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The Philippines' Misguided Plan to Stop South China Sea Tensions
The Philippines' Misguided Plan to Stop South China Sea Tensions
The Twists and Turns along China’s Belt and Road
The Twists and Turns along China’s Belt and Road
Op-Ed / Asia

The Philippines' Misguided Plan to Stop South China Sea Tensions

Originally published in The National Interest

Cooperating on oil won't work - but fishing might.

Former Philippine president Fidel Ramos was in Hong Kong earlier this month to meet his “old friends” in hopes of breaking ice with Beijing. In a statement issued Thursday, Ramos and his interlocutors, including prominent Chinese diplomat Fu Ying, said they discussed the way forward “in the spirit of universal brotherhood and sisterhood for peace and cooperation between the two countries.”

In the geopolitical equivalent of David versus Goliath, China was legally thrashed by the Philippines last month in an international arbitration over their disputes in the South China Sea. In the aftermath, both are showing desires to mend fences. The parties, however, will squander the opening if they keep circling around the tried-and-failed idea of joint development of energy.

Minutes after a tribunal under the Permanent Court of Arbitration ruled against a raft of Chinese maritime claims and activities, China issued a statement denouncing the Philippines, the tribunal and its ruling, but also said it was willing to “make every effort to reach transitional arrangements, including conducting joint development in relevant waters.”

Manila had already signaled interest. A few days before the tribunal ruled, Foreign Minister Perfecto Yasay said the Philippines wanted talks with Beijing to see how “we can utilize and benefit mutually from the utilization of the resources.”

First raised by Deng Xiaoping and repeated by subsequent Chinese leaders, joint development has become Beijing’s reflex response to its acrimonious maritime relations. Desperate for energy and incapable of developing it alone, Manila has long hung its hopes on Chinese partnership. The ruling may have rekindled the political will to collaborate, but has also legally snuffed out the prospect.

In a direct rebuke to the most controversial and sweeping component of China’s claims, the tribunal declared that “there was no legal basis for China to claim historic rights to resources within the sea areas falling within the ‘nine-dash line.’”

The line, also known as the U-shaped line or the cow’s tongue, swoops down from China’s coast to take in most of the South China Sea. It slices into the Exclusive Economic Zone (EEZ) claimed by the Philippines, as well as into those by Brunei, Indonesia, Malaysia and Vietnam. China has not specified the line’s coordinates, nor articulated exactly what it is claiming within it, but its actions—evicting other claimants’ oil and gas surveillance vessels and shielding Chinese fishermen from other coastal states’ law enforcement—suggest it asserts entitlement to natural resources within it.

The Tribunal also ruled that none of the land features in the Spratly chain, off the Philippine coast and a few hundred nautical miles from China, are legally “islands.” That means no country, China included, can legally claim an EEZ, which extends two hundred nautical miles outward and comes with exclusive rights to resources.

The ruling dramatically shrinks the scope of maritime zones that China can lawfully claim and leaves little chance that they overlap with the Philippine EEZ. The two sides are now hard-pressed to define a suitably disputed area with promising hydrocarbon prospects to collaborate in.

The Philippines’ Hunger for Energy

The Philippines may indeed be hungry enough for energy that it would consider trading off sovereign rights for Chinese capital, technology and freedom from harassment. The country imports more than 90 percent of its crude oil and petroleum products. Its only natural gas field is expected to run dry within the next fifteen years, while demand is projected to rise.

Manila has neither the funds nor the technical capacity to develop new energy sources in the South China Sea without foreign partnership. The only sizable commercial-grade natural gas reserves are on the Reed Bank, which Manila claims as part of its EEZ but which is within Beijing’s nine-dash line. International conglomerates have stayed away for fear of offending China.

