Political Risk Analysis - South China Sea Ruling T o Have Positive Spillover Effects

22 Jul 20 16

Vie tnam

P o litical Ris k

BMI View: The PCA's ruling on the Philippine arbitration case on July 12 will have wider implications for other claimant countries in the South China Sea, particularly
Vietnam, as the conclusions that were drawn will help to set legal precedent for similar maritime disputes in the region. We believe that Vietnam will likely stand to benet
vis--vis China by using the ruling to clinch concessions from Beijing as a counterbalance to nationalist domestic sentiment.
The Permanent Court of Arbitration's (PCA) ruling on July 12 will help to s et a leg al precedent for other claimant countries in the South China Sea, and s hould
s treng then their neg otiating pos itions ag ains t China in areas of competing maritime claims and conduct. One important as pect of the Philippine arbitration
decis ion ag ains t China is that it does not allocate any of the outcrops or is lands to claimant countries , but ins tead focus es on determining which maritime
features are capable of g enerating territorial claims under the UN Convention on the Law of the Sea (UNCLOS). This means that the conclus ions that were
drawn by the tribunal will als o be applicable for all s takeholders g overned by the UNCLOS. In our view, Vietnam is likely to be the key beneciary from the
s pillover effects of the ruling .
Details Of Court Ruling
In its landmark ruling , the PCA decided that China's his toric claims over 85% of waters of the South China Sea (via its nine-das h line) were incompatible with
the UNCLOS, and that China had infring ed upon the Philippines ' economic and s overeig n rig hts with its reclamation and exploration activities near the
Scarboroug h Shoal, and by res tricting acces s by Filipino s hermen. The court further ruled that none of the Spratly Is lands is capable of g enerating an
extended maritime zone, and that none of the features claimed by China within the bloc was capable of g enerating an exclus ive economic zone (EEZ ) that may
s tretch up to 200 nautical miles .

ST AKES IN T HE SO UT H CHINA SEA

Spratly Islands

Paracel Islands

China

Vie tnam

P hilippine s

Scarborough Shoal
*

Riau/ Natuna Islands

*

Indo ne s ia

Malays ia

Taiwan

S o u r c e : B MI . * R e p r e se n ts sta k e s/ c l a i m s i n th e a r e a

Broader Implications For Other Claimants

Althoug h the ruling is theoretically binding between the Philippines and China, the tribunal has no de facto power of enforcement, indicating that China can
choos e not to comply (with few repercus s ions ) des pite having ratied the UNCLOS in 1996. This means that reg ional tens ions are unlikely to be defus ed in
the near-term (see 'South China Sea Ruling To Exacerbate Regional Tensions', 13 July 2016). The verdict, however, s ets a leg al precedent for maritime conict
res olution in the South China Sea, by es tablis hing that the rules of the UNCLOS take precedence over China's his toric and territorial claims . The tribunal's
ruling not only benefits the Philippines but als o other claimants in the South China Sea including Vietnam, Malays ia, Indones ia, and Brunei. If China's nine-das h
line claims are inadmis s ible ag ains t the Philippines , they are s imilarly invalid to the res t of the claimant countries .
The tribunal als o held that China's non-participation in the arbitration proces s does not deprive the Tribunal of juris diction, and rejected its arg ument that the
act of unilaterally initiating an arbitration proces s cons titutes an abus e of the convention. China's defeat in the leg al battle with the Philippines over territorial
claims in the South China Sea could thus encourag e other claimants to le laws uits ag ains t Beijing if it refus es to compromis e on acces s to the res ource-rich
reg ion and to g ive as s urances of better conduct.

