Some economic consequences of a ‘hot’ conflict over the Senkaku/Diaoyu Islands

An island of tranquility.

With the dispute between China and Japan over the Senkaku/Diaoyu Islands heating up, some have wondered about the prospect of a war between the two states and its possible outcome.  Though unlikely, a war between the world’s second and third largest economies, who alone share over $340 billion in bilateral trade, would be rather unfortunate, to say the least.  It is, however, an interesting exercise to consider some of the implications – in this case specifically economic – of such a conflict.

 

One consequence would be the disruption of sea- and air-borne trade flows in the region.  The Senkakus/Diaoyus lie approximately 100 nm northeast of Taiwan, in the vicinity of two of the busiest shipping channels in the world – the Taiwan and Luzon Straits.  Trade across the Taiwan Strait alone amounted to $147 billion in 2011, a figure which does not include trade simply passing through the strait to other destinations.  Many Asia-bound vessels from the Americas pass through the Luzon Strait, and both straits are key routes for oil shipments to Japan and Korea.

 

While one hundred nautical miles might seem a long distance, the range of Chinese and Japanese naval and aerial weapon systems means that any combat around the islands could spill over into adjacent areas, especially as each side engaged in whatever maneuvers were necessary to gain the upper hand.  The most modern Japanese anti-ship missile, for example, has a range of approximately 115 nm.  Chinese shore-based anti-ship ballistic missiles, by comparison, may have a range upwards of 1,700 nm, encompassing the entire region.  Combat, therefore, could lead to the inadvertent destruction of merchant shipping in these crowded waters, and would certainly cause a spike in maritime insurance rates and fuel costs as ships reroute to avoid combat zones, cutting into the profitability of overseas trade.

 

In addition to disrupting physical trade flows, a conflict between Japan and China could disrupt capital flows.  Even a short conflict would generate a great deal of uncertainty in the minds of investors.  Doubts could develop as to the longevity and profitability of investments in both countries due to fears of government asset seizures and heavy regulations on trade and monetary flows to keep their own economies relatively stable.  Numerous Japanese factories in China have already publically closed, due to a wave of popular anti-Japanese sentiment and protests, while still more major companies may be keeping quiet about their own closures.  Chinese and Japanese government policies to deliberately seize each others’ assets would only exacerbate the effects of these closures.  A conflict would also have unpredictable consequences for foreign exchange rates.  Lastly, the effects would be long-lasting:  any conflict would sow doubts about the long-term prospects for a peaceful East Asian environment. 

 

Not for all the fish in the sea.

Adding to the uncertainty is the unknown role the United States would play in any Sino-Japanese conflict.  According to the terms of the U.S.-Japanese bilateral defense treaty, the United States is obligated to come to the aid of Japan in the event of war. U.S. Secretary of Defense Leon Panetta stated recently that the United States would abide by its treaty obligations if Japan was attacked, and Japanese Foreign Minister Koichiro Gemba noted that the treaty covers the Senkaku/Diaoyu Islands.  It is, of course, not certain that the U.S. would become involved, or could become involved in the time frame of a short conflict.  If it did, however, its involvement would cause even greater disruptions to world trade and capital flows.  In 2011, the volume of U.S.-China trade topped $500 billion.  The result of direct, U.S.-Chinese conflict would almost certainly be a halt to that trade, to the detriment not only of the respective nations, but also the global economy.

 

The prospect of the disruptions to global trade outline above would be concerning enough at the best of times, but these are not those times.  A recent article in the New York Times noted that global economic growth appears to be slowing due to faltering Chinese growth and continuing problems in Europe.  Analysis by The Economist suggests that even a 3.9% reduction in the rate of Chinese capital accumulation would eliminate all of Taiwan’s 2012 economic growth, and ‘hobble South Korea.’  Given that this is a potential result of current, purely economic factors, an armed conflict between two of the world’s great economic powers could only magnify it.

 

With the potential negative economic consequences of a war over the Senkakus/Diaoyus, let’s hope that cool heads prevail in Tokyo and Beijing.

