The South China Sea (SCS) is a 3.5 million-square-meters body of water within the rims of Southeast Asia. It contains islands, reefs, and low-tide elevations that are mainly grouped into the Spratly and the Paracel Islands. The SCS is of strategic importance as it is a trade route carrying $3.4 trillion worth of goods every year – an equivalent to 21% of global maritime trade – and boasts strategic sea lanes whose blockade could disrupt entire economies (O’Rourke, 2015). Recent studies estimated the SCS to contain 11 billion barrels of oil and 190 trillion cubic feet of natural gas (Fisher, 2016). It also accounts for over 10% of the global fishing trade. While its value is undisputed, determining who owns what in the SCS gets very complicated. There are overlapping claims between China, Japan, Taiwan, and several Southeast Asian states which has led to military standoffs, international court arbitrations, as well as disruptions to revenue-generating activities in the waters (O’Rourke, 2015).

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To understand the root causes and find potential solutions to the SCS dispute, this paper argues a focus on two key players: China and the Southeast Asian states. Beyond China’s lofty ambitions to become the de facto power center in the region, there needs to be a consideration of China’s modus operandi. In July 2016, the Permanent Court of Arbitration (PCA) rejected China’s ‘nine-dash claim’ in the SCS. China responded by discrediting the ruling and continuing to assert its claims by adding sediments to low-tide elevations to build artificial islands, chasing out non-Chinese vessels, and engaging in military exercises (Fisher, 2016). This is a precedent-setting behavior, and the potential for additional players to follow the same law-defying strategy should sound an alarm for increased checks on Chinese influence in the region. More explicitly, other SCS claimants should create a more united front with the collective goal of upholding international law.

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Secondly, Southeast Asian states technically operate within a regional bloc called the Association of Southeast Asian Nations (ASEAN). ASEAN is primarily an economic bloc, but that is precisely why it is crucial to solving the dispute. A study of the economic relationship between the claimants in the dispute reveals a two-faced nature. There is a clear pick-and-choose strategy by more developed claimants (e.g. China, Japan) towards Southeast Asian states which are largely emerging markets. Capital flows can thus be an influencing instrument by more developed claimants to steer negotiations in their favor. The Southeast Asian claimants then could benefit from a more integrated economic strategy via ASEAN to ensure a level playing field.

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The question that remains then, why has the status quo persisted? Why is it that seemingly logical strategies such as the above not followed? Perhaps more constructively, what incremental steps are realistic and feasible for stakeholders to take in line with these big picture strategies? The rest of this paper will expand on the contexts of these observations, use data to justify the need to change the status quo, and outline potential strategies that can maximize the long-term outcome for stakeholders. The core argument will be this: a combination of ASEAN’s flawed structure, inefficient nature of international law, and the economic-incentive dependent nature of ASEAN claimants all lead to a political scenario where free-riding on other parties’ confrontations with China while reaping China’s economic incentives will bring about the best individual outcome. This is what is called a collective action problem, a Marcus Olsen (1965) notion that stresses the inability for individual actors to achieve a goal in providing a public good – in this case, a buffer against Chinese bullying (Oatley, 2016).

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There is then a recognition of a larger Chinese strategy to dismantle ASEAN and to shift Member States into China’s sphere of influence. Solving the SCS conflict is then not quite the priority ASEAN Member States should be giving. ASEAN as an organization is an important medium to balance against China’s creeping influence, and its Member States will need to see past the short-term benefits of China’s handouts and consider the long-term consequences of the current free-riding strategies. This paper will reveal how following a long-term strategy focusing on building ASEAN’s internal capabilities can be instrumental to maximize individual interests while ensuring China’s actions are checked.

 

I. ASEAN and the SCS Dispute

 

ASEAN is a regional bloc consisting of 10 Southeast Asian states and aims to promote economic, political, and security cooperation amongst its Member States. Its biggest achievement is first and foremost its ability to rally an economically, politically, and culturally diverse group of nations. By promoting regional dialogue, ASEAN, in turn, promotes regional peace and stability, a no easy feat for a group of post-colonial states (except for Thailand). However, it is important to note that in practice, ASEAN focuses on economic cooperation more so than others. This is because ASEAN decision-making is on the basis of consensus, meaning the controversial nature of political and security cooperation is by default constrained. While ASEAN managed to eliminate significant amounts of trade tariffs, no military agreements have been signed beyond joint exercises or on matters of illegal migration between its Member States. In context of the SCS dispute, the most important fact is how ASEAN as an organization has never been mandated to resolve the dispute; this responsibility falls under the claimants themselves “through legal arbitrations or political negotiations, bilaterally or multilaterally,” (Storey, 2017).

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In a rare exception, however, ASEAN and China did sign the non-legally binding Declaration on the Conduct of Parties in the South China Sea (DOC) in 2002, which entails the promotion of “confidence-building measures”, engagement in “practical maritime cooperation”, and “the discussion and conclusion of a formal and binding Code of Conduct (COC).” The COC is intended to be a formal, legally binding document that would facilitate maritime engagements in the SCS. The signing of the DOC is a remarkable achievement because it also acts as a litmus test for ASEAN’s ability to act as a political unit.

