8849020122_45149350eb_o.jpgEconomy Polarizing Political Economy 

The South China Sea Ruling

By James H. Nolt

This week’s ruling against China’s expansive South China Sea claims by the Permanent Court of Arbitration in the Hague provides an excellent illustration for three different theories of international political economy.

Liberals champion the role of international law and public opinion as a powerful element of international relations. Those influenced by liberal theory consider the tribunal ruling as most consequential. The tribunal’s decision was anticipated by those conversant in international law, since there is little possibility of China defending its claims within the framework of current law including the United Nations Convention on the Law of the Sea.

On the other hand, realist critics of liberalism contend that such rulings are inconsequential since they are not backed by real power. Sovereign states, such as China, are free to ignore rulings of international tribunals, as indeed China has proclaimed it will. China continues to create “facts on the ground” by building large permanent structures on several of the disputed reefs and islets and by excluding non-Chinese fishing vessels from the disputed seas. Unless the Philippines or other states disputing China’s claims have a credible ability to threaten military action, they cannot effectively void China’s claims, regardless of the law. In the realist view, “the strong do what they will, the weak do what they must.” China has more powerful naval and air forces than claimants like the Philippines and Vietnam.

My corporatist approach to political economy argues a kind of middle ground in which power and interest do matter, but includes private power, such as the power of large corporations and financial interests. Private power is often less visible that state power, but no less real. There are several powerful private interests at stake in the South China Sea dispute. These include international corporations’ broad support for international law, oil companies’ specific interest in resolving territorial disputes in order to render potential oil reserves exploitable, and financial interests in avoiding weakening of the value of sovereign debt assets (mostly bonds), which would occur if armed conflict threatened.

Secular international law originated in the early modern period, and those most interested in its development were the largest corporations of that era. These included behemoths like the Dutch East India Company and the British East India Company, as well as numerous lesser known companies such as the Royal Africa Company, deeply involved in the slave trade, and the Hudson Bay Company which dominated the Canadian fur trade. These private corporations operated on the high seas and within overseas territories far beyond the jurisdiction of courts in their home countries. They were thus very concerned that property they acquired abroad, whether by force, fraud or trade, would not be subject to seizure back home. Another key early problem was distinguishing between outlaw pirates and “legitimate” privateers that seized thousands of ships for the profit of their owners during the many wars of that era. Indeed, one of the most celebrated early theorists of international law, Hugo Grotius, developed his ideas in the service of the Dutch East India Company.

Today’s international lawyers sometimes work on behalf of states, as in the case of the lawyers led by Paul Reichler who argued the Philippine case against China at the Hague. More often, international lawyers make their arguments on behalf of corporations involved in cross-national disputes over taxes, property claims, and regulations. Global business interests collectively prefer efficacious international legal procedures in order to increase the security of property and reduce the risk of global business operations running afoul of unanticipated governmental or private interference. Because of this powerful business interest, global media corporations will also, in general, be strongly antagonistic to China’s defiance of the tribunal reading. Potential overseas investors in China may become more wary as a result.

More specifically, as I mentioned previously, the real prize in the South China Sea is not the fishing rights now actively contested, but the large reserves of oil and gas thought to exist beneath that shallow sea. As long as sovereignty claims are unresolved, no private oil companies will be willing to invest the many billions of dollars in capital necessary for offshore oil platforms in the Sea. Significant private investment can only occur where property rights are defensible, widely acknowledged, and not so subject to potentially violent dispute. Only peaceful negotiations among the various rival claimants can firmly establish long-term property rights that will allow broad development of the region’s resources. The power of private interests in this case is simply to withhold investment until there is an accepted peaceful settlement. China cannot compel private investment.

Many Chinese nationalists blame the U.S., and believe that the Philippines would surely back down in the absence of U.S. support (such as a U.S. mutual security treaty with the Philippines). Such realist arguments assume that China’s growing power will compel recognition of its claims. However, realist theory makes no allowance for private power, specifically, the difficulty states have in compelling investment. Investors have alternative uses of capital. They need not commit to risky situations where rule of law is dubious. Another reading of realist theory suggests that China’s growing assertion of its claims will drive all of the rival claimants, including the Philippines, Vietnam, Brunei, Malaysia and Indonesia, closer to the U.S. in the search for a means of balancing China’s overweening power.

Both realist arguments are wrong because business interests often trump “national interests” such as disputes over territorial boundaries. A great many businesses in Southeast Asia prosper from trade with and investment in China and have no stake whatsoever in the ongoing dispute. Indeed, the newly elected Philippine president, Rodrigo Duterte, has been a champion of Filipino business leaders who value increasing economic ties with China. Therefore despite international law, and not because of weakness, business with China may simply be more important than the ultimate South China Sea settlement for many Filipino business and political leaders. This conclusion is contrary to both liberalism and realism. Only corporatism, by taking real business power and interests seriously, can discern it.

The dispute will continue to gain high publicity despite the wishes of Philippine leaders, largely due to American corporate interests (especially those in oil and finance) which have the largest stake in the ultimate exploitation of oil and gas resources in the South China Sea. Many powerful U.S. corporate interests thus support the U.S. government line that prefers a peaceful negotiated settlement in accord to widely recognized international law. In the near term, China is likely to defy such a resolution, but not escalate the conflict either.



James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.

[Photo courtesy of Times Asi]

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