 

Ian Sundstrom is a graduate of the War Studies Masters Program at King’s College London.  He is currently engaged on a research project for Imperial War Museum – Duxford in Cambridge, United Kingdom. 

           

More on International Maritime Security

 

Flower Power: HMS Lotus

What is International Maritime Security?” is an excellent post, framing the question against the common interests, threats, and resources of nations in the effort to keep maritime commons secure.  Why are these dynamics and underlying processes so complex, and what we can do with that knowledge?  Professor Mearsheimer’s work The Tragedy of Great Power Politicsnotes Kurt Albaugh, helps provide some answers.  It discusses great powers’ search for ultimate security, possible only through hegemony.  But it leaves untold the story of great powers’ neighbors. These states have a need for national security disproportionate to the real threat, which Prof. Mearsheimer explains in following way:

When a state surveys its environment to determine which states pose a threat to its survival, it focuses mainly on the offensive capabilities of potential rivals, not their intentions.

Moreover, in such a case the “stopping power of water” likely doesn’t apply, not only because neighbors could share a land border but also because defensive power is not strong enough to check a great power’s short-distance naval assault.  The Impact on the navy is important.  In the event of a neighbor’s build-up, the smaller neighbor’s scarce financial resources would be devoted to building as much war-fighting capabilities as possible, depleting a budget very quickly.  The maritime security mission becomes a “nice to have” item, especially protecting the maritime commons, which is possibly perceived more as a foreign affairs than defense issue.  The corresponding fleet composition is summarized well with another observation made by D.K. Brown in Future British Surface Fleet: Options for Medium-Sized Powers, discussing individual ship design:

This is discussed by Khudyakov, who points out that one can optimise for maximum effectiveness at constant cost or for minimum cost at constant effectiveness.  Carried to extremes, he sees the one leading to what he aptly calls the Super Battleship Paradox, the other, emphasising numbers at the expense of capability, to the Chinese Junk Paradox.  One may, however, wonder if the Royal Navy’s Flower-class of World War II was so limited in capability that it fell into the latter category.

The end result is a navy consisting of a very few “Super Battleships” to defend against the great powers, and under-appreciated fleet workhorses like the Flower-class to carry out International Maritime Security missions.  The Naval Diplomat might offer a solution to that problem.  The concept of a “Fortress-fleet” operating under the umbrella of land-based aircraft and missiles would allow a smaller nation to forgo the “Super Battleships” and develop a fleet much more oriented toward International Maritime Security.  Such “fortress” should satisfy demand for national security, cover the gap between a real threat and its perception, and allow the nation to build much lighter naval forces, which theoretically could be more focused on diplomatic and constabulary missions.  Governments would be also more inclined to invest in dual-use, army and navy weapons like aircraft, instead of very expensive systems with only a naval application.  Rooted in the views of A.T. Mahan, this distant descendant of his original concept answers partially its critics.  Fleets thus freed to get involved in international cooperation in distant waters are no longer inactive and without initiative.

Przemek Krajewski alias Viribus Unitis is a blogger In Poland. His area of interest is broad context of purpose and structure of Navy and promoting discussions on these subjects In his country

(Updated 9/18) Keeping up with the Senkakus: China Establishing a New Reality on the Ground…er, Sea

UPDATE: 9/18:

Japan’s Coast Guard has its hands full: Latest reports indicate up to 11 Chinese maritime surveillance ships have entered the Senkakus/Diaoyus’ Continguous Zone while a pair of fishermen swam ashore one of the islands before departing.

UPDATE: 9/17:

In addition to the anti-Japanese protests and violence which has flared throughout China this weekend, Chinese state media has indicated the possibility of further reaction to the nationalization of the Senkakus/Diaoyus to come later this week.  Chinese state radio said Monday that “1,000” fishing vessels are headed to the waters near the islands, as a fishing ban comes to an end.  Of note, the report quoted a Chinese source who said the vessels’ activities would be monitored by a “marine observation satellite.”  It is unclear whether this is an attempt to say the six vessels still believed in the vicinity of the islands will attempt to avoid a confrontation with the Japanese Coast Guard on station, or whether it just indicates China will be watching the situation very closely.  Meanwhile, Hong Kong reports that the ship Kai Fung 2, which earlier helped keep the islands in the spotlight, will attempt a return voyage this week as well.

