As the G20 meeting gets under way in Hangzhou this weekend, America and China are counting their true allies on the South China Sea dispute, the top item on the unofficial agenda of the meeting.

This week, America got India on its side, following a high profile visit to New Delhi by U.S. Secretary of State John Kerry. And China convinced America’s neighbor and close ally Canada to join the China-backed Asian Infrastructure Investment Bank, or AIIB, and remain silent on the dispute.

That’s certainly bad news for globalization and world financial markets, and will steer attention away from the G20’s official agenda, which targets a long list of issues facing the global economy.

Besides, forcing countries to take sides can dampen the spirit of globalization altogether, undermining the promotion of trade agreements like the Trans-Pacific Agreement – which President Obama has been campaigning for.

Defying a recent international arbitration ruling, which found that China has no historic rights over the waters of the South China Sea, Beijing has been applying both softcore and hardcore diplomacy to intimidate its neighbors.  For instance, it has been using its close trade ties with South Korea to convince Seoul not to go along with Washington’s plans for a new missile deployment to the peninsula.  And back in June, China drew a “red line” for Japan, asking Tokyo  “not to send Self-Defense Forces to join U.S. operations that test the freedom of navigation in the disputed South China Sea.”

China’s defiance of the international arbitration ruling and hardcore diplomacy has drawn a harsh response from Philippines’ President Rodrigo Duterte, who sent a loud and clear message to Beijing last week: Stay away from our territory or else it could be a “bloody”confrontation. 

In the meantime, Vietnam has been moving new rockets into the disputed area.

“Hardcore” diplomacy is bad news for the economic integration of the region and bad news for investors in the countries involved in the dispute. A military confrontation would disrupt the economic integration and growth of the region and hurt the global economy — most notably China, which needs a market frontier for its manufacturing products.

So far financial markets fixated on central bankers’ easy money have ignored the escalation surrounding the dispute. The Chinese and the Philippines’ market are up double digits over the last twelve months, while the Japanese markets is up close to 8 percent.

These are certainly worrisome moves, though markets fixated on ultra-low interest rates have been ignoring. But for how long?

http://www.forbes.com/sites/panosmourdoukoutas/2016/09/03/south-china-sea-dispute-china-and-america-are-counting-their-true-allies/#628c56c3393a

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