South_China_Sea_dispute_via Google Earth maps

The latest news South China Sea conflict (see today’s Bloomberg BusinessWeek article) broadcasts more of the same rhetoric, and reaffirms a hardened stance by China, and other Asian countries–Vietnam, Philippines, Taiwan, Malaysia, Brunei–involved in the dispute regarding rights to minerals / natural resources discovered in the South China Sea.

As we can easily ascertain from previous territorial disputes, land containing large amounts of deposits of energy producing substances like oil, gas, and coal,  often lead to conflict among countries with a stake to the claim.

While the U.S.A. denies an economic mining interest in South China Sea oil fields (and currently explains its presence in the area as being there solely to protect national interest trade routes), China and its rivals are contesting rights to areas in the South China Sea– thus quickly escalating a dispute that is becoming more serious by the day.

Without more U.S. intervention in this South China Sea conflict or a stronger rallying of support for its allies involved in the dispute, however, in all likelihood the nations coming against the might of China are likely to become fragmented, their resolve splintered, and acquiesce to China’s demands…which may tip the balance of power in the South China Sea.  (*China is the second consumer of oil in the world (USA is #1 at this time), and is vigilantly pursuing South China Sea mineral rights, with a ramped military power behind its resource / economic aspirations.)

The USA, as it were, has strengthened its presence by mobilizing military vessels in the South China Sea, but with wilting naval budgets, the move is more symbolic support of allies rather than a significant move to thwart China’s ambitions in the South China Sea.

According to Dean Cheng, in “Storm Warnings: South China Sea Tensions Reflect Danger of Defense Cuts,” The South China Sea is becoming an ever more perilous flashpoint as China increasingly asserts its control over the region and develops the means to back it up. Consequently, the U.S. needs to make clear that regional and global interests are at stake, that it remains committed to preserving the peace in this vital area, and—perhaps most importantly—that it will retain the capacity of its armed forces to do so.”

Naturally, China is criticizing the USA for interfering (and being complicit unfairly containing China) in what it sees as a Asian affair that should be handled internally, among the Asian parties involved.

From a business standpoint, the South China Sea dispute erodes trust between the U.S. and China. In the downward spiral that has become representative of U.S.-China trade relations (see Trade Wars) as of late, this is just another straw weighing heavily on the “camel’s back.” While it probably won’t have a short term affect on U.S.-China business, barring armed conflict between the U.S. and China, it signals to U.S. business leaders that doing business with the Chinese has become more fraught with risk, in comparison to off shoring to countries, like Mexico, that once saw a greater majority of U.S. economic partnerships before China became the world’s preferred manufacturer. Expect that status to shift, as labor (and other) costs increase, world consumer demand/wealth decreases, the global economic crisis deepens, (U.S.-China) protectionism gains momentum, and national interests collide in flashpoints like the current South China Sea dispute.

Reader question: Because of the rapidly multiplying complexities that comes with doing business with/in China, is your company considering an alternative business partner to China?