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Hi, Hai Jian!

In the past week, while American attention has largely been diverted, China appears to have taken a number of steps to change the reality of the situation in the Senkakus/Diaoyus (hereafter referred to as Senkakus for brevity’s sake) in a coordinated diplomatic, media, legal, and physical push.

 

With the maelstrom of news emanating from the Muslim world, U.S. media coverage of other, possibly more consequential events inevitably slackened.  Fortunately our international and domestic partners have carried the ball a bit with regards to the disputed islands claimed by Japan, China, and Taiwan.  While we noted the reports on Tuesday of two Chinese ships – the Hai Jian 46 and Hai Jian 49 – dispatched to and arriving outside the islands’ Territorial Waters (TW), the number that arrived eventually totaled six, twice as many ever previously sent by China at one time.  A good account of the stand-off, on pause for now, can be found at The Asahi Shimbun.  Although the Chinese vessels have all left the islands’ TW, they remain in the direct vicinity.

 

The Senkakus are the same five islands, under administrative control of Japan (and populated only by goats), at the center of Japanese Coast Guard clashes with Chinese fishermen and most recently protestors from all claimants.  The Atlantic Council of Canada has a good article on the history of the conflict, but the immediate cause of the Chinese flotilla was the purchase of three of the islands by Japan’s national government (another was already government-owned, and the last owned by another private owner).  The decision to go forward with the purchase was forced by Tokyo’s nationalist metropolitan government, which also attempted to buy the islands but would have furthered their use as a provocative cause célèbre – whereas the central government has mostly sought to play down tensions between the two economic partners.

 

However, with the lead-time given by advance warnings of the sale date on Sept. 11th, China had time to prepare a coordinated response.  As our counterparts @Galrahn and @cdrsalamander noted, this response not only involved the vessels themselves (which, significantly or not are from State Oceanic Administration while previous vessels were from the Ministry of Agriculture) but also articles backing the move ready to run in China’s state media.  Further, these actions appear timed to coincide with the PRC’s announcement of baselines demarcating their claims and the start of weather forecasts for the area.

 

Peaceful…but effective?

Although unprecedented for this particular conflict, China appears to be following a course it charted earlier this summer in the South China Sea, where it has so far successfully established a new reality on the ground with the Philippines-claimed and previously administered Scarborough/Pantang Shoal.  The Philippines Coast Guard pulled back its vessels on June 16th due to bad weather and has yet to return, effectively ceding control to the Chinese civilian maritime agencies, who have maintained a presence in the area and attempted to physically impede any non-Chinese vessels.

 

Back in the East China Sea, as the Christian Science Monitor noted, China likely had to take some action to appease nationalist sentiment at home in reaction to Japan’s moves.  But the paper also said that the movement of the vessels back out of the islands’ TW can be taken as a sign of China’s unwillingness to take things too far.  Here’s hoping they’re right – and that fears of further turmoil before the country’s leadership transition will serve as a break.  But with precedence already established in the South China Sea, and the vessels still loitering in the area, many signs point to the potential for future confrontation – and it may begin as early as next week. 

 

On Friday Xinhua said the vessels will start “patrol and law enforcement around the Diaoyu Islandswhile the catalyst for conflict could begin Sunday, when China’s self-imposed three-and-a-half-month fishing ban in waters near the Senkakus ends (although a typhoon to the east of the islands may further complicate the situation (h/t Galrahn)).  A Bureau of Fisheries official stated: “A large number of fishing boats will leave their ports…We will resolutely protect China’s sovereignty and the safety of fishers and step up controls in marine areas that include the Diaoyu Islands.”  Adding to the fun, Taiwan has also sent two Coast Guard vessels to protect any of its own fishermen brave enough to wade into the waters.

