Saturday, January 23, 2016

Good News, World! You Can Stop Worrying About the South China Sea!


There has been a concerted campaign to depict the South China Sea as an indispensable artery for commercial shipping and, therefore, a justifiable object of US attention and meddling.
This flagship of this effort is invoking the “$5 trillion dollars” worth of goods that pass through the SCS each year.  Reuters, in particular, is addicted to this formula.
Here’s seven Reuters news stories within the last month containing the $5 trillion figure:
What interests me is that these seven articles reflect the work of six reporters and seven editors (seven to six! Glad to see Reuters has a handle on the key ratios!) in five bureaus and they all include the same stock phrase.  How’s that work?  Does headquarters issue a ukaz that all articles about the South China Sea must include the magic $5 trillion phrase?  Does the copyediting program flag every reference to the South China Sea omitting the figure?  Or did the reportorial hive mind linking Beijing, Manila, Hanoi, Hong Kong, and Sydney spontaneously and unanimously decided that “$5 trillion” is an indispensable accessory for South China Sea reporting?
I guess it’s understandable.  A more accurate characterization of the South China Sea as “a useful but not indispensable waterway for world shipping whose commercial importance, when properly exaggerated, provides a pretext for the United States to meddle in Southeast Asian affairs at the PRC’s expense” is excessively verbose and fails to convey a sense of urgency. 


The kicker, of course, is that the lion's share of the $5 trillion is China trade, and most of the balance passes through the South China Sea by choice and not by necessity.

In other words, the only major power with a vital strategic interest in Freedom of Navigation in the South China Sea is the People’s Republic of China.  And the powers actually interested in impeding Freedom of Navigation down there are...pretty much everybody else, led by the United States.

Obviously, words fail me.
Instead, let’s look at a map. 
Here’s the map not to look at.  The oft-reproduced and abused US Department of Energy deranged tentacled monster hydrocarbon liver fluke writhing in the South China Sea map:


Instead, let’s look at  Marine Traffic, a most interesting website which offers dynamic real time ship information and some useful historical data free of charge, and provides an idea of the actual shipping patterns in the region.
 
If you select the “density map” option and zoom in, you get this view of the busiest shipping routes (green lines) and busiest ports (red blobs) in and around the South China Sea:

Note that marine traffic in the South China Sea does a few things.  First of all, much of it goes, unsurprisingly, to the Peoples Republic of China and Hong Kong.  Second, except when friendship-building volleyball games in the middle of the SCS are on the agenda, Vietnam, Indonesia, Taiwan, and the Philippines are largely served by coast-hugging routes outside the PRC’s dreaded Nine-Dash-Line. 
Third, the rest of the traffic that transits the SCS pretty much on a straight line is headed for Japan and South Korea.  This would seem to support the perception that Japan and South Korea, our precious allies, need protection against threats to their supply of hydrocarbon-based joy juice, their economies, indeed their national security and ways of life emanating from the overbearing PRC presence on the South China Sea lifeline.
Not quite.
The strategic insignificance of the South China Sea to Japan and the Republic of Korea has been well known since the 1990s, when "energy security" became an explicit preoccupation of Japanese planners.
 Here is an insightful passage from a book by Euan Graham, Japan's Sea Lane Security: A Matter of Life and Death?, published in 2005.
The cost to Japan of a 12-month closure of the South China Sea, diverting oil tankers via the Lombok Strait and east of the Philippines, has been estimated at $200 million.  A Japanese estimate puts the cost as basically the same to that imposed by a closure of the Malacca Strait, requiring 15 additional tankers to be added to the route, generating an extra $88 million in shipping costs.  This is roughly corroborated by the reported findings of a joint study conducted by the JDA and the Indonesian authorities in the late 1980s, which put the number of extra tankers required to divert around the South China Sea via Lombok and east of the Philippines at 18.
...The volume of oil shipped to Japan from the Middle East is evenly split between Lombok and the Straits of Malacca...
Here’s a nice map showing the Lombok route, also mentioning the only difference with Malacca—two more days in sailing time over twenty days for the straight shot through the South China Sea.  Also note, as this graphic does, that the biggest biggest crude carriers, 300,000 DWT and up, can only take the Lombok route.
 

