Since China began rapidly building and militarizing artificial islands in the contested, resource-rich waters of the South China Sea, the states most threatened by Chinese expansion are looking for ways to push back more forcefully. However, the region's reliance on Chinese investment is still playing in China's favor. Beijing hopes to use this reliance to promote its vision of a China-led order in which trade on its terms underpins stability and security in the Western Pacific.
Even with the proliferation of capital across Southeast Asia, no state can afford to exclusively rely on Chinese trade and investment, as has been made clear by the region-wide ripples of China's recent economic slowdown. However, Beijing can exploit the needs and divides within South China Sea claimant states themselves, particularly in the Philippines and Vietnam. Both countries stand to suffer materially from a more assertive Chinese presence off their coasts, but both are highly constrained by common economic and political factors.
Vietnam has long been attempting to diversify its economy, and it stands to reap export windfalls from foreign trade agreements such as the Trans-Pacific Partnership (TPP). But Vietnam cannot isolate itself from Chinese markets and suppliers. In 2014, China's trade surplus with Vietnam approached $25 billion, and low-priced raw materials and machinery from China are still critical to Vietnamese exports. Vietnam's dependence on Chinese investment and trade means that powerful stakeholders in Hanoi will be wary of taking decisive action against China.
Trade is comparatively less of a factor between China and the Philippines. Two years ago, the Philippines received the second-lowest total Chinese investment among ASEAN members, and China was only its third-largest trading partner. But the Philippine economy has surged anyway, with foreign direct investment jumping around 66 percent in 2014 alone via a range of partners, most prominently the United States, Singapore and Japan. Its economic growth was the second fastest in Asia last year, and it is projected to average double-digit growth over the next four years. Earlier this year, Manila expelled Chinese experts helping develop the national power grid partly because of security concerns, demonstrating its willingness to sacrifice economic interests for security considerations. Nonetheless, the Philippines is more isolated from regional markets than other South China Sea claimants, and there remains a healthy appetite for Chinese investment.
Trade considerations will continue to shape the regional landscape and give most stakeholders pause before escalating matters in the South China Sea.
