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The US and the Philippines kicked off one of the largest military exercises in waters near the South China Sea on Monday. These joint military drills take place annually but this year’s come amid rising tensions between China and the Philippines. The countries are sparring over control of the waterway, which is rich in energy reserves.

On today’s Big Take, host Oanh Ha and Senior Editor Bill Faries break down why who controls this vast body of water matters for South East Asia and the rest of the world.

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Here is a lightly edited transcript of the conversation:

Sarah Holder: Hey Sarah here. One of the best things about working at Bloomberg is that we’ve got reporters everywhere. Today on the Big Take we're bringing you a story from our colleagues in Hong Kong 

Oanh Ha: Today, the US and the Philippines kicked off one of the largest military exercises in waters near the South China Sea.

Chief Gen. Romeo Brawner Jr.: We gather here united to open the Philippine-US Balikatan exercise

Ha: Close to 17,000 military personnel **from both countries** will train together in drills locally called Balikatan, which translates to shoulder-to-shoulder.

Brawner:This exercise represents the essence of unity, collective responsibility and enduring partnership …

Ha: These joint military drills take place annually – but **this year’s** come amid rising tensions in the South China Sea over… who controls this important body of water that’s rich in energy reserves. 

Bill Faries: The controversy is really fueled right now by China's claims across almost the entire waterway. They are staking a claim to areas that are much closer to places like the Philippines or Vietnam than they are to what you would think of as traditional mainland China.

Ha:  That’s Bloomberg’s Bill Faries, a senior editor based in Singapore covering geopolitics and US-China relations.

While there have been long-running disputes over which countries have rights to parts of the territory— tensions between China and the Philippines have escalated since Philippine President Ferdinand Marcos Jr. took office in 2022. His government has been drawing attention to what it describes as Beijing's harassment of Philippine boats 

The Philippine President recently spoke to Bloomberg TV about the situation in the South China Sea

Ferdinand Marcos Jr.: The threat has grown. And since the threat has grown, we must do more to defend our, our territory.

Ha:  The United States meanwhile has promised to stand with the Philippines against what it calls  “provocative actions” by China…. and it’s criticized the Chinese use of high-powered, water cannons against Philippine boats.

And the United States and other nations have a vested interest in making sure there’s no disruption to ships traveling through this waterway. 

Faries: More than 30 percent of the maritime oil, crude oil trade is passing through the South China Sea every year. It is literally trillions of dollars in total trade.

Ha: Today on the show, escalating tensions in the South China Sea…. and why who controls this vast body of water matters for the world. 

From Bloomberg News, this is The Big Take. I’m Oanh Ha.

Ha: Now the name South China Sea gives you a sense of the region we’re talking about but YOU may not know all the countries that are around these waters. So I asked Bill to give us a mental map of the area. 

Faries: Well, I'll see if I can come up with an analogy that works for you. If you hold up your right hand in front of your face, 

Ha: Okay, got that. 

Faries: Where your fingers meet the palm, you can think of that as the southern coast of China. 

Ha: Mmm, okay. 

Faries: And everything basically down from that,  your palm down to your wrist, that would be the region of the South China Sea.

Your thumb jutting off to the right there, you can think of that as the Philippines. 

Ha: Ah, I got it now. So, if we continue on from the base of the thumb, you have all these other southeast Asian countries surrounding the palm right. There’s Brunei where your wrist is. And if you continue going back up the left side of your palm, you’ve got Malaysia and then Vietnam right below the pinky. 

Faries: Yeah and it basically takes up a big swath of Southeast Asian coastline. And it's a region that's really bigger than the Mediterranean Sea.

Ha:  More than a handful of countries or governments claim parts of the waterway, but for many years –  Beijing has asserted that much of the sea is its territory. 

Faries: They have used a 1947 map that showed really kind of a vague nine dash line running through that whole region, but very close to the coast of all these other countries. So very close to the Borneo coast and right up along the Philippine coast. And they say that that is their traditional waterway. Now all these other countries have competing claims. There's a lot of overlap. Sometimes three countries disagree about certain parts, but they're all in a, long running decades old dispute, about whose territory that really is.  

Ha: This vast body of water is dotted with mostly uninhabitable islands, reefs and shoals, which of course are shallow, sandy areas. Are these countries really fighting over rocks and reefs? 

Faries: A lot of the fight is over rocks and reefs. And it's partly because if you can claim that that reef that's exposed above the level of the ocean is your territory, then you have the right to exploit the resources that are there. 

Ha:  Many of these countries are  eyeing new sources of energy to fuel their growth. And underneath this vast body of water .. lie huge reserves that can be tapped for natural gas and oil. 

Faries: Well, the U. S. Energy Information Administration estimates that the region could contain 3. 6 billion barrels of oil and more than 40 trillion cubic feet of natural gas in terms of proved and probable reserves. So really, kind of a massive amount that has been locked up for years.

But no one really knows because the amount of exploration that needs to go into to confirm all that- a lot of that has been stalled. And a lot of the production that these countries would like to have going has also been stalled because companies get very nervous when you have multiple countries disputing any one area. So Vietnam, for instance, more than a decade ago, discovered a field that they called the Blue Whale. The rights to exploration and production are controlled by ExxonMobil. That's in a contested area that China says is actually their territory. This, uh, just a few months ago was when Vietnam expected that Blue Whale project to come online originally. Instead nothing has happened.

The main offshore energy field that the Philippines uses that provides about 20 percent of the country's energy that is seen as rapidly declining, and there's been no real adequate replacement for that.

The Philippines would like to be doing more exploration, more production offshore, but it basically hasn't been able to get any of that done because of these disputes. 