What does two extra days on the water mean?  Per Graham,
...Based on an oil import bill of $35 billion in 1997, [a cost of $88 million for diverting through Lombok] accounts for 0.3% of the total. 
To update these figures, the oil/tanker market has gone pretty gonzo recently, as everyone is aware.  Crude prices have gone down, while tanker rates are currently upupup as importers stampede buy cheap strategic reserves and, on occasion, hold the tankers for temporary storage instead of releasing them back into the wild.  Most recent shipping figure I could find was about $2.50/barrel from the Gulf to Japan.
Let's assume $30/barrel crude plus $3/barrel shipping costs.  Japan imports about 2 billion barrels per year.  That's $6 billion dollars.  And we assume the Lombok route adds 10% or $0.30/barrel to the shipping cost.  That's another $600 million dollars against $60 billion in total crude costs.  1%.  By a funny coincidence, $600 million is also about 1% of the annual Japanese defense budget.  Japan's GDP: $4 trillion dollars.
So is Japan going to light off World War III to keep the purportedly vital SCS SLOC open and save 1% on its oil bill?
Here's one fellow who doesn't think so:
CSD [Collective Self Defense] will not allow minesweeping ops in SCS/Malacca Strait as unlike Hormuz there are alternative routes.
That's a statement that notorious appeaser, Prime Minister Shinzo Abe, made in the Diet, as reported on Corey Wallace's Twitter feed.
Republic of Korea: imports less than 1 billion barrels per annum.  Cost of the Lombok detour: maybe $270 million.
Bottom line, everybody prefers to use Malacca/South China Sea to get from the Persian Gulf to Japan and South Korea.  It’s the straightest, it’s the cheapest, there’s Singapore, and, in fact, shipowners looked at the economics and decided to dial back the construction of “postMalaccamax VLCCs” (Very Large Crude Carriers) so they’d always have the option of going through the Malacca Strait and South China Sea. 
But if that route goes blooey, they can always go via Lombok and the Makassar Sea.  Just a little bit more expensive.
So, the South China Sea is not a critical sea lane for our primary North Asian allies Japan and the Republic of Korea.
What about the threat to the Antipodes?  Core ally Australia?  If the PRC shut down the South China Sea, what would that do to Australian exports (other than to China, naturally)?
From Euan Graham’s volume quoted above:
Iron ore and coke shipments from Australia account for most of the cargo moved through the Lombok Strait...Lombok remains the principal route for bulk carriers sailing from Western Australia to Japan.
They use Lombok already! 
As to the South China Sea factor, Sam Bateman, a retired Royal Australian Navy commodore who now think-tanks in Singapore, debunked a dubious piece of numerology by Bonnie Glaser:
Bonnie Glaser has recently claimed that approximately 60 per cent of Australia’s seaborne trade passes through the South China Sea…
When measured by value, the figure of 60% of our seaborne trade passing through the South China Sea is way off the mark. Based on the latest data for Australia’s overseas trade, it mightn’t even be half that—and about three-quarters of it would be trade to and from China. Thus the notion of a threat to our seaborne trade from China is rather a non-sequitur.
Doing the math…25% of 30%...that’s 7.5% of Australia’s total seaborne trade by value through the South China Sea isn’t going to the PRC.  Back of the envelope, that’s A$40 billion, about half of which is back and forth with Singapore, which could be end-arounded by entering the Malacca Strait from the west and avoiding the South China Sea completely.  So maybe A$ 20 billion theoretically at risk in the unlikely event that the PRC decided to close the SCS completely to Australian shipping.  By contrast, Australian two way trade with the PRC: A$152 billion.
If you are wondering why there is a “spirited debate” as to whether confronting the PRC, the biggest customer for Australian ore and real estate, in the South China Sea serves Australia’s national interest, I think you have your answer.
Euan Graham, now Director of the Lowy Institute’s International Security Program, recently appeared on Australian television to remark that "geography doesn't change".  No kidding.
It's worth watching his appearance and his careful parsing of the South China Sea issue.
Notice he does not advance the canard that the South China Sea is a vital waterway for Australian commerce under threat from the PRC.  It’s more about Australia doing its best to act as a willing, nay eager, ally of the United States in Asia, or as Graham puts it paying “the alliance premium”.  And that “international law” thing.  And free movement of naval forces.
It should be clear by now that the South China Sea as a commercial artery matters a heck of a lot more to…China, unsurprisingly, than it does to Japan, South Korea, Australia, and the United States.
Here’s the funny thing.  The South China Sea is becoming less and less important to the PRC as well, as it constructs alternate networks of ports, pipelines, and energy assets.
The idea that the PRC will ever wriggle free of the maritime chokehold is anathema to the US Navy, which has staked its reputation, claims to a central geostrategic role, and budget demands on the idea that the US Navy’s threat to the PRC’s seaborne energy imports is the decisive factor that will keep the Commies in their place.  America’s interest in d*cking with the PRC in the South China Sea predates any Xi Jinping-related arrogance, expansionism, and island-building and indeed predates the appearance of any PRC Navy worthy of consideration.  It can be traced to the Office of Net Assessment’s 2004 report prepared via Booz, Hamilton for Donald Rumsfeld, Energy Futures in Asia. 
As I don’t think that report has been declassified, interested readers can check out this 2010 paper from the US Naval War College titled, “Your Pitiful Pipeline Plans Will Never Succeed, Silly Chinese!  Learn the Will of the Mighty US Navy and Tremble!” (actual title, China’s Oil Security Pipe Dream, not so far off the mark).
Indeed, Middle Eastern oil, oil that at the very least leaves the Middle East by ship, is probably going to be a big deal in China for decades.  But the PRC is trying to do something about it  in reckless disregard of the friendly and disinterested advice of the (Motto: Share and Be Nice!) USNWC.
Again, it helps to look a map.  The Belt and Road initiative is creating a lot of new channels to move energy and goods in and out of the PRC that don’t rely on the South China Sea.
While you’re at it, find the Andaman Sea.  It’s between Burma and India, to the west of the South China Sea and Malacca Strait.  The PRC has already built a terminal at Maday in Burma’s Rakhine State and twinned oil and gas pipelines to Kunming in China to, as The Hindu put it, “bypass the Malacca trap’.  