Until the recent ruling, Manila’s only hope for developing the Reed Bank has been linking hands with China, and there has been no lack of effort. In 2003, the Philippines was short on options after failing to attract international investors to develop indigenous hydrocarbon resources. “We imported almost 99.9 per cent of crude oil and petroleum products. It was . . . the era of $100 per barrel of oil. We wanted indigenous oil but couldn’t explore ourselves in our backyard,” lamented Eduardo Manalac, then Philippine National Oil Company (PNOC) president and CEO and energy undersecretary.

Formerly a senior executive at Phillips Petroleum, Manalac had developed friendship with counterparts at China National Offshore Oil Corporation (CNOOC). “My instinct was, why can’t I ask these guys to help out with joint development? So I presented this to the [Philippine] president, and she enthusiastically approved.”

At the time, then president Gloria Macapagal Arroyo was presiding over a “golden age” of Sino-Philippine relations underwritten by generous Chinese infrastructure loans. During her 2004 state visit to Beijing, PNOC and CNOOC signed an agreement to collaborate on seismic surveys of the disputed waters. The agreement evaded sovereignty concerns by stating that it would “not undermine the basic position held by the Government of each Party on the South China Sea issue.”

The area covered by the bilateral agreement ended up overlapping with Vietnam’s claims. After six months of strong objection, Hanoi reluctantly joined the deal. The ambitious project covered an area of 143,000 square kilometers.

Under the tripartite agreement, CNOOC collected data that was processed in Vietnam and subsequently brought to the Philippines for interpretation. The parties performed their jobs dutifully and developed cordial working relations, and initial analysis turned up promising results for commercially recoverable deposits. They were, however, soon to encounter a debilitating backlash.

In late 2007, a Manila press conference was held to publicize the surveys. “It was then the media asked about the location of the area, and the controversy began,” said Guillermo Balce, then energy undersecretary. Though the size of the area had initially been made public, its location had remained confidential. Press articles, especially one in the Far Eastern Economic Review, revealed details of the deal, including its location. The author alleged the Philippines had “made breathtaking concessions in agreeing to the area for study,” and “about one-sixth of the entire area, closest to the Philippine coastline, is outside the claims by China and Vietnam.”

Around the same time, sentiment was turning against Arroyo and Chinese investments. The president and her husband were accused of corruption in a $329 million telecommunications deal with a Chinese company. Revelations about the joint exploration deal further energized her critics. Opposition lawmakers filed resolutions seeking probes into whether the administration had compromised sovereignty and sold out national territory for an $8 billion loan package. Some urged impeachment.

Opponents also challenged the project’s constitutionality. Under the Philippine constitution and the Oil and Gas Exploration and Development Act, Philippine entities must own at least 60 percent of the capital of a natural resource project in Philippines waters and the government must retain at least 60 percent of the net profit. Collectively, they are known as the 60/40 rule, which the tripartite agreement—with cost split evenly three ways—did not appear to meet. The Supreme Court was petitioned in May 2008 to nullify the agreement.

Besieged by legal challenges and political troubles, the Arroyo administration let the joint exploration agreement expire on July 1, 2008, despite China’s and Vietnam’s desire to renew.

Another attempt at Sino-Philippine cooperation also miscarried. In May 2012, Philex Petroleum—a private Philippine company and majority shareholder of Forum Energy—approached CNOOC and offered it an investor role in a block on the Reed Bank. CNOOC reportedly responded “positively,” yet ultimately declined, as its participation would have to follow the 60/40 rule and could be interpreted as recognizing Philippine sovereignty. Talks have continued on and off, most recently in July 2014, but without agreement.

Pro-business members of the Philippine Congress have introduced bills to loosen the 60/40 rule but failed to gain traction.

If Manila were to now propose joint development on the Reed Bank on Chinese terms—even split of ownership and profit—it would be conceding sovereign rights to an area that China has no legitimate claim to. President Rodrigo Duterte may be willing to fudge some of the issues, but such a deal would be politically perilous and legally vulnerable. Beijing could not sign off on a deal involving a Chinese company participating as a minority shareholder, because it would be seen as retreating from its own claim and risking nationalist rage.

