Is the Shooting About to Start in the South China Sea?

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It continues to pose the biggest risk to the health of the U.S. and global economies, and that risk keeps escalating.

It could even be the source of the world's next big armed conflict.

But it continues to be badly underestimated by the "experts" and the U.S. news media.

I'm talking about the growing dispute in the East and South China Seas.

We've been telling you all about this tinderbox-like situation since last summer, and with every new development, have given you an update.

With what we've seen in just the last few weeks alone, we felt it was time for another.

Just this week, for instance, the Filipino government put Beijing on notice; it announced plans to have an international arbiter declare China's actions - its attempts to claim that entire region as its own - as being "illegal and invalid."

Earlier this month, when Chinese and Japanese fighter jets met for the first time over disputed islands in the East China Sea, Japan brashly asserted its right to fire live "tracer" ammunition. The policy announcement outraged Beijing and struck fear in the military community - whose experts warned it could qualify as an actual "first shot" and lead to a possible military conflict.

Finally, in December, Vietnam alleged that a China fishing boat slashed a seismic cable attached to an oil-and-gas exploration ship in the Gulf of Tonkin, claiming this was the latest deliberate attempt aimed at keeping the small nation from discovering new energy deposits. In response, Vietnam and India (Vietnam's partner in the initiatives) will step up naval patrols in the region - increasing the odds of an escalating spark.

Professor Huang Jing, an expert on regional security at the National University of Singapore, believes there's cause for concern - and says the situation grows more and more dire with each of these incidents. And right now, it's China and Japan that are the most likely to square off against one another.

Though "I think there's still a fine line neither side is trying to cross ... political survival on both sides is more important than avoiding a skirmish, or even war," Huang told Britain's Guardian newspaper. The countries could take a step back as long as peace endured, but it would be far harder "to catch up or patch up after something happens," Huang said.

We've been telling you for months about the ongoing territory disputes in the East and South China Sea regions - and warning that it wouldn't take much to spark a major confrontation.

Now you see why.

The East China Sea dispute centers on the Senkaku Islands chain and is mostly about China and Japan. The islands (known as the Diaoyu islands by China), have been claimed by Japan since 1895. They were taken over by the United States after World War II, and were turned over to Japan in 1972. They are also claimed by Taiwan and Mainland China.

This is just one of several disagreements involving a number of countries over disputed territories in the China Sea region (click here to see accompanying map). The bigger disputes are in the South China Sea.

Those disputes are escalating - and they're also confusing.

Here are the players - and their disputes--in an area known as the "cow's tongue".

There's the Scarborough Shoal, which is claimed by China, and the Philippines and Taiwan. There's also the Pratas Islands, claimed by China and Taiwan. The Paracel Islands are claimed by China, Taiwan and Vietnam. The Macclesfield Bank is claimed by China, Taiwan, Vietnam and the Philippines. And the Spratly Islands are claimed by China, Taiwan, Vietnam, Malaysia, the Philippines and Brunei, a tiny "sultanate."

This region is flush with resources - it contains as much as 213 billion barrels of oil (10 times the proven U.S. reserves) and 900 trillion cubic feet of natural gas (equal to all the reserves held by Qatar). There's also a rich fishing ground that employs thousands and feeds millions.

Obviously, China wants (actually needs) those resources to continue along its torrid growth path. But Beijing believes that China's emergence as the dominant player in the region means it should have control over the islands, the seaways that surround them, and the rich resources they would bring.

Beijing has rebuffed all attempts to have this morass of claims negotiated in a "multilateral" setting - like with the Association of Southeast Asian Nations (ASEAN). Instead, it wants any negotiations to take place "bilaterally" - between it and one other nation at a time.

And China has become quite irritated with U.S. efforts to bring about a multilateral negotiation - an effort that U.S. Secretary of State Hillary R. Clinton has been working to pull off as part of Washington's "pivot" toward Southeast Asia.

Beijing lashed out at the Obama administration after Clinton said the United States isn't taking an official position on who controls the East China Sea islands that China and Japan are sparring over, but noted that America opposes "any unilateral actions that would seek to undermine Japanese administration."

The entire China Sea brouhaha is shaping up to be a major challenge for the Obama Administration, which realizes that closer economic ties with Southeast Asia are crucial if this country is to recover from the debt-lined black hole the financial crisis has left us in. We obviously want to maintain our ties with China, the dominant economy there. But we also want to maintain our allegiances with Taiwan and the Philippines, and build an economic bridge to such fast-growing "emergers" as Vietnam.

Those smaller countries are looking to us for both help and leadership. And we're being graded on our performance, American Enterprise Institute (AEI) Scholar Michael Auslin wrote recently.

"The credibility of the Obama administration's "pivot' to China is also being tested, and Washington must decide how to respond to Beijing's growing assertiveness," Auslin said. "To simply leave far weaker neighboring states to face China alone risks surrendering U.S. influence in Asia and making conflict more likely."

It will take time for the United States to establish itself in the manner that Auslin describes. But sparks could intercede.

As Shogo Suzuki, an expert on Sino-Japanese relations and visiting associate professor at the University of Copenhagen, told The Guardian: "All it takes is one hothead to pull the trigger and the whole thing spirals out of control. It's a dangerous situation and I think both sides have trapped themselves."

We've been writing about this situation for several months now - penning the first Private Briefing columns on the controversy well before the mainstream U.S. media wised up to the fact that this is an important story with huge ramifications for this country (we wrote about it in the July 24, 26 and 31 issues of Private Briefing, and in several subsequent issues of Money Morning (including Sept. 18), if you'd like to do some additional research click here and here).

We'll keep an eye on this for you - and will report on the key developments.
About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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