What Is the South China Sea Dispute?

A storm that's been brewing in the South China Sea for 200 years now threatens to disrupt the world's financial markets.

"The plot in the South China Sea just keeps getting thicker," Money Morning Executive Editor Bill Patalon told readers on Dec. 8. "And riskier – on both sides of the dispute that keeps escalating there."

Seven nations lay claim over the region's resource-rich islands and maritime boundaries:

• China claims the entire South China Sea region as its own.
• Vietnam is territorial over the Spratly Islands on the southern side of the island group and the Paracel Islands to the west.
• Malaysia also claims the Spratlys.
• The Philippines says it owns the Spratlys, as well as the Scarborough Shoal and the Macclesfield Bank, both on the eastern side.
• Taiwan claims the Spratlys, the Scarborough Shoal, the Pratas Islands, the Paracel Islands, the Macclesfield Bank, and the Senkaku Islands in the north.
• Japan is territorial over the Senkakus.
• The tiny sultanate of Brunei (not pictured below) lays claim only to the Spratlys.

Exactly what is the South China Sea dispute?

Here's the historical context that lends perspective to this contentious territorial conflict…

What Is the South China Sea Dispute? A Historical Squabble

Arguments over which country owns what part of the South China Sea region are seemingly endless. China contends that since 200 BC, its people have fished the Spratly Islands. Indeed, archaeologists have found Chinese-made pottery throughout the South China Sea land masses that date as far back as the 5th century.

But for the purpose of delivering a more digestible look at the South China Sea dispute's history, the focus here is set on the biggest conflicts.

To that end, let's fast forward to World War II…

Japan occupied the Spratlys and the Paracels in 1939 and claimed jurisdiction. With American help, Chinese forces pushed out the Japanese occupiers in 1945. And in 1952, Japan renounced any claims of sovereignty over the Spratlys and Paracels.

However, no beneficiary was named.

The establishment of the EEZ created the potential for overlapping claims in semi-enclosed seas such as the South China Sea. These claims could be extended by any nation that could establish a settlement on the islands in the region. South China Sea claimants have clashed as they tried to establish outposts on the islands (mostly military) in order to be in conformity with Article 121 in pressing their claims.

USS Mobile Bay, USS Russell, and USS Shoup perform military maneuvers with the HTMS Rattanakosin of the Royal Thai Navy in the South China Sea on April 25, 2006

The Spratlys lie in a shallow section of the South China Sea west of the Philippine archipelago. Tomas Clomas, a Manila lawyer, visited the islands in 1956, claimed them for himself, named them Kalayaan (Freedomland), then asked the Philippine government to make them a protectorate. Filipinos still refer to them as the Kalayaan Islands.

Philippine territorial claims escalated from there. Troops were sent to the Kalayaans in 1968. Manila regularly tried to extract from the United States a declaration that it would defend the Philippines' claim to the Kalayaans as part of the Mutual Defense Treaty between the Republic of the Philippines and the U.S., but the U.S. just as regularly refuted that interpretation.

In 1978, former President of the Philippines Ferdinand Marcos made formal claims by declaring that 57 of the islands (out of roughly 250 in the South China Sea) were part of Palawan Province by virtue of their presence on the continental margin of the archipelago. The Philippine military, which first occupied three of the islands in 1968, continued to garrison marines on several islands.

China, Vietnam, and Taiwan also occupied several islands in the South China Sea at the time. In January 1974, Chinese military units seized islands in the Paracels occupied by South Vietnamese armed forces. Beijing additionally claimed sovereignty over the Spratlys.

Nevertheless, following their conquest of South Vietnam in the spring of 1975, units of the People's Army of Vietnam (PAVN) moved to occupy the Spratly Islands (previously held by the Saigon regime). In 1978, Vietnam and the Philippines agreed to negotiate, but ultimately failed to settle their conflicting claims to the Spratlys.

In a 1988 incident, the ongoing dispute between China and Vietnam over sovereignty to the Spratly Islands erupted into an unprecedented armed encounter dubbed the "Johnson South Reef Skirmish." A brief naval battle between the nations took place at Spratly's Johnson South Reef on March 14, 1988. Vietnam was ultimately outgunned and was forced to withdraw.

Vietnam's repeated calls for China to settle the dispute diplomatically won rare support from the international community, but elicited little response from Beijing. A conciliatory mood developed on both sides of the Sino-Vietnamese border in 1989, partly because Vietnam's proposal to withdraw completely from Cambodia responded to a basic Chinese condition for improved relations.

In mid-1991, fresh from diplomatic success in helping to end the Cambodian civil war, Indonesia took the initiative in seeking to open multilateral negotiations on competitive South China Sea claims – especially those claims involving jurisdictional disputes over the Spratly Islands.

The disputed areas often involve oil and gas resources:

• Indonesia's ownership of the gas-rich Natuna Island group was undisputed until China released an official map indicating that the Natunas were in Chinese-claimed waters.
• The Philippines' Malampaya and Camago natural gas and condensate fields are in Chinese-claimed waters.
• Many of Malaysia's natural gas fields located offshore Sarawak also fall under the Chinese claim.
• Vietnam and China have overlapping claims to undeveloped blocks off the Vietnamese coast. A block referred to by the Chinese as Wan' Bei-21 (WAB-21) west of the Spratly Islands is claimed by the Vietnamese in their blocks 133, 134, and 135. In addition, Vietnam's Dai Hung (Big Bear) oil field is at the boundary of waters claimed by the Chinese.
• Maritime boundaries in the gas-rich Gulf of Thailand portion of the South China Sea have not been clearly defined. Several companies have signed exploration agreements but have been unable to drill in a disputed zone between Cambodia and Thailand.

Most of these claims are historical, but they are also based upon internationally accepted principles extending territorial claims offshore onto a country's continental shelf, as well as the 1982 United Nations Convention on the Law of the Sea (UNCLOS).

That's also where the United States' involvement comes in…