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The decision to partake in the COC negotiations is in line with China’s current charm offensive strategy in the region –explained further in Section IV, but negotiations have been significantly delayed, so much so that even the basic provisions of non-violence and non-disruptive clauses in the DOC have not been implemented (ASEAN, 2012). The DOC also created the opposite of its intended effect: creating distrust and discouraging further cooperation. This is because the DOC lacks an enforcement mechanism, leading to rampant and unchecked interpretations, where claimants have accused each other of violating the document (Storey, 2017). China sees the Philippines’s decision to take up the case to the PCA violates Article 4 which stipulates conflict resolution “through friendly consultations and negotiations by the sovereign states directly concerned”, while other claimants see China’s sand dredging to build islands fit for military use do not exemplify an act of “self-restraint” (Storey, 2017).

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It was not until September 2013 – a full eleven years since the DOC was signed – when the first China-ASEAN Senior Officials’ Meeting on the COC was held (Storey, 2017). Talks remained slow until after the 2016 PCA ruling, in a move believed to be China’s way of deflecting criticisms it received from rejecting the Tribunal’s result. More strikingly, the draft contents of the COC, as of November 2017, is devoid of the term “legally binding”, raising doubts whether countries should be invested in the COC at all (Storey, 2017).

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Even if the final version of the COC does come with a binding clause, a few things are still worth noting. First, the insistence to take time to negotiate could mean the region remains at risk of violent escalations – there is an immediacy to have the COC passed soon considering the ongoing military installations by China and Vietnam. Secondly, the COC will not mean an end to the dispute since it will not include mechanisms aimed to do so –it will not be equipped to resolve existing conflicts. Most importantly, the DOC experience and China’s precedent-setting decision to ignore the PCA ruling calls for caution whether signatories would even honor it.

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Internally, cracks in ASEAN solidarity towards the SCS dispute are becoming clearer. In 2011 the ASEAN Summit failed to issue a joint statement on how to approach the dispute and in 2017, it failed to mention the dispute altogether (Hutt, 2016). President Duterte of the Philippines made the surprise move to set aside the PCA ruling – in which the Philippines was overwhelmingly favored – and strengthened ties with China through trade deals worth $13.5 billion (BBC, 2016). Malaysia held joint military exercises and signed big budget infrastructure projects with China (Permal, 2017). Vietnam, on the other hand, is in a ‘cold war’-like state with China, with both parties actively participating in reclamation efforts in the region. Vietnam has also increased strategic cooperation with the United States and Japan who both condemn China’s activities in the region, further increasing tensions (Ives, 2017). The final twist: apart from Singapore, other Southeast Asian states remained quiet on the matter altogether.

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The key observation here is how increasingly divergent individual ASEAN states are towards the SCS dispute. As per above, the spectrum ranges from outright confrontation to normalization and all the way to blatant disregard of the issue altogether. All things considered, it seems a balancing-against-China strategy is no longer a possibility – a clear indication of the collective action problem discussed earlier. Why then, should any stakeholder in the dispute care about ASEAN? Would it not be more productive to shift the conversation towards the maximizing the interest of an individual claimant? The following sections will peel away these questions to arrive at a two-fold argument: 1) disregarding the importance of a regional Southeast Asian strategy undermines the relevance of ASEAN as a regional bloc, and 2) ASEAN is an instrumental medium in limiting China’s questionable and precedent-setting actions in the region.

 

II. Why Bilateralism (and Limited Multilateralism) Is Preferred

 

To understand why and how ASEAN’s relevance could be compromised, we need to look at both internal and external factors guiding ASEAN’s current principles, and then tie these to how they play to China’s best interests instead of the ASEAN region. Internally, the baffling puzzle is why has Southeast Asian multilateralism in solving the SCS dispute been limited to the flawed DOC and COC. A good way to study this is to deep dive into why bilateralism is heavily preferred.

On a surface level, the obvious explanation is because not all ASEAN states are involved in the conflict. Only five Southeast States are technically involved in the dispute –  the Philippines, Vietnam, Malaysia, Brunei, and Indonesia. Others are either more involved in territorial disputes with each other or are geographically irrelevant to the dispute. As Section IV will argue, it may well be the case that there are strong incentives for individual states to maintain an amicable relationship with China. Still, what this argument does not explain, is why individual ASEAN states refuse to forgo these incentives for the greater good of the regional bloc, especially in light of China’s devious actions in the SCS.

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One explanation could be how bilateralism has worked to solve past disputes in the region. When oil and gas reserves were found in the 70s, the Philippines moved in first in 1976, establishing a commercial field in the Reed Bank near its Palawan Island. This received strong opposition from China, Taiwan, and the newly reunited Vietnam, who all claimed the Reed Bank to be within their territories (Muscolino, 2013). Bilateralism took center stage, with each claimant stressing the importance of a peaceful resolution. Negotiations with each claimant avoided escalations for the rest of the decade (Muscolino, 2013). More recently in 2008, Malaysia and Brunei agreed to resolve their dispute by demarcating the land and maritime boundaries, while also collaborating in the exploration of hydrocarbon resources. These became resounding evidence amongst ASEAN leaders that bilateralism could prevent escalations while still maximizing the interests of all parties involved (Roach, 2014).