Ha: And so for these developing Southeast Asian countries, finding new sources of energy is key to their economic growth, right? You’ve got Vietnam and the Philippines for example with rolling blackouts and brownouts throughout the year and that really impacts electricity in homes and factories for hours

Faries: Well, and that's a situation that's expected to worsen in a place like the Philippines if they can't find better sources of fuel. And, you know, nothing, uh, puts off investors more than the question of whether there'll be sufficient energy to run the factories. So when you're looking at how you diversify your supply chains out of China, one of the things you're going to look at is how reliable is the energy supply if I go to this country? How reliable is the water supply? All these things affect, you know, the investment climate that these countries are looking to create. 

Ha: Now to be fair, China’s aggressive actions in the South China Sea  aren’t the only reasons why energy projects haven’t gotten off the ground. These projects are also battling red tape, corruption and  shifting market demands. Bill, This jockeying over the South China Sea by various countries goes back decades. And China has been exerting control over these waters for years. What is new in this dispute right now?

Faries:  Several years ago, the Philippine president at the time, Rodrigo Duterte, was really turning away from his nation's alliance with the U. S. And trying to get closer to China. So he really downplayed a lot of these differences and disputes over some of this territory.

Come just a year or two ago, you had a new president, Ferdinand Marcos, Jr, who took over in the Philippines, and he basically went in the opposite direction. And he started being much more forward about pushing what he viewed as the Philippines traditional claims.

So he started sending more resupply missions out to some of these isolated outposts where there were a few Philippine troops stationed, and he started trying to send the Philippines Coast Guard out to some of these islands that the Philippines claimed, but that China was also claiming. 

Ha: So with new leadership in place, we’re seeing the Philippines get more aggressive about patrolling these waters and claiming its sovereignty. Are we also seeing more Chinese ships out there in these waters too?

Faries:  Absolutely. China has what analysts talk about as their maritime militia. So at one level, these essentially are like fishing fleets, but they're not necessarily doing a lot of fishing – there out there to swarm any other boats that try to come out and get to some of these disputed areas. So if the Philippines tries to send a Coast Guard cutter out to a disputed island,  it might find itself completely surrounded by what might look like a fleet of Chinese fishing vessels. But those vessels are backed by a Coast Guard that is either right there or looming in the distance, helping coordinate that action.

Ha: Here's what this kind of confrontation can sound like...

Watercannon Footage

Ha: This is sound from video taken by the Armed Forces of the Philippines.  It’s from March 5, when two Chinese coast guard ships turned high power water cannons directly at a Philippine ship in a contested shoal. The incident left several Filipino crew members injured. There have been at least six incidents like this in eight months.  

Faries:  It really is the front lines of what a lot of geopolitical analysts say is one of the biggest flashpoints, in the world at this point, but particularly in, in the U. S. China, Southeast Asia relationship because any of these incidents, if something goes badly wrong, it could really spiral into a much broader conflict.

Ha: After the break we’ll hear how countries are bracing for a potentially bigger conflict in the South China Sea.

Ha: This week military personnel from the US and the Philippines are conducting joint military exercises off the coasts of the Philippines near the South China Sea. 

Faries:  we're talking about dropping bombs, launching missiles, launching torpedoes as close to real war practice as you can get, the communication systems. How do the two sides talk to each other when they've built different systems? How do they coordinate,  if there's an attack in one area, what's the strategy to get over there?

They're not really looking to provoke the Chinese into a reaction, but they don't mind the Chinese getting a chance to watch their exercises and how they would respond in a crisis.

Ha: And that's because there's a mutual defense treaty between the US and the Philippines, right?

Faries: Right. That's really kind of the core of the U. S. Philippine alliance. They have this 1951 treaty that says the two sides will come to each other's aid in case of attack. There's always been a lot of questions about what constitutes an attack.

The Philippines has tried to in some ways sidestep that a little bit. A lot of times when it sends resupply boats, for instance, out to this small garrison of troops that keeps on one of the reefs, it charters civilian vessels to do that. So when those vessels get pushed back on by the Chinese, you don't have a situation of a Chinese military vessel going against the Philippine military vessel, but, the big question is, at what point would the U.S. feel obligated to come to the Philippines’ defense if there was a bigger crisis?

Ha: how real is that threat, you know, is the U. S. really going to fight China over islands in the South China Sea?

Faries: Yeah, I think all sides concerned would like to avoid that. I mean, in the end, you really would have a conflict going up over some reefs and shoals. They're important to all the nations involved, but, I think everyone would like to avoid a full scale war. What the Philippines president has said is that he's not trying to poke the bear, referring to China.The Philippines strategy here has been to try to publicize this in some ways, like a name-and-shame. When they go out now, they are filming. They're trying to put drones in the air. 

Ha: And how much of an advantage does China have here in this dispute – it seems like it’s really using its military militia to assert control in these contested areas? 

Faries: Well, China has a big head start, and it's very hard to see them backing down from this. They have been building up some of these claims. They've been building up these islands for more than a decade now, and a lot of other countries took a less confrontational approach and don't have that kind of footprint in the region. 

Until there is some sort of a diplomatic breakthrough, it's going to be very hard to see how these resources close to the Philippines, close to Vietnam, how those get out of the ground and what the framework, what the agreement that would bring, all those sides together  to get that, get those projects going.It's hard to see at this point. It's really a stalemate and it's not clear that it's going to get any better. 

Ha: Bill, thanks so much for the insight. 

Faries: Thank you for having me.

(Corrects attribution in third and fifth lines of transcript text.)

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