What Is The United States Doing In The South China Sea?

From the British’s colonization of the region to the nuclear explosions over Japan to the Khmer Rouge’s ethnic cleansing, the South China Sea has experienced some of the world’s deadliest conflicts. This region was been a bloody battleground for centuries.

Countries in the South China Sea have gone through invasion, colonization, liberation multiple times over. Elected presidents imprisoned and ruthless dictators dethroned, the world as we know it has changed because of revolutions and civil wars that have occurred here. Divided countries are in a constant state of saber rattling.

This region has both rising democracies and dying nations, along with being home to both monarchs and dictators alike. To control ever dwindling resources, both state-led and free-market economies compete.

The permanent state of affairs in the South China Sea has been continual discord, since countries here do not make the best neighbors. Now is as good a time for investors to predict how this four-dimensional game of chess will take place, as tensions here are growing again and funds that are worth trillions of dollars are at stake.

The Costs of War

Before we can understand the present and take advantage of the future, we need to know about the region’s history.

In 1949, one of the bloodiest battles in the South China Sea took place. Chairman Mao, leader of the Chinese communists, ousted the nationalist Kuomintang from the mainland. They retreated to Taiwan.

Eight million lives were lost because of this conflict, while two million were driven out of their homes. Taiwan is overshadowed by one of the world’s largest and toughest countries, which also has an unquenchable desire to control the region along with its resources.

American troops landed on Inchon port around the same time. Korea had been ruled by foreigners for many years. From 1910 to 1945, Imperial Japan controlled this peninsula. Afterwards, this country was divided, where the North was backed by China and the South by the U.S.

To this day, conflict between these two countries had killed a million people. World peace is at stake since international leaders have very little patience while North Korea’s unstable regime keeps on testing nuclear weapons.

But compared to the Vietnam War, the Korean War was just a small skirmish. Having claimed nearly four million lives, the Vietnam War is one of the bloodiest military conflicts in modern history.

The effect of Vietnam’s large-scale war spread to its neighbor, Cambodia, after the nationalist and communist forces battled against each other, this country then suffered from genocidal purges by the Khmer Rouge.

New Friends and Old Foes

The South China Sea is undoubtedly the one of the bloodiest regions on this planet.

Countries in the area have been either allies or enemies for hundreds of years, while other countries around the world are ‘nosey’ about this region. And the main player of recent major regional conflicts here, whether it was behind the scenes or on the frontlines, has been the U.S.

There were two main pacts from several decades ago: China (and formerly the USSR) and the U.S. In Europe, old foes may become fast friends. But in the South China Sea, this attitude is rarely if ever seen, and so a regional arms race was initiated.

Defense spending skyrocketed, where over 500,000 military personnel in the Asia-Pacific is from the U.S. alone, which you can see from the graph below.

The Loots of War

When you station over half a million soldiers thousands of miles away, spending is hefty. But what is the U.S.’s goal? Since the end of the Second World War, this country is informally regarded as the ‘world police’ helping maintain the peace in this erratic region.

Peacekeeping is not necessarily a charity. Armed conflict during the Cold War was a moneymaking business. New jobs, new industries and new technologies were created, since governments had incentive to spend on research and development.

As a result, not only demand during economic downturns but also consumer confidence was enhanced. The benefits of increased spending spread to other sectors and industries like a domino effect. The Vietnam war alone brought US$130 billion to the U.S.’s GDP. This is called “wartime economy”.

But trade in the Asia-Pacific region is deemed more important to the U.S. Not only does this region provides cheap resources and labor that the U.S. needs (to ensure prices for U.S. consumers are low), but it also accounts for 30% of the total U.S. exports. China produces 70% of Walmart’s goods. Out of 10 top major trading partners for the U.S., 6 belong to the South China Sea region.

Meanwhile, the U.S. cannot escape all of its defense treaties made with various nations within the region. Those treaties can drag the U.S. to conflict with China in case of war. If that happens, then the consequences to regional trade and investment will be massive.

Profits in the defense sector, specifically return on equity and revenue per share, has increased. In other words, defense companies are earning lots of profit. But because countries want to have an edge against regional rivals, they invest more on researching and developing their competitiveness, which raises operating costs.

War can Break Out Soon!

Although the South China Sea’s long and bloodied history was a thing in the past, this scenario can potentially occur again. Despite being more connected via international capital, over US$5 billion worth of trade can disappear if military conflict falls onto the region.

If war breaks out, then not only will there be bodies lying on the streets, globally, jobs, markets and investments will be affected as well.

If regional conflict influences U.S. trade, the top Asian companies that export to the U.S., shown in the table below, will suffer the most.

Top Asian Companies Exporting to the United States

But the race to war can be profitable if an investor can choose the right firms in the right markets that are gaining the most from massive state spending. Since 2014, the dispute in the South China Sea began to escalate, revenues from major defense and aerospace companies, such as Lockheed Martin Corp., General Dynamics Corp. and Northrop Grumman, have been rising as shown from the graph below.