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The preference for bilateralism is perhaps better explained by the oddest feature for a regional bloc: a non-interference policy where member states could not interfere with the affairs of another. In context of the SCS dispute, it effectively means that there are no binding mechanisms for the more confrontational Vietnam to coerce the more pro-China Malaysia into shifting its policy stances, for example. The non-interference policy is a result of a shared trauma from colonialism (9 out of 10 ASEAN states are former colonies), with the idea of self-governance becoming a centerpiece when state leaders signed the ASEAN Bangkok Declaration in 1967 (Molthof, 2012). It means there is a heavy reliance on political goodwill for any regional level cooperation to work. It is not surprising then, that the multilateral-centric strategies outlined earlier in this paper remain unrealistic under current conditions. A united front between ASEAN states on the SCS dispute will first require internal disagreements to be solved, which will require a regional supranational body that could fairly rule over the overlapping claims. Amassing enough political goodwill to do this considering the already contentious internal maritime politics is nearly impossible. The practical short-term solution then, as per evidenced by current strategies, is to rely on micro-level, government-to-government negotiations.

 

III. The Role of International Law

 

The second dimension that explains the Southeast Asian states’ current strategy is the complications brought about by international law. The earlier discussion on the DOC and COC was only one part of the legal dimension in the SCS dispute. The United Nations Convention on the Law of the Seas (UNCLOS), intended to mitigate disputes over maritime claims such as in the SCS, exacerbated the situation in the region. This is a two-part issue: 1) vagueness in UNCLOS language allows for different interpretations, and 2) opt-outs from arbitration processes defeat the mechanisms that could have overcome the vagueness.

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For there to be a universally recognized dispute settlement mechanism, there also needs to be a universally recognized set of definitions for what is being disputed. UNCLOS stipulates legal definitions for the rights of states over waters beyond their shore, most controversially the provision of Exclusive Economic Zones (EEZs). It legally gives states the right to exploit resources 200 nautical miles off their shores (The Economist, 2012). There was no practical need for this beyond an incentive for states to sign onto UNCLOS, and that short-term incentive backfires. There is a two-part implication: 1) the importance of owning physical features in the SCS becomes of a strategic importance since EEZs establish a sizable control over a revenue-generating region, and 2) signatories regardless of size and military strength are now able to join in the conversation, which is good, but convolutes the already messy conflict by adding more players to the mix.

Note also that Southeast Asian states are primarily emerging markets, and the opportunity to reap benefits from riches of SCS can be vital growth drivers. There is also a more patriotic perspective to this; states could also be pursuing purely nationalistic campaigns to enforce historical claims. The Singapore-Malaysia dispute over Pedra Branca and China-Japan dispute over the Senkaku Islands are prime examples. Irrespective of what motivates the states to enter the dispute, the demarcation process would be delicate as the SCS outlines the shores of at least nine states.

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Even so, a fair and peaceful delimitation of boundaries would be possible if the arbitration process is thorough all the way to the enforcement stage. This is unfortunately not the case with UNCLOS. Article 298 in UNCLOS gives signatories the option to be excluded from arbitrations of “sea boundary delimitations”, “military activities”, and those within the allowable functions of the Security Council (United Nations, 1982). This clause is effectively an ‘opt-out’ from the very legal proceedings UNCLOS was built for. It allows UNCLOS signatories to circumvent the accountabilities that come with violating the document. China, as expected, opted out of Article 298, giving it the legal backing to not have to act on the 2016 PCA ruling.

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Consider Section II’s discussion on ASEAN states’ preference towards bilateralism. Government-to-government negotiations can be effective if and only if both sides agree to make themselves accountable to the outcome of those negotiations. Once this accountability becomes optional, it begs the question whether it is still wise for ASEAN to rely heavily on bilateral talks. Another way to put it, what are the consequences of ignoring the apparent systemic flaws in the way ASEAN operates?

 

IV. China’s Golden Paradise

 

A good way to understand the full consequences of the systemic flaw referred in the previous section is to study how that flaw has been used against ASEAN. Again, China is a key player here. With ASEAN preferring bilateralism over multilateralism, there is an opportunity for China to tailor its strategy to individual ASEAN countries. Furthermore, with non-interference policy in full effect, any bilateral relationship an ASEAN country builds with China cannot be questioned even if that relationship adversely affects ASEAN as an organization. While this may not necessarily be the case, it will be argued that China’ current strategy suggests it may be pursuing a Southeast Asian political realignment to Beijing.

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On ASEAN’s part, with its Member States focusing on building a closer relationship with China, there exist trade-offs in capacity building an already fragile ASEAN, whose social, economic, and political linkages remain underdeveloped. In context of the SCS dispute, this could mean a chipping away of the very foundation of ASEAN as a potential balancing power. A grimmer picture could be that, in the long term, the very existence of ASEAN may be endangered, should its weak organizing power falter under a Chinese realignment.

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To capture how this can play out, one needs to first understand how China specifically has come to hold the bargaining chip it currently has. The obvious is China’s economic strength; with a gross domestic product (GDP) of $11.2 trillion (2016), China dwarfs even the that of a combined ASEAN at $2.6 trillion (2016) (Asian Development Bank, 2017). As primarily developing markets, Southeast Asian countries are right to leverage on larger economies such as China or the United States, where injections of investments can help speed up their development process.