Those little red men, by the way?  Burma Army battalions.  Security of the pipeline is a big deal for the PRC, something that it is prepared to ensure even if it means blackmailing the Burmese government with the threat of unrest in the border areas, as Aung San Suu Kyi apparently already understands.
And for container shipment, the PRC apparently plans to jog the highspeed railway it’s building to Bangkok over to a new deep sea port down the coast from Maday in Burma at Dawei (instead of pursuing the perennial Thai pipe dream of the Kra Canal across the isthmus separating the Andaman Sea from the Gulf of Thailand).
Also check out Gwadar.  The PRC has made a commitment to invest tens of billions in the Pakistani insurrectionary, logistical, and geopolitical nightmare that is the Boondoggle in Balochistan with the prospect of sending oil and gas over the Himalayas to give provide another option for avoiding the South China Sea.
Pipelines are, of course, more expensive to operate and vulnerable to attack by local insurgents and more mysterious forces, as US strategists are suspiciously keen to point out.  Ports in third countries are liable to meddling by pro-US governments, factions, and regional proxies.  But the PRC is building ‘em.  If the US can spend half a trillion dollars on our national security, the PRC is also willing to gamble a couple hundred billion on its energy security in defense and capital budgets (and enrich deserving PRC contractors) and bear the added operating expense of moving oil & gas from A to B not through the Malacca Strait.
Which means, of course, it’s time to hype that PRC threat to the Indian Ocean!
As these massive and risky alternative expenditures by the PRC—and the complete absence of plausible threats to Japan, South Korea, and Australia interests—indicate, the only genuine role the South China Sea played as a strategic chokepoint worthy of US interest is…against the PRC.
Bad news is, with the PRC putting its energy eggs in a multiplicity of baskets, if it ever comes to fighting the real war with China—a full-fledged campaign to strangle it by cutting off its energy imports (like we did with Japan in the 1930s! Hey! Useful historical analogy)—we’ll have to do it in a lot of places, like Burma, the Indian Ocean, and Djibouti, as well as the South China Sea.  A real world war!
Good news is, as the PRC’s shipping options increase, the strategic importance of each individual channel decreases…as does the desire of  the PRC, Japan, ROK, or Australia to risk regional peace for an increasingly irrelevant sideshow—and the local interests of Vietnam and the Philippines--diminishes. 
What I hope is that the South China Sea, instead of serving as the flashpoint for World War III, may well end up as a stage for imperial kabuki as the US & PRC bluster and posture to demonstrate resolve to their neighbors and allies…and an opportunity for political posturing, amped-up defense spending, and plenty of opportunities for the hottest of media and think-tank hot takes.
That would keep everybody happy.


13 comments:

Hayjay said...

Astoundingly accurate and legible - thankyou.

Arius said...

Excellent article. Very informative.

ChinaODI said...


Very interesting article, analyzing marine traffic density data is a great idea,
but the spectrum of issues is too narrow, focusing mainly on energy supplies,

several missing issues that struck me while reading, e.g.
--- underestimation of the Singapore hub importance for the containerized shipments, no alternatives yet,
--- missing issue of the SCS grab by China on the inter TPP trade
--- not a word on the influence of the Chinese dominance over SCS on the inter ASEAN trade
--- the security and stability is not easily calculated in dollars but it makes a difference, not only just 2 - 3 days of sea freight, not blocked aggressive expansions is a source of instability that can make region instable,

as for marine transportation:
--- overestimated transportation capacity of the gas pipeline in Myanmar (oil pipeline not completed yet) and gwadar weight on the oil supplies,
--- overestimated potential of the energy supplies from Central Asia (natural gas from Turkmenistan matches the thesis, but Kazakh oil no, it's too expensive now, e.g. kashagan oil is a deal when prices on international market hit 80usd up/barrel

couple of other also but that for marine traffic

US raises the issue of freedom of navigation but also highlights obligations to protect the allies (Philippines) and Chinese try to grab the sea that other countries claim as their territory,

Why is the author so harsh on US while forgetting who is the aggressor these days?
btw China as the only country opposes legally binding South China Sea Code of Conduct which would help to stabilize the situation

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Terje M said...

Thank you Peter,

here is my Norwegian translation of this informative article:

https://midtifleisen.wordpress.com/2016/01/27/gode-nyheter-verden-du-kan-slutte-a-bekymre-deg-for-sorkinahavet/

Terje



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