It remains to be seen how Beijing might react were Manila to reopen blocks in the disputed waters for international bidding, but the prospect for China and the Philippines to jointly develop hydrocarbon resources in the South China Sea, for now at least, is dim. It is time to give up wishful thinking and base cooperation on reality.

Fishing for Cooperation

The tribunal has left space and hope for the parties to share and jointly manage fisheries. Fish stocks may be less glamourous than hydrocarbons, but they are more strategically important from two perspectives: disagreements over fishing rights have led to most of the clashes in the area, and a collapse in stocks from overfishing would present an existential threat to many of the claimant governments—some 210 million people in the countries surrounding the South China Sea are estimated to depend on fishing and its associated industries for their food and livelihood.

The ruling states that both Filipino and Chinese fishermen have the right to pursue their traditional livelihoods in the surrounding territorial waters—a twelve-nautical-mile band—of the Scarborough Shoal, regardless of its sovereignty. Before Beijing sealed off the area during a two-month standoff in 2012, the waters had long been accessible to fishermen of both countries. With the ruling, China could reopen the waters to Filipino fishermen without detracting from its sovereign claims. This restoration of the status quo ante would ease tensions at little cost to Beijing.

In addition, in ruling that no land feature in the Spratly group qualifies as natural islands capable of generating EEZs, the tribunal has classified a sizable swath of the waters there as “high seas” in which all states enjoy “freedom of fishing.” That leaves space for all claimants to jointly manage fisheries.

Overfishing and ruinous fishing practices are devastating the South China Sea’s fish stocks, which “have fallen 70% to 95% from 1950s levels, according to researchers at the University of British Columbia” as cited in the Wall Street Journal. Cooperation in sustainable fishing would not only build trust, but also help ensure the sustainability of a vital source of food and income. If the South China Seas fisheries continue to be unregulated and unmanaged, the fish stocks could drop “by as much as an additional 59% from 2015 levels in the next 20 years.”

Contributing to a sustainable fishing regime would help China salvage its reputation. The tribunal ruled that China had failed to prevent its fishermen from using fishing practices that destroy the environment and poaching endangered species. China can establish itself as a guardian of the marine environment and biology by participating in or even leading cooperation on sustainable fishing and enforcement against illegal activities.

The tribunal’s ruling provided legal clarity. The attendant international attention lit a fire under China’s seat to show goodwill and reduces the daunting power asymmetry that faces the Philippines. An opportunity for collaboration is presented—in fishing, not drilling.

Contributors

Former Senior Analyst, China
YanmeiXie
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Adam Lee
PhD candidate at Johns Hopkins University’s School of Advanced International Studies
Chinese shipping containers sit abandoned on a remote plateau in Kyrgyzstan, one of the many countries through which China's Belt and Road Initiative will run, on 19 March 2015. Martin Saxer
Commentary / Asia

The Twists and Turns along China’s Belt and Road

China’s trillion-dollar Belt and Road Initiative could potentially transform relations with over 60 countries across Eurasia, Africa and beyond. But to bring the concept to fruition, Beijing must overcome mammoth logistical obstacles, navigate fragile political situations and placate growing regional apprehension surrounding its ambitions.

“The project of the century” is how Chinese Foreign Minister Wang Yi touted the Belt and Road Initiative to the world when addressing the UN General Assembly on 21 September. It was only the latest in a series of pronouncements and events, including a Belt and Road Forum in Beijing in May and the ninth BRICS (Brazil, Russia, India, China and South Africa) summit in Xiamen in early September, choreographed to position China at the vanguard of a new stage of globalisation. Step by step, China is demonstrating that the Belt and Road is now the guiding framework for its international economic statecraft.

Formally launched in 2013, the vision combines a Silk Road Economic Belt along the ancient Eurasian routes, a 21st Century Maritime Silk Road through the South China Sea and across the Indian Ocean, and other Asian transportation corridors, logistics hubs and investments. China hopes to construct a network that will connect remote economies and drive renewed prosperity. Collectively dubbed the Belt and Road, these existing and proposed projects leverage China’s strengths—vast reserves of capital, business savvy, engineering expertise, and production and construction capacity—to generate geopolitical influence and reshape trade patterns.

