We have been waiting to see what a Trump presidency really means for the Asia Pacific region and US-China relations more specifically. There has been growing concerns about a possible trade war between the two countries which could in turn threaten already anemic global growth.

Recent comments by the Trump administration however have given rise to the much greater concern of outright conflict between China and the United States with a spokesperson for the Trump administration indicating that the United States would prevent China from taking over territory in international waters in the South China Sea, something Chinese state media has warned would require Washington to “wage war.”

Reuters reported that the comments were made at a briefing from White House spokesman Sean Spicer and signalled a sharp departure from years of cautious U.S. handling of China’s assertive pursuit of territorial claims in Asia.

“The U.S. is going to make sure that we protect our interests there,” Spicer said when asked if Trump agreed with comments by his secretary of state nominee, Rex Tillerson. On Jan. 11, Tillerson said China should not be allowed access to islands it has built in the contested South China Sea.

“It’s a question of if those islands are in fact in international waters and not part of China proper, then yeah, we’re going to make sure that we defend international territories from being taken over by one country,” he said.

China responded by saying the United Sates was not a party to dispute in the South China Sea stating that “We urge the United States to respect the facts, speak and act cautiously to avoid harming the peace and stability of the South China Sea”.

These comments from the Trump administration signify a real risk that has the potential to lead to outright conflict, a risk we have not truly experienced since the end of the Cold War. It is becoming apparent that the Trump Administration fails to recognise the immensely strong place that South China  Sea occupies in the psyche of Beijing and its view of ‘One China’. The South China Sea is not solely a key strategic issue for China but also a defining nationalism issue.

As my colleague Mathew Casey noted in his article “China: The Reluctant Superpower” China do not possess strong hegemonic ambitions in the sense that we have come to expect of superpowers and Beijing has proven to be very pragmatic in conducting international relations, however the South China Sea remains one those few but ardently important issues that could provoke Beijing into a direct military response. Up until now Beijing has been characteristically patient in evaluating the true nature of the Trump presidency but if this is the hand that Trump decides to play, then enormous political and security implications lay ahead.

Each year, $5.3 trillion of trade passes through the South China Sea; U.S. trade accounts for $1.2 trillion of this total and most other economies around the world have at least some exposure to this trade flow. The ramifications of a conflict in this area, or a naval blockade by either side, would have disastrous global economic ramifications. Companies with direct exposure to such an event should be ensuring that their contractual arrangements, including International Commercial Terms, and War Risk Insurance is all in order as well as ensuring that appropriate risk management procedures are in place.

While we have been playing down the risk of direct conflict in the South China Sea, we would suggest to all Risk Managers that they consider evaluating and adding this risk to their Enterprise Risk Management system as a precaution.

At Pozières Consulting we will be following this story closely and providing timely updates to all our clients.

 

Pozières Consulting Inc is a Political Risk Advisory firm, providing bespoke analysis and business intelligence through our worldwide network of analysts and sources. We work with clients to identify, analyse and contextualise strategic Political Risks and turn them into tangible, actionable business insights. We utilise a combination of in-depth thematic research, innovative analytic tools and tailored business intelligence gathering to provide a bespoke service to clients. For comprehensive Political Risk advice and a confidential consultation, contact us at info@pozieresconsulting.com