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Nonetheless, China’s economic strength does not explain why Southeast Asian governments are leaning heavily towards China more so than the region’s traditional hegemon, the United States (US). A traumatic colonial experience for most ASEAN Member States towards the West, in general, could partially explain this (Wilson, 2017). More recently in 1997, the International Monetary Fund (IMF)’s unpopular austerity policies in Thailand and Indonesia lead to disastrous results. This tattooed skepticism among Southeast Asians on long-term relationship building with the West, chiefly the US which holds the IMF’s largest voting power. An even more recent development is unrelated to ASEAN public sentiment at all; the United States is seeing a wave of populism that is pressuring both ends of the political spectrum to be more inward-looking. The election of conservative populist Donald Trump as president further solidified that the US may no longer focus on Southeast Asia. The final confirmation was in Trump’s decision to pull the US out of the Trans-Pacific Partnership (TPP), history’s largest regional trade accord (Granville, 2016).

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The vacuum created by a receding US adds to the already favorable conditions for Chinese dominance in Southeast Asia. All that is left is an execution plan that avoids painting China as another superpower taking advantage of weaker nations. In a 2004 speech, China’s Prime Minister Wen Jiabao made a compelling remark, stating that China’s rise “will not come at the cost of any other country, will not stand in the way of any other country, nor pose a threat to any other country” (Kurlantzick, 2007). This was in the wake of China’s Peaceful Rise strategy, when it realized that its aggressive, military-centric and coercive tactics backfired badly (Kurlantzick, 2007).

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This is what is called a charm offensive. The strategy draws from a concept political scientist Joseph Nye calls ‘soft power’, “the ability to shape the preferences of others...It is leading by example and attracting others to do what you want,” (Kurlantzick, 2007). To exercise its soft power, China needs to first change the rhetoric surrounding China’s position in Southeast Asia. The turning point was the 1997 Asian financial crisis, where China made the smart move to lessen the devaluations of the Thai baht and the Indonesian rupiah by refusing to devalue its own currency. The decision was publicized as an Asian solidarity measure, which reframed the conversation on China in the region.

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China’s charm offensive was then timely; it quickly moved to establish relationships with each Southeast Asian country through cooperation in cultural, educational, and business spheres. China invested heavily to improve its diplomatic outreach, visiting its Southeast Asian neighbors twice as many times as its US counterparts (Kurlantzick, 2007). China has also integrated Southeast Asia into its larger plan to create “the world’s largest platform for economic cooperation”, the Belt and Road Initiative (BRI). BRI is an ambitious modern iteration of the Silk Road trade route, and it aims to promote physical, economic, and social connectivity (Jinchen, 2017).

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China’s $113 billion pledge in infrastructure building along the proposed trade route is a catnip for ASEAN states who, according to The McKinsey Global Institute, need over $2 trillion investments between 2016-2030 “in road, rail, port, airport, power, water, and telecommunications infrastructure across ASEAN to maintain economic growth,” (McKinsey Global Institute, 2016). This is the key dilemma created by China’s charm offensive: there is a clear need to address its questionable actions in the SCS dispute, yet the allure of Chinese economic incentives is at the same time too good to ignore.

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While China continued to deny any geopolitical agenda behind BRI, two observations seem to imply otherwise: 1) the timing of BRI coincides with China’s increasingly aggressive position in the SCS, and 2) selective awarding of valuable economic packages to pro-China ASEAN Member States, most evidently the Philippines $13.5 billion pledge upon President Duterte's U-turn from the PCA ruling. The latter observation is further supported by a tripling of Chinese investment value in Malaysia between 2014 and 2015, curiously coinciding with Malaysia’s refusal to answer calls by the Philippines’ then-President Benigno Aquino III to stand up to China. This sparks speculation that the fluctuating Chinese investment value in Vietnam is a means of Chinese retaliation towards Vietnamese reclamation efforts in the SCS (Cheok, 2017).

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Therefore, ASEAN states tiptoe the line between maintaining their sovereignty in the SCS and appearing favorable to China to exploit its generous handouts. On the one hand, maintaining control over geographical features in the Spratlys and Paracels could come with additional revenues through EEZs, but cost-benefit analyses could prove economic ties with China to potentially bring in much higher revenues. At the core of this argument is the fact that the commodities at stake in the SCS are primarily in oil and fishing stocks. Consider the difficulty of extracting oil, its price volatilities, and its grim long-term prospects:  in 2016 BP estimated that the global oil reserves will last only for the next 53.3 years. A recent study by the OceanAsia project estimates depletions of up to 59% in key fishery stocks by 2045, putting the value of controlling fishery areas at stake (Sumalia and Cheung, 2015).

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Even in the potential unsustainability of income streams in the SCS, nationalism is such a big part of ASEAN – evidenced by an earlier discussed non-interference policy– that it begs a closer study on whether economic incentives are all it takes for China to assume a winning position in the SCS dispute. Earlier, it was argued that ASEAN’s non-interference policy creates a collective action problem where strong forms of multilateralism are hindered. This argument is also applicable to ASEAN’s inability to achieve the level of market integration required for a seamless intra-ASEAN trade and capital flows. ASEAN’s single market initiative, the ASEAN Economic Community (AEC), has made way for tariff reductions of 99.2% in ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) and 97.52% of tariff have been reduced to 0-5% in others (ASEAN Economic Community, 2015). Albeit slow, this is a remarkable achievement and signals a strong ASEAN solidarity in spite of its shortcomings. However, a closer look reveals a different story: there is almost a four-fold increase in non-tariff barriers and measures (NTB/NTM) from 1,634 measures to 5,975 leading up to AEC’s launch in 2015 (Zulfakar, 2017). Essentially, while ASEAN Member States markets their tariff reductions as proof of their commitment to ASEAN, the apparent shifting of potential loss of income to NTB/NTM suggests a collection of countries focused on individual economic gains more than Southeast Asia’s collective wellbeing. And by virtue of non-interference policy, ASEAN Member States cannot pressure each other to change their policies, at least not within the ASEAN framework. The inference is that yes, China may have struck gold through its charm offensive strategy.