The Belt and Road is conceived of as a multipurpose umbrella for foreign policy and domestic development. It is both a means to open markets, export overcapacity, generate employment, reduce regional inequalities, promote political stability and security through prosperity, as well as ultimately restore China’s spheres of influence to their historic highs. It is estimated to involve a trillion dollars in projected financing.

It will take more than public relations, propaganda and public pronouncements to persuade many participants that the economic benefits outweigh their apprehensions [...]

Many observers are understandably sceptical of such an ambitious, expensive and risky vision. While China’s remote borderlands showcase world-class domestic transportation infrastructure and special trade and economic zones, the condition of roads and other structures declines abruptly beyond China’s frontiers. Such situations frustrate a China that has depended on international trade for its stunning rise and is now facing slowing GDP and diminishing returns on investment at home. There is a sense of ambition and economic dynamism – or at least a slowing simulacrum of it based on state-financed fixed asset investment – bursting at China’s seams. The hope is that by exporting its economic model to over 60 countries across Eurasia, Africa and beyond, and fostering alternate routes to Europe, it can rekindle global and domestic growth.

Navigating Regional Relations

To put its vision into practice, China will have to reckon with many twists in the Belt and turns in the Road. It will take more than public relations, propaganda and public pronouncements to persuade many participants that the economic benefits outweigh their apprehensions about China’s expanding geopolitical footprint.

The starkest example is China’s border with North Korea, where a recent Crisis Group research trip was rattled when it coincided with Pyongyang’s sixth nuclear test at Punggye-ri on 3 September. China has set up trade and processing zones around the border cities of Dandong, Yanji and Hunchun and linked them to the provincial capitals with high-speed rail. The missing link is access to the sea through North Korea’s Rason port. For now, these plans are stalled by international sanctions and increasingly frosty relations between Beijing and a truculent Pyongyang that seems to loathe China while paradoxically depending on it for survival.

While North Korea marches to its own drumbeat, frictions elsewhere are a direct result of China’s own growing power and presence. Beijing has often struck an assertive, even aggressive tone that is discordant with the Belt and Road’s peaceful message. This has manifested through a growing strategic rivalry with the U.S. and its allies, maritime sovereignty disputes in the East China Sea and South China Sea, tensions across the Taiwan Strait, and pressure on South Korea over the deployment of America’s Terminal High Altitude Area Defense (THAAD) anti-missile system. At home, China’s increasingly restrictive national security laws and persistent barriers to market entry have cooled the ardour of many foreign companies to do business in China. Together, these policies stoke tension, fear and mistrust that undercut China’s Belt and Road overtures.

The recent Himalayan border standoff with India in Doklam, a contested territory on the border between China and Bhutan, is but the latest illustration that while roads can connect, they can also divide. Although the spat was hastily patched up ahead of Indian Prime Minister Narendra Modi’s attendance at the September BRICS summit, it underlined how Beijing’s new ambitions on land and sea have unnerved India with fears it could be encircled while its neighbours are co-opted – even as many in New Delhi say that the economic relationship with China is valuable. India’s challenge is to balance the geopolitical and economic aspects of the relationship. As in the South China Sea, Chinese construction activities in the Himalayas have acquired an ominous strategic shadow for its neighbours.

Beijing has often struck an assertive, even aggressive tone that is discordant with the Belt and Road’s peaceful message.

Relations with another BRICS representative, Russia’s Vladimir Putin, are much warmer thanks to good personal chemistry with President Xi Jinping, a regular schedule of bilateral meetings, and increasingly aligned interests due to Russia’s estrangement from Europe and simmering disputes with Washington. But despite the friendly optics, Xi and Putin have complicated issues to manage, particularly in Central Asia where their two initiatives – China’s Silk Road Economic Belt and Russia’s Eurasian Economic Union – have divergent purposes and priorities and face many obstacles. Despite having committed to cooperating in principle, China and Russia could see increased rivalry due to competing visions.

