South China Sea: Rising Maritime and Geopolitical Tensions

Geopolitical tensions due to maritime territorial disputes in the South China Sea (SCS), particularly between the Philippines and China, are likely to escalate in the short term in light of the 10th anniversary of the July 12, 2016, SCS arbitral tribunal ruling. The tribunal had ruled largely in favor of the Philippines and concluded that China has no legal basis under the United Nations Convention on the Law of the Sea (UNCLOS) for its historic rights claims within the SCS. China has rejected this ruling while continuing land reclamation around islands that it controls in the SCS. Both countries are likely to double down on their respective claims in the SCS as they cannot be perceived as making concessions to the competing side domestically or internationally. The risk of either side initiating a conflict over the disputed territories remains low, but the risk of accidental clashes and miscalculations is still elevated.

Maritime risks will likely remain concentrated in disputed waters rather than in major commercial shipping lanes. Companies operating in contested waters may face difficulties securing financing or commercial partners for projects. Spillover from confrontations involving Chinese and Philippine coast guard, navy, and maritime militia-linked vessels may include the potential for increased insurance premiums, temporary exclusion zones, crew safety concerns, and delays. With these incidents heavily politicized across Philippine media channels, anti-China sentiment in the Philippines has increased, which may affect the revenue of some Chinese-owned companies and heighten the risk of targeted incidents nationwide. 

Philippine-linked commercial shipping could still experience indirect impacts during periods of heightened escalation. In addition to threatening crew safety, any clashes between naval forces could result in temporary spikes in insurance premiums and the closure of maritime areas to shipping. Furthermore, if China sought to apply economic pressure on Manila, Beijing’s island bases, Coast Guard vessels, and maritime militia fleets would give it a greater ability to monitor, shadow, or potentially disrupt trade. Such a scenario remains unlikely in the short term, as it would risk wider international backlash and disrupt China’s own economic interests.

The most exposed businesses will be those operating in disputed waters—including in the offshore energy and support sectors and in marine surveying-rather than those transiting through them. Such businesses will face higher risks as their activities require resource exploitation and sovereign jurisdiction.  

Due to extensive media coverage of incidents between China and the Philippines, anti-Chinese sentiment increased across the Philippines in the lead-up to the anniversary. This dynamic has led to some businesses or individuals with Chinese links being targeted in the Philippines. While such cases remain isolated and are most likely linked to opportunistic crime, there might be an increase in such incidents during elevated tensions relating to the SCS.

With the Philippines currently experiencing heightened social unrest due to the impeachment trial of Vice President Sara Duterte and the issuance of arrest warrants for some senators, there is an elevated risk that any protests may spill over to encompass some Chinese businesses and individuals. Government institutions in the Philippines have also begun prosecuting some businesses with Chinese links, with businesses in cyberspace being most impacted. 

In the coming months, these domestic pressures will likely cause heightened uncertainty in the investment markets of the Philippines and China. The Philippine government has increased scrutiny and investment screening of Chinese firms that plan to invest in key infrastructure sectors, such as energy, ports, telecommunications, and digital infrastructure.

The Philippines will continue to be heavily dependent on China for imports such as electronics, renewable energy, consumer goods, and heavy machinery. Nevertheless, persistent tensions in the SCS are likely to inhibit deeper economic integration, with bilateral relations increasingly centered on commercial trade rather than large-scale government-backed investment and infrastructure projects. 

Although widespread disruption to regional commerce remains unlikely, sustained tensions in the SCS will probably create a more complex operating environment for businesses. Companies with direct exposure to disputed maritime areas, Chinese-Philippine commercial relations, or regional investment projects should prepare for elevated operational, regulatory, and reputational risks over the coming months.

• Offshore energy companies may experience operational disruptions, particularly in obtaining an exploration license and in terms of extraction delays, due to sporadic harassment by Chinese and Philippine ships.
• Philippine businesses that rely on trade through the SCS will probably have to implement greater supply chain resilience measures to reduce the risk of disruptions due to Chinese gray-zone activities.
• Businesses that plan on investing in the SCS will likely experience higher insurance costs and risk premiums due to the risk of clashes between the Chinese and Philippine coast guards.
• Companies seeking to invest in the region may face reduced business opportunities as government policies increase regulatory scrutiny and investment screening.
• Companies in the consumer goods and retail sectors may be impacted by heightened tensions, as domestic unrest may lead to the boycotting and targeting of Chinese or Philippine businesses.
• Global supply chains are likely to remain broadly unaffected by the increased tensions due to shared interest in keeping commercial lanes open, while incidents primarily remain localized to disputed features and offshore resource areas.

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