inside
the "nine-dash line" have no lawful effect if they exceed what's entitled to under United Nations Convention on the
Law of the Sea (UNCLOS). The Philippines v. China (PCA case number 2013–19) 5, also known as the South China
Sea Arbitration, was an arbitration case brought by the Republic of the Philippines against the People's Republic of
China on January 22, 2013, under Annex VII to the UNCLOS concerning certain issues in the South China Sea,
including the nine-dash line introduced by the Republic of China (Taiwan) since as early as 1947.

In March 2017, under the current Duterte Administration, Chinese ships were spotted in the Benham Rise, a
protected food supply exclusive zone of the Philippines. The Philippines, through its ambassador to Beijing has
officially asked China to explain the reported presence of one of its vessels in Benham Rise in the Pacific. A week
later, the Chinese Ministry of Foreign Affairs released a statement saying that China is honoring the Philippines'
sovereign rights over Benham Rise, and that the ship was passing by. However, the ship was revealed to have been
on the area for about three months. In May 2017, Philippine president Duterte revealed that Chinese president Xi
Jinping made an unveiled threat of war against the Philippines over the islands in the South China Sea during a
meeting in Beijing.

In April 2019, international satellites and local reports revealed that Chinese ships have swarmed Philippine-
controlled areas in the South China Sea The swarming continued for the entirety of April 2019. A few days before
the 2019 Philippine Independence Day, President Duterte stated that the country may go to war with China if China
claims disputed resources.

In March 2021, Philippine President Rodrigo Duterte expressed concern to China’s ambassador about 200 Chinese
vessels massing in the South China Sea. The boats were moored at the Whitsun Reef within Manila’s 200-mile
exclusive economic zone.6

If Chinese territorial expansion into the South China Sea succeeds, global geopolitics will render Southeast Asia
subordinate and compliant to China’s will. 7 For Brunei, Malaysia, the Philippines, Taiwan, China and Vietnam who
have competing territorial claims in the South China Sea, through which at least US$3.4 Trillion of annual trade
passes, they could lose up to 12% of their GDP if the geopolitical tensions were to force closure of key trade routes
in the region.8

Potential Economic Impact of Strained bilateral relationship between China and the Philippines

According to a report from the Philippine Department of Trade and Industry, China is our country’s top trading
partner, our 3rd largest export market, and our foremost import supplier. The Philippines and China bilateral trade
reached close to US$50 Billion in 2019, growing at an average of 17% in the last five years. Exports to China grew
from US$18.4 Billion in 2018 to US$ 19.5 Billion in 2019 while imports expanded by 16.02% in 2019. For the 9
months ending in September 2020, China remains the Philippines’ our 2nd top investment partner 9.

The Chinese Ministry of Commerce reported that between 2016-2018, project contracts signed by Chinese
enterprises in the Philippines increased 27.9% annually, with turnover increasing by 18.5% annually. In 2019,
newly-signed contracts were worth US$6.4 Billion with a growth of 102%. In 2020, newly signed contracts reached

5
The South China Sea Arbitration (The Republic of Philippines v. The People's Republic of China), The Permanent Court of
Arbitration. https://pca-cpa.org/en/cases/7/
6
Philippines, Vietnam press China over vessels massing in South China Sea, Reuters, by Neil Jerome Morales, March 25, 2021.
https://www.reuters.com/article/us-philippines-china-southchinasea-idUSKBN2BH13R
7
The South China Sea in Strategic Terms, Wilson Center, by Marvin Ott, May 14, 2019. https://www.wilsoncenter.org/blog-
post/the-south-china-sea-strategic-terms
8
The Geopolitics of International Trade in Southeast Asia, National Bureau of Economic Research, by Kerem Coşar
Benjamin D. Thomas, November 2020. http://www.nber.org/papers/w28048
9
Opening Remarks of Secretary M. Lopez, First Manila Forum for China-Philippines Relations, March 3, 2021
US$9.59 Billion, up 54% year-on-year. Considering the trade leverage China has over the Philippines, politically
driven economic sanctions to gain policy concessions in the South China Sea disputes.