Still, the example of Russia and Central Asia suggests the BRICS and other participants in the Belt and Road have an opportunity to shape China’s rise along a path of mutual benefits. This will require governments to take the initiative seriously and be strategic about their responses, weighing both economic and political implications. While each country pursues its own interests on the Belt and Road, they may also find it helpful to share insights and best practices on engaging with increasingly influential Chinese actors.

Expertise First, Development Second

Applied wisely, the Belt and Road and supporting institutions could be vehicles for China to play an increasingly important, cooperative and beneficial role in the international system. The bulk of financing is likely to come from the China Development Bank, China Exim Bank, New Silk Road Fund and state banks. The Asian Infrastructure Investment Bank and New Development Bank can add global expertise and legitimacy as well as funding. Together, they could enable China to deploy capital, technology and engineering capacity to help millions escape poverty, just as it has done at home. But this will have to be balanced with factors at the country and local level. Belt and Road projects will have to contend with a myriad of complex political, security and social situations. These include terrorism, violent extremism, inter-ethnic tensions, xenophobia, brittle authoritarian regimes, and political systems and behaviours that perpetuate high levels of corruption and inequality.

China’s basic premise is that economic development will alleviate these problems. In some ways it may, but if prosperity is unequally shared, local communities are not consulted on projects that affect them, and reforms of institutions and systems of governance fail to keep pace with inflows of investment, then the Belt and Road could make fragile situations worse. Some Chinese analysts argue that so long as the interests of ruling elites in Belt and Road countries are aligned with China’s, problems can be managed. History suggests otherwise. No wonder many of China’s own enterprises are cautious about putting costly and uncertain Belt and Road projects on their balance sheets. As illustrated in our report, China’s Foreign Policy Experiment in South Sudan, Beijing’s investments in insecure places come with complex risks and dilemmas that challenge its traditional aversion to intervention.

To mitigate those risks, China and its partners will need to deepen their understanding of neighbouring countries and situations, and be more transparent, inclusive and accountable in implementing projects. This could include: consistently engaging with affected communities; taking their interests into account; assessing the political as well as economic implications of projects; and ensuring that benefits are not simply divided as spoils among unaccountable elites in backroom deals. Just as necessary will be to study the drivers of terrorism and appeal of extremist ideologies, and investing in more nuanced policy responses. Crisis Group’s research illuminates many of these challenges in Belt and Road countries across South East Asia, South Asia, Central Asia, the Middle East and North Africa, and the Horn of Africa. Our research on Jihad in Modern Conflict also has relevant insights for counter-terrorism across much of the Belt and Road.

Some Chinese analysts argue that so long as the interests of ruling elites in Belt and Road countries are aligned with China’s, problems can be managed. History suggests otherwise.

Companies, financial institutions and other organisations involved in Belt and Road projects will have to be more rigorous in assessing and addressing political and security risks. Quantitative metrics and vague strategic frameworks are not enough. It requires extensive field research, engaging on the ground and making qualitative judgements. China’s own capacity to assess political and country risk is not keeping pace with its sprinting ambitions. To rectify that, Beijing should empower its policymakers, universities and think-tanks to engage freely with foreign counterparts and provide frank assessments of pitfalls and policy flaws.

Through his vision of a new Silk Road, President Xi has invoked the potent historical imagery of China as a pole of commerce, prosperity and stability. He and his advisers would do well to also draw inspiration from another high point in China’s long history – the Tang Dynasty, which flourished in large part because of its cultural and intellectual openness to the world. By ensuring that its policies and actions live up to the lofty rhetoric, China has a chance to truly foster the soft power, influence and admiration that it clearly seeks.

This text was changed on 3 October 2017 to rectify the original version that incorrectly stated that North Korea's nuclear test at Punggye-ri was carried out on 3 August instead of 3 September.