ASEAN path to economic union muddied by South China Sea

Posted on July 31, 2012


JAKARTA (Reuters) – Discord in Southeast Asia over how to deal with Beijing’s claims in the South China Sea comes as the region struggles to overcome competing national interests and form a European Union-style economic community by 2015.

Political leaders and officials say the row may not directly affect plans by the Association of Southeast Asian Nations (ASEAN) for the economic integration of countries ranging from wealthy Singapore to impoverished Myanmar.

But what doesn’t help is China’s growing investment in the bloc’s poorer members, which critics say gives it influence that it has effectively used to block a unified ASEAN stance in the South China Sea dispute. The South China Sea, which stretches from China to Indonesia and from Vietnam to the Philippines, lies atop what are believed to be rich reserves of oil and gas.

“It’s not going to hold progress (on integration) hostage,” ASEAN Secretary-General Surin Pitsuwan told diplomats in Jakarta, referring to a recent meeting in Cambodia, where rifts over the South China Sea prevented the group’s foreign ministers from issuing a communiqué for the first time in its history.

“It is an early warning sign … this will not be the last.”

Southeast Asia is a hot destination for investors seeking returns that are drying up in Europe, still to recover in the United States and slowing in the rest of Asia.

Estimated net flows into offshore ASEAN funds stood at $1.4 billion in 2012 through June, according to data reported until July 10. By comparison, China and India offshore funds saw net outflows worth $1.6 billion and $185 million respectively.

Investors have high hopes for plans by the 10-member ASEAN for a single market and production base for a combined economy of $2 trillion, with free movement of goods, services, investment and skilled labour among 600 million people.

While there is consensus in ASEAN for economic union, the group struggles with political differences ranging from a land border dispute between Thailand and Cambodia to a cultural spat between Malaysia and Indonesia. The most destructive is the inability to deal with claims by four of its members, and China and Taiwan, in the South China Sea.

Since only some elements of the economic plan will be in place by 2015, such as zero tariffs, more developed members may have to push on with integration in a two-tier model, just as the European Union did, leaving the others at risk of missing out on regional investment.

ASEAN’s older and more developed members are Singapore, Malaysia, Thailand, the Philippines, Indonesia and Brunei. Vietnam, Laos, Cambodia and Myanmar joined later.

The two-tier model could leave fringe members further exposed to influence from China — and the United States — as they seek influence through investment and diplomacy in a “Great Game” played out in the tropics.

China is already the top investor in Cambodia and Myanmar and is catching up with investment by Europe, Japan and the United States in the region overall.

“The difference is that China is giving something that Cambodia needs, while ASEAN is promising something that is abstract,” said Aleksius Jemadu, dean of the school of political and social sciences at Pelita Harapan University in Jakarta.

“ASEAN countries will act based more on their domestic needs … When this community is built we can’t expect them to be in unison, just like what happened to the South China Sea.”


At the Phnom Penh meeting of foreign ministers, some diplomats said Cambodia blocked the South China Sea dispute being put on the agenda at China’s behest. Cambodian diplomats in turn accused the Philippines and Vietnam of trying to hijack the meeting.

China has maintained it wants to deal with the issue bilaterally.

The Philippines has said it deplored ASEAN’s failure to address the row and criticised Cambodia for its handling of the issue.

Cambodia had GDP per capita of $900 in 2011 and foreign direct investment (FDI) of $800 million in 2010, according to World Bank figures. That compares to Singapore’s $46,241 per capita and $39 billion in FDI.

The China Daily has said Beijing’s investment in Cambodia from 1994 until 2011 was $8.8 billion.

Even without the economic and political differences, a lack of capacity among some of ASEAN’s members is making it hard to implement economic agreements.

Completion of measures towards a single market in its 2010-2011 phase was only 49 percent overall, according to ASEAN’s latest scorecard, with reform lagging in food and agriculture.

“Early achievements were based on low hanging fruit … The process of transposing regional commitments into national laws is the biggest (challenge),” said Subash Pillai, ASEAN’s director of market integration.

The Philippines struggles to send officials to meetings sometimes and can be slow making decisions, insiders say, and may even risk falling into the weaker group of Cambodia, Laos, Vietnam and Myanmar. These four are already being given more time to fully reduce tariffs.

“They might not be up to the same level,” said Pillai.

