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Troubled waters: Vic Edwards on the dispute in the South China Sea

August 17, 2016
Global

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Shanghai-born Vic Edwards is a visiting fellow in the school of banking and finance at UNSW Business School and a part-time professorial visiting fellow at China Youth University of Political Studies in Beijing. He has extensive experience in industry and academe, and was director of the Asia Pacific Financial Research Centre at UNSW. Edwards spoke with Julian Lorkin for BusinessThink.

An edited transcript of the interview follows.

BusinessThink: The Permanent Court of Arbitration's ruling at The Hague in July has been rather coolly received, at least in China. It deals with thorny issues [of historic rights and the source of maritime entitlements] in the South China Sea, through which much of the world's trade passes.

The question is, should Australia be worried and should China be concerned, particularly as the Chinese economy starts to cool? Let's start with what China is calling the nine-dash line. What is the historical basis for their claims?

Vic Edwards: It really goes back probably more than 100 years but up until 1948 it was clearly accepted, and that's because at that time people may recall that China was an ally of the US, of the UK and the Western alliance – and Japan, of course, was the enemy.

Now, after 1948, when Mao Zedong took control of China, the Americans were not that pleased. Previously it could be said that two people in particular – Patrick Snow and also Pearl Buck, who was the first American noble laureate in 1938 – had made intercessions to president Roosevelt to try and get Roosevelt to align himself with Mao. But of course the two American generals – that's Eisenhower and  MacArthur – had basically said, 'how could America align itself with a communist?'

So the US switched their allegiances to Japan and managed to persuade Japan to come on the side of the US, even though they were deadly enemies before that. And that was on the basis that they would save the life of the emperor, Hirohito, who was a godlike character in Japan. So by offering that as an olive branch, so to speak, Japan came onside with the US and with Great Britain in 1952.

​Over quite a long period there hasn't been a great deal of difficulty and I think the position that China took was when you had the Permanent Court of Arbitration say that it wanted to arbitrate on the matter, China saw clearly that the international law of the sea, which they had interpreted as accepting their position of having the South China Sea, was therefore up for arbitration and dispute. Consequently, they decided not to submit themselves to the jurisdiction of the UN and the Permanent Court of Arbitration.

​'I think one of the problems that Australia has is that it may be doing the beckoning of the US'

VIC EDWARDS 


Now, that might have been their weak point because the court would have said that they were in fact subject to the jurisdiction of The Hague, whereas they had decided to withdraw from it because they felt that their position had been misrepresented. It's not that they're without support. They do have about half a dozen to a dozen countries that would give them some support on the matter.

 nd they are asking Australia to be very careful about drawing any conclusions or trying to make a judgment about what China should do. So we have already had one or two statements from Australia that China should comply with international law and they have responded by saying Australia ought to be careful because while we do have an international agreement for trade, that can very easily be dismantled.

BusinessThink: It sounds as if Australia could be in a position of trying to calm down the situation. Indeed, Australia could actually just pour a little bit of oil on those very troubled waters?

Edwards: I think because Australia has had a very strong position with trade with China, and China appreciates that because it is very short on things such as coal, iron ore and other minerals, also meat and farm products, all those sorts of things they really need. And Australia has supplied it at the right price and at the right time. So I think that that's a very positive thing between Australia and China, but by the same token Australia also has a very strong allegiance to the US. So consequently, I think one of the problems that Australia has is that it may be doing the beckoning of the US.

The US, you might notice, has not actually come out strongly and criticised China on this matter, not directly. There are a few minor officials that have done so but you haven't found Barack Obama coming out. And I think one of the reasons is that America itself does not comply with the international law of the sea and in fact it has not submitted itself to the jurisdiction of the UN here so it would be quite hypocritical if they were to criticise China in that position.

BusinessThink: It's a dangerous game to be playing, particularly as so much of the world's trade goes through those areas. And we've seen, since the judgment, that a lot of people are quite concerned about what the possible outcomes could be. What would be the implications if, say, world trade was disrupted?

Edwards: Well, they (China) would argue that, since 1948, how many matters have been brought before the World Court or anything in terms of disruption of trade? They have held that position all along since 1948. So they're saying that what is being put forward now is really a beat-up. They're saying that they're not going to stop trade, they're not going to stop fishing, they're not going to stop peaceful planes from flying over the South China Sea. That will be continued just as it has been since 1948.

BusinessThink: Also in the area we've got Japan which has previously been – let's call them neutral for the sake of a better word – for many, many years since World War II. But now, of course, we've got the rise of a much more dominant Japan. Could that throw a spanner in the works?

Edwards: Well, that would be something that could be an undesirable eventuality. Japan has been peaceful because part of the 1952 agreement with the US and the UK was that Japan would not under any circumstances have any armaments, would not have an army, navy or air force. Now, Prime Minister Shinzo Abe has recently suggested that Japan needs to go back to a more defensive footing. Part of his excuse is China's perceived aggression – and he may have some argument there.

However, he has just recently got a majority in the Upper House – I think he's even got his two-thirds majority – so he can in fact form an army, navy and air force. And he has said that he would like to form at least the army and perhaps the navy before 2018, which is the end of his term. So we won't know what will happen then, but I would hope that nothing would happen in terms of having armaments, having any sort of warfare, having any sort of skirmishes. I don't think that would be helpful to anyone and I really think it would be a lose/lose situation all round.

BusinessThink: All this controversy is happening just as the Chinese economy is slowing. What's happening there?

​'Without China, the whole world would probably slump into another recession'

– VIC EDWARDS  

Edwards: Well, I think we've had the global financial crisis; that's one of the main factors that's occurring. And also China is trying to transition from being an export-oriented economy to a consumption economy. Those two factors were always felt to slow down China and China had planned on transitioning from about 11.5% growth rate to about 7.5 % growth rate. But currently it's running at around about 6.7%, so it's a little bit under what it has planned for.

I think we should see it in perspective. That 6.7% is about twice as much as any other economy in the world and of course China is the big growth factor in the world. Without China, the whole world would probably slump into another recession.

So what China feels should be done is that countries such as the US and the EU should try to pick up their demand for things. And as recently as two weeks ago, the G20 countries agreed that they would try to improve demand. But they didn't have any specific targets to meet so I'm not sure whether they will do very much.

The US also is at present concerned about its trade with China, about the outsourcing of jobs to China, and particularly with Donald Trump [saying] he would like to not have any outsourcing and he would like to have local employment, etc, in the US. So the outlook is not great. China is still saying that it will meet its 6.5% to 7% target and it is endeavouring to do so, but I think that they will have a little bit of difficulty, but they will still be well above the world's norm of around about 3.5%.

So Australia can still see that it will do well. In fact, in such things as coal, minerals, iron ore and agricultural produce, demand from China has picked up. But of course the prices are lower, so we don't get quite the same bang that we used to.

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