South China Sea Conflict Could Harm U.S. Small Business Interests

Island, rock or low-tide elevation? 

The question might seem trivial, but it could have major implications for U.S. small businesses that engage in international trade. That's because disputes between China and other countries in South Asia over territorial rights in the South China Sea could disrupt important shipping lanes or make shipping riskier and more costly in that region of the world.

Particularly at risk are small businesses that import or export goods that are shipped through the South China Sea or that purchase supplies from or sell products into China or other South Asia nations.

Shipping Costs Could Rise

The South China Sea covers 1.4 million square miles and contains some of the world's most valuable shipping routes. By some estimates, more than $5 trillion of goods pass through this area annually. The U.S. is estimated to account for about $1.2 trillion of that total. The area is also believed to contain valuable oil and natural gas reserves.

If sailing through the region becomes more dangerous or is perceived to be riskier as a result of the disputes, maritime insurance costs could rise, and U.S. small businesses that ship goods through the area could face higher costs.

Another risk is that China or other nations might demand tolls on ships or goods that pass through seas they claim to control. That also could raise shipping costs for U.S. small businesses.

The South China Sea is also an important region for fishing as some 12% of the global supply of fresh-caught fish is estimated to come from this area.

In the same way that U.S. businesses' shipping costs could rise if the disputes aren't settled, the price of fish and cost of fishing in the area could increase as well.

Armed Conflict Is a Possibility

The controversy also could create ripple effects that might spill over to business operations far beyond shipping.

With labor costs in China on the rise, many U.S. companies have moved their manufacturing facilities to other South Asian countries. That could also increase their risk of negative consequences.

If disputes in the South China Sea area aren't resolved peacefully, military action or war could be the result.

While a war in the region could create new business opportunities for small U.S. companies that supply the nation's defense contractors, additional U.S. military costs could lead to higher federal income taxes for small businesses or business owners. 

Ruling Against China Sparks Concerns

The island, rock, or low-tide elevation question was at the heart of a recent ruling by a tribunal of the Permanent Court of Arbitration in The Hague, Netherlands. In one particular dispute between China and the Philippines over certain portions of the South China Sea that China claims to control exclusively, the panel found for the Philippines and against China.

Concerns that the dispute could escalate into military confrontation have been sparked by China's stated intention to ignore the ruling. Both China and the U.S. have expressed a strong preference for a peaceful diplomatic solution.

The Philippines and China aren't the only countries involved in these disputes. Indonesia, Malaysia, Taiwan Region, and Vietnam also have made claims to parts of the South China Sea.

Some of these countries have built their own islands and airstrips in the area to try to solidify their position. China has been the most active and has also produced a map on which it claims almost all of the South China Sea for itself.

China's map, known by its nine-dash line, suggests it would be extremely difficult for ships to pass through the area without entering Chinese-claimed territory. The long way around would take ships south of Indonesia at much greater cost.

International laws and treaties that govern the area are complex and open to interpretation. Not all of the treaties have been ratified by all the affected nations, including the U.S.

Though the South China Sea is far from U.S. shores, small businesses here should monitor developments in the area and be prepared for a variety of possible political or military developments that may positively or negatively affect them.