A recent Reuters visit to Myanmar’s central bank found just a few idle computers, a stark contrast to the soaring towers that control banks and policy in Singapore and Indonesia.


The bloc’s ASEAN Minus X mechanism allows “flexible” implementation of commitments, by enabling members to opt out of economic schemes if they are not ready.

This has already been used. Singapore and Laos are the only members pushing ahead with an agreement on education services. Six countries including Vietnam signed an agreement to link their stock markets by the end of 2011, to spur electronic cross-border trading, but only Singapore and Malaysia are implementing it.

“You cannot expect all countries to be moving ahead at the same time. The ones lagging behind will suffer,” said another senior ASEAN official, who declined to be identified.

The South China Sea spat also shows the problems ASEAN has resolving major disputes. Unlike the European Union, an inspiration if not a model, ASEAN lacks elected members of a central parliament, a powerful executive body or a regional court to make law and enforce its will.

Instead, it has the Jakarta-based ASEAN Secretariat, a body with little clout.

“Without a strong central mechanism it is very difficult to coordinate and survey all the issues that could become big issues,” said Surin.

The bloc will face further challenges as it tries to standardise customs procedures and open up protected industries such as financial services to competition from within. It has implemented free transfer of profits and dividends but needs to remove further barriers to intra-regional investment flows.

“They are behind schedule (on the economic community) and clearly not going to make it … they are not going to see much action on services,” said Hal Hill, professor of Southeast Asian economies at the Australian National University.

And China’s expanding influence looms large.

“The Phnom Penh meetings in July were significant not just because China sought to divide ASEAN by leaning on Cambodia, but because China was happy to do so, so brazenly,” said Bryony Lau, a researcher on the South China Sea for the International Crisis Group think-tank in Jakarta.

The South China Sea: From Bad to Worse

TOKYO – Territorial disputes in the South China Sea are about to get a whole lot worse — and at the worst possible time.

Whether the U.S. can avoid being dragged into a shooting match will depend on how far Beijing and its unruly mix of military, maritime and natural resources agencies choose to push their claims. And whether China’s increasingly frustrated neighbors decide to push back.

Last week’s regional security talks in Cambodia were a step in the wrong direction. China refused to look at a written code of conduct being drafted to govern navigation, resources and related issues in the South China Sea, one of the world’s most important waterways. It also blocked discussion – let alone resolution — of the conflicting territorial claims in the region.

China claims exclusive rights to virtually all of the South China Sea, including its vast reserves of oil, gas and ocean resources; four other countries and Taiwan claim large parts of the region, as well. The disputes have led to increasingly tense standoffs between China and its neighbors.

The weeklong security talks, hosted by the Association of Southeast Asian Nations (ASEAN), dissolved amid charges of Chinese bullying, without even a customary closing statement. China made its point, but it may be a short-lived victory, says Mark Valencia, a Hawaii-based maritime policy analyst and senior associate at the Nautilus Institute for Security and Sustainability in San Francisco.

“What China is saying is, ‘We have this historic claim to the South China Sea and we own everything within it – islands, reefs, submerged areas, resources, you name it. That’s the way it is, and we’re not even going to talk to you about it.’ But they’ve painted themselves into a corner now, and that’s very dangerous for everybody,” says Valencia.

So far, the U.S. has stayed out of the territorial disputes. That’s wise. The U.S. cannot referee the welter of legal, historical and emotional arguments that accompany each dispute (all or parts of the Spratly Islands, for example, are claimed not only by China, but also by Taiwan, Vietnam, Brunei, Malaysia and the Philippines, with evidence and documentation of varying degrees of credibility and relevance, dating back hundreds of years in some cases).

The primary U.S. interest in the region is in ensuring freedom of navigation. Half the world’s commercial shipping passes through the South China Sea — $5 trillion a year — and U.S. warships regularly transit the region on their way to and from the Persian Gulf, Southwest Asia and the Indian Ocean.

China has promised not to interfere with any ships passing through region. But China has also signaled that it may require prior notice, and that military exercises and surveillance activities by foreign ships and planes may not be permissible. Those are hot-button issues for the U.S., which insists that under international law, nations cannot restrict activity other than economic development within most of their their 200-mile limits – assuming that those claims are internationally recognized to begin with.