 

V. A Chinese Takeover – Blessing or Curse?

 

As each ASEAN Member States form a closer bilateral relationship with China, it effectively means China will compete with ASEAN to become the common denominator in the Southeast Asian region. Should it succeed, it theoretically would put the entire region under its sphere of influence. The key puzzle this section will answer is whether a pivot to China would be detrimental to the development of ASEAN. Measuring this will first require a modeling of what a Chinese ‘takeover’ of the region would look like. One way to do that is to look at Member States who are now already highly dependent on China; a good example is Cambodia whose Chinese FDI amounts to 61% of its total FDI inflows.

The fascinating aspect of the Cambodian example is that its Prime Minister, Hun Sen, has not always been friendly to China, once calling the country “the root of everything that is evil”. Within twelve years, Hun Sen altered the description to “Cambodia’s most trustworthy friend”. China covered Cambodia’s shortages in aid during a 1997 coup. This has led to an over-reliance on Chinese aid, which in turn prevents Cambodia from doing anything that may irk China. One expert describes Cambodia “as an extension of China’s foreign policy,” (Hutt, 2016). This is proven by the country’s constant blocking of official ASEAN statements on the SCS dispute, all while using the term ‘neutrality’ to justify its position. Drawing a parallel to ASEAN, the Cambodia model could very well be China’s vision for the whole Southeast Asian region.

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Unlike the European Union (EU), ASEAN’s highest decision-making power remains at the state level, hence the logic should follow that individual Member States’ interests precede regional goals. Therefore, consider the endgame following a Chinese takeover as the region’s de facto common denominator. China’s ability and willingness to fill in investment gaps, the considerations towards ASEAN’s inherent flaws, and the realization that resources in the SCS are unsustainable all points to the perspective that China may be an ASEAN alternative Southeast Asia needs. Beyond the push and pull of power play between China and its Western counterparts, what then, is wrong with Southeast Asia embracing China?

For one, several red flags exist in the Chinese brand of regionalism. Firstly, China’s ignorance of the PCA ruling – a rejection of its ‘nine-dash’ claim in the SCS – sets a precedent of disrespect towards the international law. Secondly, there are contradictions in China’s narrative to create a harmonious cooperative environment while at the same time aggressively building up military capacity in the SCS, creating an environment of skepticism and distrust. Last and perhaps most dangerously, China’s support of authoritarian regimes such as in Cambodia and Laos does not bode well for human rights improvements. A Chinese sphere of influence appears to promote norms contrasting to that of ASEAN Member States at large. Should the consensus model remain a feature of Chinese-led regionalism – which it realistically will – the aforementioned norms would not promote healthy intergovernmental relationships.

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To prove this point, it is appropriate to use game theory to compare Southeast Asian cooperation between ASEAN’s framework and a Chinese-led regionalism. This is because Southeast Asian regional cooperation much resembles cartels seeking oligopolistic profits; the consensus model mirrors a similar decision-making process in a cartel where each firm’s decision could not be questioned by another. Collusion returns a higher producer surplus than a market competition would. In Southeast Asia’s case, economic benefits from free trade agreements (FTA) outweigh trade without barriers eliminated. However, cartels are generally unstable due to strong incentives to deviate. Without going too much into the underlying mathematics, the price or quantities set in a cartel, while bringing overall higher profits to the market, do not follow the best response possible for each firm.

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This is already happening in Southeast Asia: the AEC’s effort to eliminate trade barriers. Section IV outlined that while ASEAN Member States made significant inroads to eliminate tariff barriers, it was found that non-tariff measures and barriers (NTB/NTM) had in fact increased, signaling a mere shift income stream rather than a thorough elimination. This increase in NTB/NTM is a form of deviation, following obvious calculations that Member States stand to enjoy above average benefits through NTB/NTM while still reaping from the advantages of an FTA. Game theory states that for collusion to be sustainable, it requires for there to be: 1) only a few actors in the cartel, 2) a multi-market competition, 3) a transparent market for detection of deviations, and 4) symmetry between the firms (Policonomics). ASEAN Member States violate three of these conditions. With ten players, an often-opaque regulatory framework that makes detection of NTB/NTM difficult, and diverse economic strengths, from a game theory perspective it makes perfect sense that multilateralism is weak within ASEAN.

