A dark possibility lurks in the shadows of the United States and China’s mutually beneficial trade relationship. As China’s militarization of the South China Sea continues to create tension with the United States and its allies, including Japan and the Philippines, a potential showdown looms. The conflict is still in its early stages, but if the precarious relationship between the United States and China falters even slightly, the economies of both countries could change irreparably.
Several weeks ago, Chinese President Xi Jinping warned American officials to stay away from the islands China has been building and arming in an area of the South China Sea. U.S. Defense Secretary Ashton Carter publicly refused, asserting that China does not have sovereignty over the water. Now, the United States has plans to send several Navy warships to the zone in question, solely for the purpose of exercising its legal right to do so and flexing its military muscle.
The Economist predicts that America’s direct refusal to respect China’s orders will not lead to mass violence — for now. The resources and power of the U.S. Navy are absolutely unmatched, and Chinese officials would be extremely unwise to issue a specific threat.
However, the Chinese did tell us to stay out of their waters, and even though they left us little choice but to disobey, this conflict could affect the global economy. Even without regard to specific relations between the two countries, the South China Sea is an important economic location. The Council on Foreign Relations predicts that a clash in the region would detrimentally affect the $5 trillion worth of trade that travels through the South China Sea yearly.
Furthermore, the economic relationship between the two countries is at stake. China is our primary source of imports and our third-largest source of exports, according to the Library of Congress. In the past, many economists have accused China of undervaluing its currency in order to boost exports. This policy may have been a crucial factor in the development of the huge U.S. trade deficit within the last few decades.
If keeping the value of the Chinese renminbi low could affect the U.S. economy so strongly, actual naval conflict between the two nations could be catastrophic. Not only would both nations be funneling immense quantities of money into fighting one another, but also their codependent economies could fall into recession or worse if trade decreases greatly.
Fortunately, a war is unlikely to occur, at least for now, but China is putting considerable resources into bolstering its navy and militarizing the South China Sea. World trade and the Chinese/American relationship will likely not escape completely unscathed.
Consequently, the U.S. government should tread carefully in making policy decisions from this point on. In the longterm, the country can focus on diversifying trade options and forging connections with smaller nations. However, due to the largely free and open nature of U.S. trade, the government has relatively limited control over the countries with which its firms and consumers interact.
China has most of the power in this situation. Hopefully, it will realize that it has little to gain from picking fights with the world’s strongest navy. However, its increasing militarization of the South China Sea appears to be leading somewhere, and surrounding nations — Malaysia, the Philippines, Taiwan and Vietnam all lay claim to parts of the region — are concerned.
The oil and natural gas reserves in the South China Sea make it extremely valuable, so it makes sense that several countries are trying to claim it. However, if China tries to force other nations away, they will all have an incentive to band together with the United States against that aggression. China probably recognizes this factor and will hopefully end militarization when it sees that it is not scaring away its neighbors and the United States.
Overall, the continued openness of Chinese trade routes is crucial. If China goes to war with a nation that has invaded its claimed territory, world trade could decrease drastically. This result benefits no one and will decrease the size of many countries’ individual economies. Exchange and inflation rates would fluctuate unreliably, and the damage would increase irreparably. The devastating effects that could come from China’s recent militarization are limitless.
Gracie Hochberg is a sophomore in the College. By The Numbers appears every Friday.