Why Beijing owes Manila nearly $200 billion for South China Sea assets

US Navy/Kelby Sanders

By Holly Reeves

The Philippines could ask China for nearly $200 billion in rent and damages after the ruling in its favour on sovereign rights to the rocks and islands of the South China Sea. And the economic cost for Beijing could go even further, with the threat of a boycott of Chinese exports and tussles over the waters that bring in huge amounts of raw materials to fuel their manufacturing.

Considering Mischief Reef alone, China owes the Philippines a significant $12.4 billion, says an expert on the matter. The huge figure accounts for environmental damages to the reef from building projects as well as “rent” for the military bases constructed on their territory. And if they don’t pay, Manila can sue in any country where China has assets.

And this provision to sue for assets extends further. Under the terms of the international treaty involved, if a Chinese energy company uses a platform to take gas, as an example, within the Philippine Exclusive Economic Area and then tries to sell it on overseas, the Philippines can use the court ruling as evidence in a legal case in the foreign country. This would most likely be enough basis for the Philippines to win and let them claim the assets of the energy company as compensation for the gas effectively “stolen” from it.

So, in practice, the Philippines uses the court ruling to prove it has economic control of the gas reserve. This proves the gas was improperly taken for sale overseas. Any Chinese company then found selling the gas can be forced by the court to hand over their assets as compensation. That’s a painful outcome considering China has invested heavily in a number of licenses to prospect for resources beneath those waters.

The power of the market

Foreign courts aside, Manila – if it chose to do so – could also take on Beijing more directly. The law of the sea states that a country is liable for damages to the marine environment of a coastal country and the ruling specifically noted the destructive effects of dredging on what are now clearly Philippine waters.

But the next steps are likely to be at the shallower end of the diplomatic pool, not the deep end of another court case. In our modern, interconnected and commerce-driven world Manila and her allies could inflict a far more painful punishment on the economically-stagnating China.

China’s economy has a lot at stake in those waters. External trade, either in the goods it manufactures, or in the essential raw materials those goods require, is vital. As the population grows this is unlikely to change – it has already taken over as the largest importer of iron, lead, soy beans, zinc and copper, as well as taking the world’s second largest share of petroleum. Most of these arrive by sea.

On the other hand goods leaving the country also need a path to markets regionally and worldwide; that’s why an assertive Philippines policing access to its territorial waters must be a worry. Ensuring uninterrupted access is vital. But that’s not the only problem for Chinese exporters.

Ill-feeling against China, and Chinese products, is running high in the Philippines. If this sentiment grows we could see a joint boycott of Chinese goods in both that country and its partner in opposing Chinese claims, Vietnam. And with Chinese factories already producing over-capacity in many goods the loss of two significant overseas markets could be a real problem for an already slowing economy.

As a side-note, there does seem to be at least some upside to the ruling for China. Stocks in defence companies saw around a 4% gain, while an announcement on a new national aircraft engine company was also welcomed. Let’s home this isn’t a sign of more aggressive times ahead.

What the President did next

It is worth being clear that despite the legal basis for a huge claim for damages, President Xi Jinping is unlikely to be receiving a bill any time soon. Duterte of the Philippines is playing a longer game. His response to the ruling has been sober, calling for dialogue and restraint; reflecting his election campaign promises that he favoured discussion with China over confrontation.

China, on the other hand, has been clear it will never publicly agree or acknowledge the findings of the court, and Beijing is keenly aware the ruling comes with no provisions for enforcement or sanctions. However,  at the heart of the country’s “peaceful rise” as a global power is a thirst for new markets, growth and economic development. This alone may bring them to the negotiating table – using the Hague ruling as a basis for discussions that reframe relations in the region.

Modern warfare is becoming more than planes or guns, though these also seem to have a place in this struggle. China says it must protect its sovereignty, but its economy may be under greater threat.