Mention of The Hague, much like Brussels, makes my eyes glaze over. In my mind, both are always overcast and dreary.
But The Hague is important today. Emerging markets investors will have to respond to the surprisingly clear and harsh decision from the Permanent Court of Arbitration on the dispute between the Philippines and China over the Spratly Islands in the South China Sea.
It is an understatement to say it ain't looking good for China. The court ruled against Beijing in every way, saying that its crazy claim to almost 90% of the South China Sea based on the Nine Dash Line, from a 1947 map made by the pre-Communist Chinese, is total nonsense.
Being a court, however, it actually said that China's rights to any resources in the disputed part of the South China Sea were "extinguished" when the Law of the Sea came into effect in 1994, establishing the rules for clear exclusive economic zones around islands.
Who cares about this dispute? Well, around 60% of the world's trade, worth $5.3 trillion, passes through the waters claimed by China. The oil and gas under the South China Sea is also worth around $5 trillion. This ruling says China can't have any of the oil and gas in the Spratlys.
That's just a portion of a whole sea that is a mess, with overlapping claims by everyone in the region: Vietnam, Brunei, Malaysia, the Philippines, China and even Taiwan (it occupies one rock it is pretending is an island). Oh and Japan, which isn't really even in the region.
The Hague's decision heightens political and military tensions. It could roil the waters of emerging markets in Asia, perhaps not short term but certainly in the long run. That would spill over to emerging market indexes in general.
The specific dispute was filed by the Philippines, which says China has been preventing its fishing boats and petroleum explorers from making the most of waters that it claims are Filipino. The court ruled that yes, China has been doing that, and no, it is not allowed to do that.
The court has delivered a "legally binding ruling" on China. Only it isn't binding at all, since there's absolutely no power, organization or even individual person to enforce it. But it's a political hand-grenade.
There's more. The Philippines had asked the court to decide if the Spratly Islands are in fact "islands" or "rocks." Why does that matter? Islands, which must sustain human habitation or economic activity, get a 200-mile exclusive economic zone, while rocks get zip.
The Spratly Islands are not islands, they are rocks. Confusing, but the court said only small groups of fishermen and some Japanese fishing and guano-mining types had tried to make a go of it in the Spratlys, and they had all failed. So there's no special economic zone in the Spratlys. The islands within 200 miles of the Philippines instead belong to it, businesswise, based on its own economic zone. (The court says it can't make territorial decisions).
China has been ramping up the rhetoric over its ownership of the Spratlys for a few years, and then early last year it took action. It has now turned seven Spratly reefs into man-made islands, with runways at the aptly named Mischief Reef, at Subi Reef, and at Fiery Cross Reef, the largest airstrip of the three.
That's also illegal, by the way, the court said. And bad for the environment. And Chinese fishermen have been harvesting illegal species like turtles and giant clams. Are turtles fish, if they are fishermen? No. The court didn't rule on that though.
It did say that China has aggravated the whole situation by laying down cement and shoving military personnel, and weapons, onto the islands. It can't do that, either.
Check out this fascinating interactive time lapse on exactly what it's been doing, from The New York Times. The Sydney Morning Herald also has a great aerial demonstration of how all three runways have changed the reefs, describing the construction as "arch-villain's hideouts."
China, which boycotted proceedings, had always said it was going to ignore any decision. It has "ignored" it by reacting very fiercely and immediately. The Ministry of Foreign Affairs put out a statement that it stands by its claims, based on history and other bits and pieces of law.
But China says it's practical, too, and is holding out its hand. It says it's willing to negotiate directly with the states, individually. Big Brother wants to talk to you, alone.
Perhaps most importantly, it said that while the legal stuff is sorted out, it is willing to enter into provisional, practical deals involving joint development in the South China Sea, to "achieve win-win results and jointly maintain peace and stability." It really did say win-win. China can do biz jargon too.
Here in Asia, we have been worrying that after this decision, China will flex its military muscles even more violently. It is already sending a parade of warships to patrol the area. The United States and Australia have sent warships of their own into China's claim, just to show that they can. So they would surely follow suit.
So an incident like the 2001 collision of a U.S. spyplane with a Chinese fighter jet isn't out of the question. In fact, it's very much on the cards. This May, two Chinese jets buzzed a U.S. surveillance plane, passing within 50 feet. In 2014, China's version of Tom Cruise flew his Su-27 fighter jet within 30 feet of a U.S. Navy P-8 Poseidon patrol plane. The Chinese pilot passed above, below and alongside the U.S. plane and at one point did a barrel roll to show off his missiles.
I reckon this is just going to keep going on and on, while China builds on at a slower pace, and the risk of accidental or deliberate military clash rises and rises. Possession is better than ownership, so China will stake its claim physically instead of in the courts. It knows it would look really bad, in light of this decision, to make any sudden military moves.
None of the other countries involved can really stand up to China. In fact, the Philippines has been taking a big risk to challenge by far its biggest trading partner in court. China warned it not to do it, over and over again.
But Southeast Asian nations may strike individual deals, particularly on the resources. That's what President Rodrigo Duterte of the Philippines has hinted he would be open to, as I wrote about before. Before he got elected, "Dirty Harry Duterte"said he would run a jetski out to the islands and plant a Filipino flag there. So what he actually does is a real wild card. It's important that he only took office in June, well after the Philippines filed its claim.
Will the decision from The Hague shake up emerging markets stocks? It's a landmark ruling and much stronger in its wording than I ever expected from what I've always regarded as a talking shop.
I doubt the markets will make any sudden moves. Clearly, China wants to let the whole legal issue simmer, while getting on with business. While it's important politically, I don't see how a non-binding binding resolution is going to have much practical effect.
The legal ownership of the South China Sea may never be resolved. China's actions, rather than words, will be the thing to watch. A military mistake sure has the potential to cause a lot of sudden harm, both physically and to investors. All the trade deals, machinations, and projects to develop the resources, will be fascinating to watch.The Hague has made its move. Now over to Beijing.