The number of claimants, the complex cultural and political landscape of Southern Asia, the balance of military power, and a range of geographical issues create a multi-layered problem that defies common resolutions and requires a complex approach in order to arrive at a plausible solution.
Purpose of Paper
The first objective of the paper is to critically analyze the issues pertaining to the land ownership dispute and outline a solution for one of the island groups, the Paracel Islands. The second objective is to identify the political risks for external parties that engage in economic relationships with one or more claimants or are otherwise involved with territories in question.
Overview of Paper
The paper covers each issue in a separate section by providing a brief overview, outlining the most appropriate solutions, and identifying the strengths and weaknesses of each option whenever appropriate.
Main Issue 1
Paracel Islands are one of the several chains of islands in the South China Sea that remains a point of active ownership debates between several countries. Similar to other island territories in the region, the Paracel Islands offer significant economic advantages due to the presence of abundant fish stocks (Griffin & Pustay, 2015). In addition, it has been established that the territory around the islands contains major natural deposits of oil and gas. Finally, the ownership of the islands determines the location of territorial waters and, more importantly, an exclusive economic zone (EEZ), which provides significant economic opportunities for the owner. Currently, the ownership of the Paracel Islands is disputed between China, Taiwan, and Vietnam. Historically, the territory was administered by South Vietnam from 1954 to 1974, when the control was ceased by the Chinese navy. Recently, a claim of ownership was made by the National Assembly of Vietnam but was dismissed by the Chinese government. The case is further complicated by the fact that China considers Taiwan a part of its sovereign territory.
Several approaches have been proposed to resolve the issue. First, it is possible to create a binding Code of Conduct between the Association of Southeast Nations (ASEAN) and China that would regulate commercial activities in the region. Such an option offers an advantage of incorporating the existing international conventions that are already ratified by both sides of the conflict and cover the possible misinterpretations of the Code (Thayer, 2017). However, the Code of Conduct is adopted after a consensus is reached between all parties, which is unlikely in this situation (Thayer, 2017). Another option is a binding arbitration under the aegis of the United Nations Convention on the Law of the Sea (UNCLOS). The arbitration is expected to provide optimal conditions for all involved parties with a sufficient degree of formality. However, this option will likely be unfavorable for China, whose agreement is required to start the process. Finally, it has been proposed by China to initiate bilateral negotiations. Such an option would minimize the complexity and cost of the resolution but offers China the upper hand in settling upon the conditions, which will result in unfavorable terms for less powerful countries. Considering the information above, a binding Code of Conduct offers the fairest conditions for all stakeholders and is the most realistic option.
Main Issue 2
In a scenario where the rights for the exploration of the Spratlys Islands were granted to the Forum Energy PLC by the Philippines, it is reasonable to expect several political risks. The most apparent one stems from the fact that Vietnam also claims ownership of the islands and actively issues exploration rights to international partners. In the latest example, the country’s officials have granted such rights to an Indian company ONGC Videsh (Griffin & Pustay, 2015). Once both organizations initiate their exploration, the dispute likely reverts to the original confrontation between the parties. The issue is further aggravated by the fact that many of the claimants station their troops on the islands’ territory (Griffin & Pustay, 2015). It has also been pointed out that the Philippines tend to ignore China’s claim over the entire territory of the islands and instead view only three reefs as sovereign territory of China. It is important to note that the claims by China are based largely on the historical perspective and, according to some experts, are questionable (Thayer, 2017). Thus, considering the scope of the issue and the forces currently involved, it is possible to suggest a major intervention including arbitration under the supervision of a third party as the most feasible solution to the identified risks.
Main Issue 3
Toyota is one of the major players in the global automotive market. Due to political tensions, the company’s FDI in China faces significant risks associated with a complex geopolitical situation regarding the Pinnacle Islands. In the past, Chinese consumers have reacted to Japan’s nationalization of the islands by boycotting the Japanese brands of cars, which has led to a 50% drop in sales in 2012 (Griffin & Pustay, 2015). In addition, it is necessary to acknowledge the risk of anti-Japanese riots that may inflict substantial damage to Japanese-owned businesses.
In order to mitigate the identified risks, it is first necessary for the company management to assess the possible threats and opportunities of the Chinese market. Currently, the Japanese domestic automotive market is limited by geographical conditions, requiring international expansion in order to generate revenue. From this standpoint, sustaining operations in the Chinese market remains a priority. Next, it is necessary to estimate the losses expected to be incurred as a result of political tensions. For instance, it should be acknowledged that the 2012 decline in sales was followed by a relatively fast rebound of the market in the same year (Kiyoyuki, 2014). Admittedly, the automotive market was among the slowest segments to recover, alongside tourism and government procurement. Nevertheless, the next year all major Japanese car manufacturers with FDI in China, including Toyota, reported exceptional sales figures (Kiyoyuki, 2014). Incorporating these scenarios in the strategic planning of Toyota’s corporate activities is thus the most reasonable solution that would allow an accurate evaluation of profits and an adequate allocation of resources for risk prevention and mitigation at a corporate level.
The described situation is unlikely to be resolved to the mutual satisfaction of all parties via negotiations. The main takeaway of the case study is thus the illustration of a possibility for the vested parties to frame the issue in their favor by appealing to ambiguity in formal proceedings. Therefore, it is recommended to resort to a binding Code of Conduct between ASEAN and China in order to ensure optimal political conditions. It is also possible to use arbitration under UNCLOS, which would address the issue of conflicting discourses between China and the Philippines. Finally, the foreign corporate entities operating in China are advised to mitigate the political risks by incorporating the known ones into their companies’ strategies and allocating resources to risk prevention and mitigation practices, thus avoiding unexpected losses and maximizing profits.
Griffin, R. W., & Pustay, M. W. (2015). International business: A managerial perspective (8th ed.). Thousand Oaks, CA: Pearson.
Kiyoyuki, S. (2014). Economic opportunities outweigh risks in China. Web.
Thayer, C. A. (2017). South China Sea: Pros and cons of ASEAN’s code of conduct. Web.