Australia’s Box Seat View of the East China Sea Dispute

If you needed a bit more evidence of how important China is to Australia, the trade figures for October should do the trick.

According to the Australian Financial Review, exports were a record $9.1 billion, double the value from sales to the United States and Japan. Sales to those markets, in fact, also happen to be in decline.

But probably here’s the key quote for all of us: ‘They [the figures] also confirm why economic data out of China is having an increasingly growing impact on the Australian dollar, local shares and interest rate expectations.‘ 

It’s also why it makes China’s recent move in to establish the ‘East China Sea Air Defense Identification Zone’ (ADIZ) so fascinating…

China Flexes Some Muscle

In case you missed the story so far, the East China Sea ADIZ is just north of Taiwan and covers the disputed Diaoyu/Senkaku islands. China and Japan both lay claim to the islands. The Chinese announced the ADIZ without warning. It also conflicts with the Japanese one already in place. 

Practically speaking, the ADIZ deals with rules concerning commercial aircraft flights. The Chinese ‘rules’ include all aircraft identifying themselves to Chinese air traffic controllers, being approved and staying in communication. That all sounds pretty tame except for the threat of the armed forces that ‘will adopt defensive emergency measures to respond to aircraft that do not cooperate.

Even so, who cares? Well, things might just go a little bit deeper than that. As Dan Denning argued in Scoops Lane this week, if you view it in the context of World War D, there’s a broader territorial ambition here.  

Source: Military Tech Alert, US Ministry of National Defense
Click to enlarge

At stake is not just fishing rights but also potentially lucrative oil and gas reserves under the seabed.

China will open up a ‘Deep Sea Base’ facility next year at the port of Qingdao, with the purpose of facilitating offshore oil and gas exploration,’ reported Dan on Thursday. ‘The East China Sea is relatively unexplored territory for oil and gas. It almost surely won’t turn out to be a new North Sea or Gulf of Mexico.

But in the scheme of things, there’s no doubt that China is using its growing economic power to exert more political and military influence in the Pacific. This complicates matters for Australia. Will it choose a political alliance with the US or an economic alliance with China, even if it means tacit agreement with China’s regional ambitions?

It’s a question that led Dan to get Byron King on the phone this week. Port Phillip Publishing subscribers can see the conversation here.

Byron is an ex US navy officer and currently an editor for a publication focused on the military. He’s also a geologist and security analyst. That’s a handy set of skills. There just some of the reasons we’ve booked in Byron to appear at the World War D  conference next year.

The big question for Byron is whether the agreements and alliances in East Asia will hold. A lot of them are relics of the Second World War and now China’s in town to shake up the old order.

‘When you take it all in,’ he wrote in a recent note. ‘China just converted a war of words with Japan into a full-blown, potential wartime scenario. The new Chinese ADIZ now clearly defines a battle space.

‘Under traditional international law, Japan could view the Chinese ADIZ declaration as an act of war. At the very least, the Chinese ADIZ is a direct military challenge to Japan.

‘Legally, there’s a troubling precedent here. If Japan — and/or other Asian nations, the U.S. and/or the U.N. — does nothing, inactivity lays legal foundations for China to make a similar ADIZ declaration that covers the South China Sea, also subject to Chinese claims and multilateral territorial disputes. But at this stage, a "South China Sea ADIZ" would be in keeping with Chinese efforts to dominate air and sea space adjacent to its coastlines.’

What’s Going on With China?

The way Byron sees the tea leaves, Asian countries suspicious of Chinese hegemony like Japan, Taiwan, South Korea and the Philippines are about to open their cheque books and ramp up defence spending. ‘Money will flow like Niagara into Asian rearmament.‘ But what’s in it for China? Here’s how he sees it:

I’m inclined to believe that we’ll see more Chinese actions that assert the country’s status and power. Why? Well, moves like this play to the strength and decisiveness of the Chinese Communist Party as it tackles the vast economic issues and reform that are coming home to roost.

Still, consider the larger perspective. If the U.S. — and certainly the aggressor of World War II, Japan! — builds an alliance of anti-Chinese Asian states, it would represent a true reversal of the tide of history. And perhaps the Communist big shots and ideologists in Beijing have misread themes of history that they believe predict Chinese dominance in Asia. We’ll all likely live long enough to see this play out.

The very least we can say is Australia certainly has the box seat.

Callum Newman+
Editor, Money Weekend

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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