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However, at least within the ASEAN framework, there is a conscious effort – a strong political goodwill – to address the issue of NTB/NTM, so much so that the AEC Blueprint 2025, a 10-year action plan for the area, includes a focused and detailed effort to tackle this very issue (ASEAN, 2015). Consider this case in a Chinese-led regionalism, with the norms of disrespect towards international law and untrustworthy narratives coming into play. In a framework that relies so much on political goodwill, an air of distrust not only discourages cooperation to solve the underlying issue, but it further incentivizes deviations in a cartel-like arrangement. There is the true danger of a Chinese realignment in Southeast Asia. While the short-term economic incentives may be attractive and essential to fill in Southeast Asia’s infrastructure gap, there may be significant losses in economic benefits of an integrated Southeast Asian region compared to a bilateral-focused, Chinese-led model.

 

VI. Moving Forward

 

The previous section provides a strong case for there to be check and balances in China’s charm offensive in Southeast Asia. Analyzing the root causes of the SCS dispute’s prolongation revealed China’s apparent strategy to engulf the Southeast Asian sphere of influence into its own. Any strategy moving forward then must go beyond the SCS dispute; it also needs to address China’s long-term strategy in the region. In a way, China’s charm offensive has been a blessing because it also revealed what needs to be done to counter China’s rise. The crux of the strategy should be to look for economic-incentive driven strategies to encourage multilateralism in ASEAN, thus balancing against China. There are three ways to do this: 1) diversifying FDIs, 2) creating an ASEAN investment distribution mechanism, and 3) capitalizing on state strength to engage in less lucrative, intra-ASEAN investments.

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For starters, there needs to be a paradigm shift from the hunt of immediate gains that appeals to voters. This refers to China’s hefty financial investments, which, as shown, in states like Cambodia, Malaysia, and the Philippines, had apparent geopolitical agenda behind them. Cambodia especially, perhaps because it has no conflicting interests in the SCS as a landlocked country, is now practically a proxy for China in the region. It was the reason behind the failure for ASEAN to issue joint statements in recent years. With the Cambodian case in mind, the logical step would be for individual ASEAN Member States to be careful not to let China be in a dominant position in any form of monetary assistance. The guiding strategy here is then to diversify the pool of incoming capital, be it in terms of FDI, aid, or trade. There are two ways ASEAN Member States can diversity, by increasing their extra-ASEAN and/or intra-ASEAN sources.

In the extra-ASEAN strategy, the impending puzzle would be to find other partners as able and as willing as China in handing out economic incentives. The best alternative is perhaps Japan, another Asian economic power which, despite stagnating FDI contribution to ASEAN, remains the Chinese amount in net terms ($17.6 billion compared to China’s $8.2 billion in net inflows at 2015 levels). What needs to change in Japan’s strategy is the distribution of its investments in the region. Japan’s investments are focused on manufacturing, the largest in the region by far, which does imply that it is playing a role in filling in the infrastructure gap required by the industry. However, Japan’s factories are highly concentrated in Thailand and Indonesia, and are highly insignificant in the CLMV (Cambodia, Laos, Myanmar, Vietnam) countries, with FDI shares in the single digits (ASEAN, 2017). The CLMV countries are key because their low-income status creates an easier path for China to supplant its influence. Apart for Vietnam’s historical adversity towards China, the country holds a giant’s share of FDI inflow into Cambodia and Laos – 22% and 66% respectively – and is currently Myanmar’s largest trade partner at a third of its total (ASEAN, 2017).

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The key difference between China and Japan is their motivation behind investing heavily in Southeast Asia. While both seek to balance each other out with regards to the SCS dispute, Japan does not have an apparent geopolitical agenda comparable to that of China. At least from an investment perspective, it appears Japanese companies are flocking for its economic incentives, and not for any Japanese-government mandated charm offensive. CLMV states will need to provide better economic incentives to Japan than the ASEAN-6 (Malaysia, Thailand, Singapore, Brunei, Indonesia, the Philippines). At the moment, this is unrealistic because even with their high growth rates –averaging at 6.1% compared to 4.1% in ASEAN-6 in 2016, GDP per capita in CLMV remains 2.7 times lower than the ASEAN-6.

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Should ASEAN Member States fail to find a suitable substitute for China’s inflowing capital, an alternative proposal could instead be to create a regional-level capital distributing mechanism. The idea is to have all capital inflows to ASEAN to first go through a central collecting agency, which will then distribute them to areas of the highest need. An advantage of this strategy is in eliminating the ‘carrots and sticks’ strategy China currently employs in the region. China can then no longer reward obedience and punish confrontations. The strategy also encourages a more equitable development within the region, which, as stated previously, remains disparate between CLMV and the ASEAN-6.

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As compelling as this idea may be, it faces several challenges. First, it will face an uphill battle from ASEAN Member States because a centralized collection agency essentially implies a violation of the non-interference policy. Given ASEAN’s diverse economies with varying returns to investments, a central collecting agency may deter potential investors since they will not be able to control where their investments go. The final caveat is that the political feasibility of this strategy, given China’s charm offensive, nears impossibility. China will likely use its leverage in Cambodia and Laos to veto any binding decisions on the strategy.

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Taking such roadblocks into consideration, perhaps a modification of this idea can work. Instead of a centralized collection agency that becomes the middleman for foreign investments, ASEAN Member States can opt to create their own version of the ASEAN Infrastructure Fund (AIF), an initiative under the Asian Development Bank (ADB) that gives financial assistance for infrastructure building. AIF on its own is insufficient because it remains capped at $300 million a year, far below the what is needed by the region. Indonesia, for example, needs $358 billion worth of investments in infrastructure spending by 2019 to keep pace with its targets (ASEAN, 2017). More tellingly, AIF funds are tied to projects endorsed by the ADB, in which China holds the largest voting share amongst Asia-Pacific shareholders. The proposed ASEAN Regional Fund (ARF) ought to be within the full jurisdiction of ASEAN, where it can dispense funds without having to answer to China or other superpowers.