 

Not a pretty kitty. MEOW: Mutual Economic Obliteration Worldwide

From the perspective of the U.S., hoping to de-escalate any conflict between two of its most important trading partners and avoid being dragged in to an armed conflict, it’s clear we need better mechanisms with the PRC in case of emergency.  The threat of MEOW (mutual economic obliteration worldwide) is not enough.  It’s vital to separate the sides in the early stages to prevent a confrontation going past a point of no return – so we need to know who to call, and that they’ll have actual authority to call vessels back.  That is of course easier said than done with a country whose future president can drop of the face of the Earth for over a week at a time.  What the U.S. can work on, however, is building “habits of trust and cooperation,” through increasing partnership opportunities with China – a topic I will return to shortly.

 

If the long-term solution has to be through international diplomacy, China, by demarcating its claims to the specific rocks and islands around the Senkakus – a step experts have called the Chinese to take in the South China Sea – might this week actually have made progress of a sort.  But next week might not be as useful.

 

LT Scott Cheney-Peters is a surface warfare officer in the U.S. Navy Reserve and the former editor of Surface Warfare magazine. He is the founding director of the Center for International Maritime Security and holds a master’s degree in National Security and Strategic Studies from the U.S. Naval War College.

 

The opinions and views expressed in this post are his alone and are presented in his personal capacity. They do not necessarily represent the views of U.S. Department of Defense or the U.S. Navy. 

Support Our Diplomats

The events occurring throughout North Africa and elsewhere have sparked invective between many opposing sides on many issues. Any comment I could make on the strategic or policy implications of the tragic past 48 hours wouldn’t rise above the din of voices clamoring to control the narrative of the assaults on our embassies in Libya, Egypt, and elsewhere. Public dignity should move us to memorialize those who have given their lives in the line of duty, and Rear Admiral Foggo does a better job than I could ever do over at the USNI Blog. If any immediate lesson should be drawn from our collective loss, it’s that we need to move beyond supporting the troops and re-think our approach to celebrating public service.

America has become used to supporting the military over this past decade of war. Many Americans quietly give time, money, and other services to support servicemembers who are wounded, in dire financial straits, or just because they wear the cloth of the nation. This is a good thing – it speaks to a culture of dignity, humility, and generosity that forms an important, but oft-ignored, part of American character.

But when I go to the movies and receive a military discount, or when I get head-of-the-line privileges in an airport security line, or when I’m in uniform and someone picks up a bar tab for me, I wonder why we don’t accord the same benefits to other public servants. Retired Army Colonel Paul Yingling expressed a similar thought in a Washginton Post op-ed late last year:

The iconic, life-preserving figures of the post-9/11 era — soldiers, police officers, firefighters — certainly deserve the adulation they receive. However, security is merely instrumental; peace and freedom make a good life possible but not inevitable. Especially in a democracy, we ought to respect most those who foster the character traits that make self-government attainable — parents and teachers, coaches and ministers, poets and protesters. When I hear the Army motto, “This We’ll Defend,” it’s them I have in mind.

Yes, supporting members of the armed forces is important. But there are many, many Americans in dangerous or difficult postings across the globe, and their lives are often a great risk. The Libya case proves this clearly. I’ve worked with many Foreign Service Officers during my career and greatly respect their professionalism as they fulfill important duties with little thanks. The most recent issue of Proceedings discusses ways that Foreign Service Officers and the Navy can work together more closely. Secretary Gates repeatedly made calls to increase State Department funding during his time in office. Diplomats make important sacrifices for the United States, so why is the military one of the few groups that recognizes this? I don’t think the public wants to ignore this kind of public service. Is it because that, unlike the armed forces, there are no political constituencies that support the State Department? Since they wear a coat and tie, is that why they’re unlikely to have a bar tab paid by a philanthropic stranger?

My message is simple: Support our Diplomats. The professionals in the foreign service components of the Departments of State, Agriculture, and Commerce routinely sacrifice – and too often make the ultimate sacrifice – to support our nation. Service is service. To citizens who value the armed forces: think about ways you can support other kinds of public service in your community and across the globe.

LT Kurt Albaugh, USN is President of the Center for International Maritime Security, a Surface Warfare Officer and Instructor in the U.S. Naval Academy’s English Department. The opinions and views expressed in this post are his alone and are presented in his personal capacity. They do not necessarily represent the views of U.S. Department of Defense or the U.S. Navy.