On 12 July, the Hague-based Permanent Court of Arbitration (PCA) delivered a historic ruling under the UN Convention on the Law of the Sea (UNCLOS) by declaring that China has no legal claims to resources based on its ‘nine-dash line area’ in the South China Sea (SCS). It also said China is violating, in some areas, the Philippines’ exclusive economic zone (EEZ) rights by exploring potential hydrocarbon reserves, fishing, and building artificial islands for strategic aims. Another significant conclusion from the tribunal ruling is that all contested Spratly Islands are considered as rocks and thus entitle the sovereign country to a mere 12-nautical-mile territorial sea. In consequence, seas beyond China’s potential sovereignty on those islands would belong to the Philippines’ EEZ. At first, Beijing furiously reacted by reiterating that it opposed to this arbitration by (what it considers) an illegitimate tribunal – China is a party to the UNCLOS, though – and hence strongly rejects the PCA’s verdict and remains determined to ensure its sovereignty rights are respected. Though Manila emerges strengthened by the ruling, its sober reaction points at a low profile approach in future negotiations with Beijing in order to diffuse tensions.

Impact on country risk

Manila had introduced this case to the UNCLOS with the hope to stop, through legal means, China’s creeping expansion in the SCS in a zone claimed by Manila. In theory, the ruling stating that China has no historic economic rights in the ‘nine-dash line area’ might affect its future claims in the SCS in ongoing disputes with other claimants (including Vietnam and Taiwan). The latter and the US are expected to revert to this ruling and promote respect of international law to defend maritime rights. However, in practice, the future will largely depend on how claimants use the ruling and how China behaves. In the short term, Beijing and new Philippine President Duterte should opt for bilateral talks to ease tensions. The best practicable solution might be a joint resource development in the disputed areas. Nevertheless, negotiations are going to be very complicated as China sets as a prerequisite not to discuss the ruling, which is something the Philippines disagree with. Beijing is thus likely to simultaneously flex its muscles via various actions in the SCS. In the medium term, even though all players want to avoid military escalation, regional tensions and indirectly those with the US are likely to stay, probably intensify and thus represent a persisting high war risk in the region. As a political and economic heavyweight, China will continue to develop its military capacity and assert its authority and sovereignty – notably by pursuing the construction of islands in the SCS in defiance to the UNCLOS ruling – in what it considers to be an internal sea and a natural zone of influence of the highest geopolitical interest.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com