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It will become obvious that ASEAN governments will not be able to gather the funds necessary on their own. One possible model to follow is to engage in a public-private partnership (PPP), only instead of a single company doing a joint venture with a particular ASEAN Member State, the proposed ARF will be responsible to pool money by their relevant sectors. Any infrastructure building projects will then be on a shared value basis. That way, state-owned companies cannot exert any geopolitical agenda behind proposed projects. In 2016, intra-ASEAN investments accounted for a quarter of FDI flows in the region ($24 billion), a 500% increase from 2003 levels where an upward trend has been observed since. What is more compelling is how intra-ASEAN investments in CLMV are also getting the lion’s share of total investments (ASEAN, 2017). These figures show an increasing regionality of ASEAN businesses, and that an ASEAN-led ARF may not be far from reality. In terms of feasibility, it is to be expected that ARF’s implementation will take a long time since there remains the issue that ASEAN Member States possess varying regulatory frameworks. It would require some minimal level of harmonization to avoid issues such as double taxations.

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As far as short-term strategies go, ASEAN Member States are fairly limited by the constraints echoed throughout this paper. A viable short-term strategy has to navigate through the inability to legally coerce other ASEAN Member States, an international law framework that does not have a real enforcement power, and high reliance on economic incentives. Therefore, it can be argued that a state-level solution remains the most viable option. The explicit suggestion here is for Member States to individually forgo trade deals with China, and signing less lucrative deals with other external partners or other ASEAN Member States. What the strategy aims to do is to capitalize on ASEAN Member States’ incentive-driven nature to promote multilateralism. How is this politically viable on a local level? Intuitively speaking, foregoing valuable financial assistance may paint incompetence to local voters, thus potentially costing elections. ASEAN Member States, however, are ‘strong states’, where “policymakers are highly insulated from [domestic interest-group pressures]” (Oatley, 2016). It suggests that ASEAN governments have significant room to follow policies that the public may not agree with, which includes the proposed strategy above.

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The core logic of the strategy is the following: increasing intra-ASEAN trade and capital flow to facilitate capacity building in ASEAN. These intra-ASEAN investments will help to create formal and informal linkages that intertwine Member States’ interests beyond their own geographical border. These newfound linkages may pressure Member States to also think about their regional investments on top of China’s investments, especially as China becomes more fearless in exercising its ‘carrots and sticks’. In the long run, this could mean a greater need to align policies, hence promoting more multilateral dialogues. In context of the SCS dispute, this could also encourage the option of joint explorations in the waters, solving the dispute at least between ASEAN Member States.

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The three strategies outlined above focus heavily on trying to balance against China’s creeping charm offensive, but it requires a closer look to determine whether they would automatically solve the SCS dispute. On the one hand, each of these strategies seeks to cripple China’s ability to use money to pressure its ASEAN dependents to respect its interests. On the other, a decaying Chinese influence is not an easy solve; it merely equates to a leveling of the playing field. Another dimension remains unsolvable: the failure of current legal frameworks to fairly arbitrate the dispute. Unless China submits itself to the binding mechanisms under UNCLOS, or voluntarily respects the original PCA ruling, the SCS will remain a contentious issue. A further argument could be made on the possibility that the SCS is not a fight worth fighting. This is in consideration of an earlier cost-benefit analysis of maintaining EEZs in the SCS. The natural resources, namely oil and fish, are unsustainable and are expected to deplete in the near future. Beyond the pretense of sovereignty, it seems clear cut for ASEAN Member States to abandon an unwinnable battle to focus on more actionable strategies.

 

VII. Conclusion

 

A study of the South China Sea maritime dispute requires focus on two key players: China and ASEAN. A surface level observation sees China engaging in questionable behavior in the SCS through its aggressive militarization, island building, and blocking of fishing activities. As for ASEAN, it is striking why there is not a strong multilateral opposition against China, given the high-stakes nature of the disputed areas. A preliminary analysis of how China and ASEAN have approached this dispute so far reveals an insufficient Code of Conduct, where recent negotiations indicated China’s unwillingness to succumb to rule of law at its own expense. There is also the observation that an increasingly diverging ASEAN Member States position also weakens multilateral approaches to solve the dispute.

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On reasons why the boundary delimitation process has been slow, the argument is two-fold. First, the preference for bilateral process stems from a historical success of such dialogues in the past. Digging deeper, ASEAN’s own structure appears to be at fault. By having a consensus model, and a non-interference policy towards Member States, ASEAN lacks a punishment or coercion mechanism. It means that any regional-level initiatives will require the political goodwill of all Member States. A second dimension that explains the SCS dispute’s prolongation is in the role of international law. UNCLOS, designed to mitigate disputes such as in the SCS, is found to be inherently flawed in two ways. First, UNCLOS’s legal definitions for what states can claim complicates the SCS dispute; the unnecessary inclusion of EEZs contributed towards increasing competition to take control of features in the SCS. Secondly, the use of opt-out clauses from certain parts of the arbitration process defeats the whole purpose of the arbitration process altogether.

