Sourcing professionals should be aware that tensions between China and Southeast Asian countries over the South China Sea territorial claims are reheating. China’s latest maneuvers in the Sea have a high potential to reignite protests by factory workers in Vietnam, as well as in the Philippines. As tensions increase and countries become confrontational, there is a growing probability of supply chain disruptions in an area where $5.5 trillion in global goods transits each year, 23 percent of which is U.S. trade in the form of footwear, apparel, electronics, and machinery among others.
Background
In May, China erected an oil exploration rig near the Parcel Islands in the South China Sea, which was inside Vietnam’s nautical Exclusive Economic Zone (EEZ). The oil rig and China’s provocative actions were seen by Vietnamese as a direct violation of their national sovereignty, creating violent protests across the country in mid-May. Those who source in Vietnam will not soon forget the factory damage, halts in production and delays in shipments of a wide range of goods.
Earlier in the year, the Footwear Distributors and Retailers of America (FDRA) issued a report on how South China Sea territorial disputes would impact sourcing in the region. The report, while focused on footwear, is a primer for executives in any industry who manufacture in the region.
Months after the protests, China announced the removal of the oil exploration rig on July 15. This came one month ahead of when China had originally scheduled to remove it, giving hope to regional governments that China was working to deescalate tensions and rebuild relations. These ideas have now been dashed.
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On August 5, Chinese officials announced through state-owned media that China would begin the construction of five lighthouses in the South China Sea. Reuters has reported that several of the lighthouses are to be constructed on islands also claimed by Vietnam.
China’s move is strategic. These lighthouses are one part of their building block strategy to take control of the large majority of the South China Sea. China is also planning to construct military garrisons and permanent oil rigs, all of which will cause additional worker protests and civil unrest in important sourcing countries like Vietnam.
China’s mentality is that the Sea, full of energy resources, is their rightful territory due to historic control for centuries when it was Asia’s hegemon. This is important to note as calls for an international court to delineate nautical boundaries will have no bearing on China’s actions and will not ease tensions – no major power wishes to enact economic sanctions on China or risk war to enforce any such rulings. Rather, over the past several years China has become increasingly aggressive over its claims, dismissing regional dialogues to solve these problems and deploying naval vessels to the region to use “gunboat diplomacy” to back down regional competitors.
Southeast Asian nations are trying to walk a tightrope with China over these territorial claims. They want access to Chinese goods and inputs vital to manufacturing finished products, but they fear China is trying to force them into vassal states where they no longer control their own destinies. This comes at the same time as America is increasing its military presence and diplomatic outreach to the region.
America has been getting increasingly involved in the territorial disputes because it–mixed with rising nationalism in the region–is creating a potent cocktail that could turn small water cannon fights into a full blown conflict. China is not happy with any U.S. mediation and, as if a shot across America’s bow, China’s lighthouse announcement was made just prior to U.S. Secretary of State John Kerry’s meeting with Chinese Foreign Minister Wang Yi to discuss regional security issues.
At the meeting, Secretary Kerry was expected to push the Chinese to agree to a code of conduct where nations involved in disputes would voluntarily avoid actions that could be seen as provocative. These lofty goals were set aside as Sec. Kerry was forced to try and push back on yet another act of provocation, a move which may have major repercussions for sourcing in Vietnam and other Southeast Asian countries.
Analysis: What This Means For Sourcing In the Region
Construction of the proposed lighthouses is not expected to begin for the next few months due to typhoon season. The current fears are that vessels amongst these nations will ram each other or use water cannons again as China’s Navy continues to survey and patrol these areas in larger numbers. Such an act could again turn nationalistic anger into action across Vietnam, the Philippines, Indonesia or other regional countries. Massive public protests in Vietnam, like those seen in May, are not out of the realm of possibility though with little to no violence this time.
Vietnam’s government has learned its lesson and will not be fanning rising nationalistic flames by distributing pictures and videos of any naval engagements, but will be working to stamp out any violent outburst to protect foreign investment and production.
When construction does begin on these lighthouses in areas Vietnam claims as its own, activists will have had plenty of time to prepare large peaceful demonstrations. Rather than fear more damage to their supplier factories, sourcing and supply chain professionals should be prepared for basic national strikes by Vietnamese workers in the months ahead; factoring it into production and delivery time tables.
Recommendations
Protests over issues involving the South China Sea should no longer be seen as anomalies but rather the new normal. Companies and brands should increasingly be looking at geopolitical issues and thinking critically about how they may impact production and supply to the U.S. market. When regional media reports on these issues, there should be additional time added to manufacturing schedules to help prepare for production disruption and delivery delays.
While many sourcing professionals focus on regular compliance issues in regard to workers, these new geopolitical issues present unseen challenges. Sourcing professionals should also find ways to help factory management engage and discuss nationalistic issues with their workers. During the May riots, Taiwanese owned factories were damaged because workers thought they were Chinese. Educating workers on these differences might help prevent such acts. Likewise, setting up a system that empowers factories to provide workers days off when national strikes are eminent could help curb any potential harm to factories and improve productivity and worker loyalty.
Andy Polk is Vice President of the Footwear Distributors and Retailers of America (FDRA), the largest footwear trade association in the U.S. Andy holds a masters in International Relations from the London School of Economics (LSE) and previously served as national security and foreign policy advisor to former Congresswoman Sue Myrick. He can be reached at apolk@fdra.org