An early test could be shaping up with Vietnam. In June, China issued an invitation for foreign companies to explore for oil in a region where Vietnam has already awarded exclusive contracts to U.S., Russian and Indian oil firms. The region is within Vietnam’s standard 200-mile exclusive economic zone. China’s move is likely in retaliation for a law enacted by Vietnam’s parliament earlier in the month that asserts sovereignty over the Paracel and Spratly islands, which of course, China says it owns.

There’s little love lost between the two countries, which fought a short but bloody border war in 1979. Last year, a Chinese fishing ship and government fishery patrol boats cut the cables of a Vietnamese exploration vessel in an area claimed by both countries.

Valencia says he won’t be surprised if the latest dispute results in bloodshed.

“I don’t think it will be war, per se. But Vietnam has shown that it’s not afraid of China, so I can see them sending out their navy, and I can see China shooting back at them,” says Valencia.

A far more dangerous confrontation could be shaping up outside the South China Sea, with an even older and better-armed rival.

On the same day that Japan’s foreign minister was due to meet with his Chinese counterpart at the ASEAN security talks last week, three Chinese maritime patrol ships entered Japanese waters near the disputed Senkaku Islands.

The two governments have been sparring over the islands – which China calls Diaoyu – since 2010, when Japan seized a Chinese fishing vessel that it says rammed a Japanese patrol ship in territorial waters near the islands; the ship and crew were released only after intense economic and political pressure from China.

Japan Foreign Minister Koichiro Genba initially said he wasn’t sure whether the intrusion last week “just happened, or was timed to coincide with the bilateral meeting.” But all doubt seemed to disappear when another Chinese patrol boat entered Japanese waters the very next day. Tokyo summoned the Chinese ambassador and Genba complained again to Foreign Minister Yang Jiechi, who responded by repeating China’s claim to the islands, located in the East China Sea near Taiwan, were “inherently” Chinese.

Although Tokyo has been publicly trying to tamp down the dispute, it’s clear that patience is wearing thin.

Tetsuo Kotani, a maritime security specialist with the Japan Institute of International Affairs, a leading Tokyo think tank, said at a forum in Washington DC in late June that it is time for Japan’s naval forces to begin actively tracking Chinese submarines in the South China Sea, and to be prepared to intervene militarily.

“If an armed conflict results between the South China Sea claimants – for example, China and the Philippines, or China and Vietnam – we have to protect our ships in the South China Sea. And what I am proposing to the government is that if anything happens in the South China Sea, we have to send our self-defense forces to the vicinity of the conflict area to protect Japanese ships,” said Kotani, who is not affiliated with the government but who is believed to reflect government views.

Japan’s Maritime Self-Defense Force is designed largely for anti-submarines and anti-mine warfare and generally operates in home waters and the Western Pacific. Venturing into the South China Sea could be seen as a provocative move not only by China, but by some of the regions smaller powers, which still view Japan with suspicion. Japan’s constitution currently forbids the use of military force except in self-defense.

The South China Sea already is heavily militarized and is certain to become more so as the “re-balancing” of U.S. forces in the Asia-Pacific gains traction. The U.S. Seventh Fleet, based in Yokosuka, Japan, routinely operates there. Three U.S. littoral combat ships are scheduled to begin operating from Singapore next spring. Japan is supplying the Philippines with 10 patrol boats. China has completed construction of a major naval base at Yalong, on the southernmost tip of Hainan Island, which can hold nuclear-powered ballistic missile and attack submarines and large surface warships, including aircraft carriers.

Although the U.S. does not have a security treaty with Vietnam, it does with mutual defense pacts with other nations that have disputes with China. U.S. officials said earlier this month that a Chinese attack directed at the Senkaku Islands would fall under the U.S.-Japan Mutual Security Treaty, which requires the U.S. to come to the aid of Japan. The U.S. has a similar pact with the Philippines, which was involved in a months-long standoff with China earlier this year as the Scarborough Shoal, a collection reefs in the South China Sea.

The U.S. Energy Information Administration said in a 2008 report that the South China Sea has potential oil reserves as high as 213 billion barrels, larger than then Saudi Arabia.

In addition to the People’s Liberation Army Navy, at least four other government agencies or ministries operate patrol craft or have a degree of authority over maritime-related issues. At a forum hosted by the Center for Strategic and International Studies, in Washington DC, one Chinese participant stated that even if a procedure were developed to resolve the territorial disputes, it is not clear which agency within the Chinese government would have the authority to settle the issue.

And that’s how you go from bad to worse.


Posted in: Economy, Politics