How South China Sea tensions threaten global trade

The post-COVID era has been punishing for global trade. Lockdowns and factory closures sparked supply chain delays worldwide and helped fuel decades-high inflation.

The Suez Canal was closed for a week in 2021 after a container ship got stuck. Attacks on shipping by Yemen-based Houthis and Iran over the past 10 months have forced a rerouting of container vessels from the Red Sea via Africa

And now China's military standoffs in the South China Sea could also impact the smooth flow of trade.

How important is the South China Sea for world trade?

Making up part of the western Pacific Ocean, the South China Sea sits between southern China, Taiwan, the Philippines, Indonesia, Vietnam, Thailand, Cambodia and Malaysia.

About a third of global maritime trade passes through the 3.5 million square kilometer (1.4 million square mile) seaway annually, according to the United Nations Conference on Trade and Development (UNCTAD). 

Around 40% of petroleum products traded globally are delivered via the sea every year.

In 2016, an estimated $3.6 trillion (€3.29 trillion) worth of goods and commodities traveled the seaway, according to the Washington-based Center for Strategic and International Studies (CSIS). Another estimate put the figure as high as $5.3 trillion.

Researchers at Duke University in North Carolina calculated that total trade through both the South China Sea and the East China Sea — which lies between China, the two Koreas and Japan — is worth $7.4 trillion per year.

Tens of thousands of cargo vessels move through the South China Sea every year, carrying around 40% of China's, a third of India's and 20% of Japan's trade with the rest of the world, according to CSIS data. 

Out of all of Asia, the three countries' economic security is most closely tied to the smooth running of the waterway. The South China Sea is a vital crossroads for both intra-Asian trade as well as for commerce with the rest of the world, especially Europe, the Middle East and Africa.

What makes the South China Sea such a controversial issue?

Beijing claims almost all of the South China Sea as its own, angering its neighbors who say China's territorial ambitions cut into their exclusive economic zones. China ignored a 2016 ruling by an international arbitration court in The Hague, Netherlands, that Beijing has no legal or historical basis for its expansive claims under international law.

The Chinese military has staged increasingly aggressive actions in the seaway recently, including clashes with Filipino ships, fueling fears of a full-scale conflict. The United States has repeatedly warned that it is obligated to defend the Philippines if the Filipino military were to be attacked, including in the South China Sea.

Vietnam filed a claim last month with the United Nations for an extended continental shelf beyond the current 200 nautical miles (370 kilometers) in the seaway. The Philippines made a similar move in June.

China also regards Taiwan, which split with the mainland at the end of a civil war 75 years ago, as a renegade province with which it must eventually be reunified. Concerns that Beijing may use military force to bring the democratic island under its control have further raised tensions in the South China Sea.

Why is the South China Sea contested?

The South China Sea is estimated to hold about 5.38 trillion cubic meters (190 trillion cubic feet) of proven and probable natural gas and 11 billion barrels of oil reserves, according to the US Energy Information Administration.

The disputed waters also contain large deposits of rare-earth minerals crucial to China’s technological ambitions, including electric vehicle batteries and advanced electronics.

Some estimates suggest the Pacific Ocean contains a thousand times more rare-earth minerals than the currently known land reserves, more than half of which are controlled by China and are needed for the transition to cleaner energy. 

Could the China and Middle East tensions converge?

Since late last year, global trade has been hurt by attacks by Iran-backed Houthi rebels in the Red Sea off Yemen. The Houthis ordered drone and missile strikes on commercial shipping in response to Israel's offensive against Hamas militants in Gaza.

The big shipping firms have diverted their vessels from the Red Sea route, which includes the Suez Canal. Instead, cargo ships traverse the Cape of Good Hope in southern Africa, adding around 10 days to the average journey from Asia to Europe. The move has spiked shipping costs due to higher insurance and diesel prices, which caused delays at container ports in Europe and Asia.

As the Israel-Hamas war threatens to spill over into the wider Middle East region, with Iran reported to be planning a direct attack on Israel any day, there are fears that Tehran could close another major chokepoint for trade, the Strait of Hormuz. The narrow waterway sits at the mouth of the Persian/Arabian Gulf and handles almost a third of the world's oil trade.

Iran has regularly targeted commercial vessels in the strait in recent years, and the West would consider any further attacks a major escalation. If shipping firms choose to avoid Hormuz, maritime trade could face additional delays and even higher costs.

If tensions between China and its neighbors deteriorate further, it could open a third front in the global shipping crisis. Maritime firms may look to avoid sections of the South China Sea. Subsequent hold-ups and price hikes could cause shortages of goods and commodities and cut vital revenue to key Asian ports, including those in Singapore, Malaysia and Taiwan.

Where is the biggest chokepoint in the South China Sea?

While the main current tensions are between China, the Philippines and Taiwan, the real threat to trade in the South China Sea could come in the Malacca Strait, which lies further south between Malaysia, Indonesia and Singapore.

Last year, 23.7 million barrels of oil and petroleum products were moved through the strait per day, according to the US Energy Information Administration (EIA). The figure was 13% higher than through the Strait of Hormuz.

The Malacca Strait is just 64 kilometers wide at its narrowest point and is already vulnerable to congestion and collisions. Over the years, the waterway has seen many incidents of robbery and piracy. 

Some geopolitical and military experts have predicted that if China were to invade Taiwan, for example, the US and its allies could blockade the Malacca Strait, limiting Chinese access to oil as well as exports from Asia's largest economy.

Edited by: Uwe Hessler