Another catalyst for Chinese domination in the region is in a receding US trend, at least in terms of its soft power. China recognizes the weakness of its hard power; hence, it exercises its soft power through a charm offensive strategy. This entails changing China’s rhetoric among ASEAN Member States as well as handing out generous economic incentives. The observation that China channels capital to Member States that protect its interests, and pulls out of those who do not, showcases the country’s ‘carrots and sticks’ gameplay to become the region’s new common denominator. Between the fight for sovereignty and economic incentives, it was shown that fighting for sovereignty in the SCS may not be the best strategy after all. Depleting fisheries and oil reserves does not amount to the same long term economic benefits of a Chinese infrastructure splurge. Also, the increase in non-tariff measures and barriers (NTM/NTB) upon the launch of the AEC in 2015 shows that ASEAN Member States are inherently incentive driven. Therefore, a Chinese-led regionalism is clearly the profit-maximizing outcome.

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In exploring the downsides of a Chinese-led regionalism, comparing the operation of ASEAN to a cartel, leads to the equilibria where Member States are strongly incentivized to deviate from a cartel-like arrangement. The difference from an ASEAN-led regionalism is in the norms China practices. China’s rejection of the PCA, for example, shows brazen disrespect for international law. Norms practiced by China does not promote healthy intergovernmental relationships moving forward.

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There is now a recognition that the SCS maritime dispute is only a small part of a larger, more existential threat towards ASEAN. Strategies moving forward should not then be short-sighted to any single aspect such as the SCS dispute alone. The first recommendation would be to diversify the sources of foreign investments in the region. Japan was given a suitable alternative, but a balancing against China can only happen here if Japan invests in the same sectors and locations, which is unfortunately not the case in such a segmented region.

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The second strategy is to create a capital distribution mechanism to promote equitable development hence reducing the ability of external powers such as China to influence the foreign policies of any Member State. A central collecting agency may prove to be too intrusive, hence a modified version centered on pooling money through public-private partnerships (PPP) may be a good way to do this. The only downside of this strategy is that it requires significant advances in ASEAN’s regional regulatory framework.

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One potential short-term solution to the existential threat posed by China would be to capitalize on ASEAN Member States’ ability to pursue sometimes unpopular policies in their respective countries to encourage intra-ASEAN investments. The whole point of this strategy is to further intertwine Member States’ interests within the region, but beyond their own national borders. These will create formal and informal linkages which will pressure governments to protect their now far-reaching investments. This is a form of an economic incentive-led way of encouraging multilateralism. All in all, as the strategies proposed show, ASEAN remains an essential medium in managing internal and external threats to Southeast Asian nations. ASEAN’s flaws are being used against it, but it also exposes where it can improve on moving forward. That is good progress.

 

Endnotes

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9To meet its energy demands, China imports 54 percent of its oil from the Middle East, 80 percent of which passes  through the southern SCS passage.

10 Southeast Asia technically consists of 11 countries, with Timor-Leste remaining as an observer of the bloc

11 Cambodia, widely considered as China’s “most faithful client state”, has been behind the blockade of at least two post-summit statements; their position could be because China remains Cambodia’s largest aid provider, an incentive the low-income state sorely needs to catch-up with other ASEAN Member States.

12 Malaysia’s military exercise is part of a growing bilateral military cooperation between the two countries. It has grown from cooperation in disaster relief towards sea lane protections in Straits of Malacca. China also signed a ~$13.5 billion contract to build a rail link that will cut cargo shipping by 30 hours.
13 Vietnam began dredging its military-controlled Ladd Reef in 2016, and signed a gas-drilling venture with ExxonMobil due to be in full operation by 2023.
14 Singapore is in an ongoing dispute with Malaysia over Pedra Branca and South Ledge; Thailand and Cambodia both dispute overlapping claims over Koh Kut; Myanmar does not have shore in the SCS; and Laos is a landlocked country.

15 “In the mid-1990s, China had tried to use military strength to intimidate other countries in Asia, by aggressive moves like sending ships to unoccupied, disputed reefs in the South China Sea. At the same time, Beijing called on other nations in the region to abandon their alliances, mostly with the United States, arguing that these had been made obsolete by the Cold War. This strategy backfired. Countries across the region condemned Beijing’s aggressive behavior and solidified their military links with the United States, drawing the US armed forces closer into the region, and closer to China—exactly what Beijing did not want.”

16 The FDI is on a net basis, and computed as follows: Net FDI = Equity + Net Inter-company Loans + Reinvested Earnings. The net basis concept implies that the followings should be deducted from the FDI gross flows: (1) reverse investment (made by a foreign affiliate in a host country to its parent company/direct investor; (2) loans given by a foreign affiliate to its parent company; and (3) repayments of intra-company loan (paid by a foreign affiliate to its parent company). As such, FDI net inflows can be negative.

17 Japan’s FDI share in 2016 are as follows: Vietnam, 10%; Myanmar, insignificant (collapse into Others; Lao PDR, 4%; Cambodia, 9%.

18 In 2016, intra-ASEAN investments account for: Cambodia, 28%; Laos, 18%; Myanmar, 58%; Vietnam, 18%.

 

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