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Disputes In The South China Sea

South China Sea Map And EEZ Demarcation

Source: BBC, BMI, UNCLOS, Vietnam MFA

Implications For The Spratlys

Thes e ruling s have s ig nicantly narrowed the s cope of the maritime dis pute between China and Vietnam. Under the application of the conclus ions drawn
from the Philippine arbitration cas e to Vietnam's dis pute with China in the Spratlys , there would be no overlapping claims between China's nine-das h line and
Vietnam's extended maritime zone, as well as between the theoretical EEZ of certain outcrops in the Spratlys (which are claimed by China) and Vietnam's EEZ
as calculated from its coas tline.
While Vietnam s tands to g ain ag ains t China from the PCA's ruling , it los es leg itimacy in the claims in the Spratlys ag ains t the Philippines (even thoug h the
ruling does not addres s Vietnam directly). Importantly, Vietnam may have to withdraw its troops on s ome of the reefs in the Spratlys (s uch as Alis on Reef,
Tennent Reef, and Cornwallis Reef) and abandon its claims over Mis chief Reef and Second Thomas Shoal, all of which fall under the Philippines ' EEZ . Hanoi
had previous ly s oug ht clos er ties with Manila in a bid to form a united front ag ains t China, but the ruling could pos s ibly threaten this s trateg ic relation. That
s aid, we believe the outcome will larg ely depend on bilateral neg otiations between the two ASEAN countries , and the PCA's ruling is unlikely to hurt bilateral
ties over the near-term (as their common caus e ag ains t China's as s ertivenes s has not yet been res olved). Hanoi's s upport for the ruling als o s ug g es ts that
policymakers believe that the benefits would likely outweig h the los s es .
Ruling Positive For Paracels Claims
The PCA's ruling als o s ets a leg al foundation for Vietnam to manag e its maritime row with China over claims in the Paracel Is lands . If Hanoi were to le a cas e
in the PCA ag ains t Beijing 's claim of an EEZ us ing features in the Paracels , it is likely that the tribunal would als o rule in favour of Vietnam g iven that features in
the Paracels are s imilar in s ize to thos e in the Spratlys . With this in mind, Vietnam now has s trong er leg al g rounds to eng ag e China with reg ards to the
latter's repeated attempts to s hift the Haiyang Shiyou 981 oil rig into dis puted territorial waters near the Gulf of Tonkin (off the coas t of Hainan Is land) and
within Vietnam's EEZ (see 'Hanoi To Maintain Foreign Policy Bearing', April 11 2016) .
Hanoi Welcomes Ruling, But What's Next?
As one of the protag onis ts in the maritime conict, Hanoi has welcomed the ruling . In its ocial s tatement, Vietnam's Minis try of Foreig n Affairs (MFA)
reiterated the country's s upport for the peaceful s ettlement of dis putes in the reg ion, and called for the maintenance of freedom of navig ation and overig ht, and res pect for rule of law. The s pokes pers on als o reas s erted Vietnam's s overeig nty claims over the Hoang Sa (Paracel) and Truong Sa (Spratly)
Archipelag os , its rig hts over internal waters and territorial s eas , and juris diction over its EEZ and continental s helf.
Going forward, we believe that Vietnam could choos e to purs ue two pos s ible cours es of action. In the rs t s cenario, Vietnam would us e the momentum
es tablis hed by the arbitration ruling to clinch conces s ions from China. This is the more likely and economically favourable s cenario for both parties , but we
believe that the neg otiations are unlikely to take place over the near-term, cons idering the s ens itivity of the is s ue to China rig ht now. The Vietnames e
g overnment will als o continue to s trike a balance between manag ing s trong and ris ing nationalis t s entiments at home, and economic ties with China.

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In the s econd s cenario, Vietnam could le its own arbitration cas e ag ains t China. However, we believe that this is les s likely g iven that China has repeatedly
demons trated non-compliance to the ruling . Filing a cas e on its own would likely further ag g ravate China and is unlikely to benet Vietnam s ig nicantly as the
tribunal does not have enforcement capabilities . China's military capabilities are are als o s uperior to Vietnam's . In addition, China is Vietnam's larg es t trade
partner, and Hanoi will not want to jeopardis e its economic relations with China.

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