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Explained by Graphics: Tension in the South China Sea

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Explained by Graphics: Tension in the South China Sea

Explained by Graphics: Tension in the South China Sea

Claims on the South China Sea, the recent ruling, and why China is ignoring it

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

Tension in the South China Sea reached a potential inflection point this week.

Days ago, an international tribunal ruled in favor of the Philippines, dismissing China’s sweeping territorial claims to the hotly contested waters in the South China Sea.

Since then, it has become clear that China plans to ignore the ruling, while Chinese Vice-Foreign Minister Liu Zhenmin has threatened to declare an air defense identification zone over the waters to help protect the country’s interests.

But how did we get to this point? How was this ruling determined, and what does it mean moving forwards?

Why the South China Sea matters

The South China Sea is home to 250 small islands, shoals, reefs, sandbars, and other tiny landmasses.

The South China Sea is the second most used sea lane in the world, and home to:

  • $5 trillion of annual trade
  • 11 billion barrels of oil
  • 266 trillion cubic ft of natural gas

Six countries claim parts of the South China Sea as their own: China, Taiwan, Philippines, Vietnam, Malaysia, and Brunei.

However, China has the boldest claim, insisting that over 80% of the sea is their territory based on historical maps.

Island or Rock?

The ruling in the Philippines vs. China hearing is based on the provisions of the United Nations Convention on the Law of the Sea (UNCLOS), which came into force in 1994. All countries disputing claims in the South China Sea are signatories.

UNCLOS defines three types of landmasses, and whether something is a “rock” or an “island” has huge implications for territorial claims.

  • Low-tide elevation: A landmass above water only at low tide.
  • Rock: A landmass permanently above water, but unable to sustain human habitation or economic life on its own.
  • Island: A landmass permanently above water that can sustain human habitation and economic life on its own.

Rocks get some territorial benefits, but islands get 200 nautical miles (370 km) of special economic rights around them in each direction.

  • Low-tide elevation: Not entitled to any separate maritime zone.
  • Rock: Entitled to territorial sea and contiguous zone. Each are up to 12 nautical miles (22 km) from base line.
  • Island: Entitled to territorial sea and contiguous zone, but also entitled to an exclusive economic zone of 200 nautical miles (370 km), and continental shelf rights.

The economic zone confers rights for fishing, drilling, energy production, and other economic activities.

The Ruling

The tribunal ruled that Scarborough Shoal, along with areas occupied by China in the Spratly Islands do not count as “islands”, and therefore do not justify 200 nautical mile (370 km) economic zones around them.

China has rejected the ruling calling it “ill-founded”. Taiwan, which has administered Taiping Island since 1956, also rejected the ruling.

China has argued that the tribunal has no legitimate jurisdiction on this issue since it concerns “sovereignty” – which the text of the UNCLOS explicitly prohibits tribunals from addressing.

What are the consequences?

If China continues to ignore the ruling, likely there will be a “hit” to China’s reputation, but that’s it.

Going back in history, there is a long list of situations where superpowers have ignored international rulings. It is also worth noting that China is a permanent member of the U.N. Security Council and has veto power.

Tension will continue to increase in the South China Sea, creating a situation that could boil over at any time.

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Chart of the Week

Visualizing the Biggest Risks to the Global Economy in 2020

The Global Risk Report 2020 paints an unprecedented risk landscape for 2020—one dominated by climate change and other environmental concerns.

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Top Risks in 2020: Dominated by Environmental Factors

Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.

While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.

Front and Center

Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.

According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:

Top Global Risks (by "Likelihood") Top Global Risks (by "Impact")
#1Extreme weather#1Climate action failure
#2Climate action failure#2Weapons of mass destruction
#3Natural disasters#3Biodiversity loss
#4Biodiversity loss#4Extreme weather
#5Humanmade environmental disasters#5Water crises

With more emphasis being placed on environmental risks, how much do we need to worry?

According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.

While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.

The Stranded Assets Dilemma

If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.

Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.

The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.

– Institute for Energy Economics and Financial Analysis

The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:

  • Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
  • Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
  • New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.

A Tough Road Ahead

In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.

These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.

Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:

  • Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
  • Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
  • An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.

The Ball Is In Our Court

It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.

How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.

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Chart of the Week

The Sum of Its Parts: The Smartphone Multiplier Market

Every day, 3.3 billion people rely on their smartphones to stay connected. The products and services enabling this—the smartphone multiplier market—is now worth $459 billion.

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The Sum of Its Parts: The Smartphone Multiplier Market

There’s a 60% chance you’re reading this article on a smartphone right now—a testament to how ubiquitous these devices have truly become in our lives.

We rely on smartphones every waking minute to stay connected. However, the various products and services—also known as the smartphone multiplier market—that allow us to use these devices in the first place can often be an afterthought.

Today’s chart uses data from Deloitte Insights to show just how sizable this ecosystem is becoming, and why it’s heating up as a battleground for big technology companies such as Apple, Alphabet, and Amazon.

The Smartphone Plateau

There are over 3.3 billion smartphone users in the world today.

The smartphone economy—estimated to pull in $944 billion in total revenue in 2020—is so massive that it rivals the GDP of countries like Indonesia and the Netherlands.

At the moment, the smartphones themselves contribute over half the market value. Despite the continued hype surrounding the release of new models, global unit shipments of smartphone devices appears to have reached a saturation point:

Smartphone Sales

There are two theories as to why shipments are leveling off. First, product innovation is more iterative today than in the past, which means there are fewer groundbreaking features to entice consumers into purchasing new devices. A second factor is that people are simply holding onto their devices for longer than in the past.

As device sales plateau, tech giants are diversifying efforts to find new ways to lure customers back in—and another related market is growing more lucrative as a result.

What is a “Smartphone Multiplier”?

When people think of the smartphone market, hardware likely springs to mind first, but an equally important part of the equation is the plethora of apps, services, accessories, and complementary devices that help us connect with the digital world.

The ecosystem of these products and services are known as smartphone multipliers. According to Deloitte, this ecosystem will drive $459 billion of revenues in 2020, an impressive 15% increase from the prior year.

The market can be broken down into three main categories:

CategoryMarket Value (2020e)Sub-categories
Content$312B
(68% of total)
$176B: Mobile ads
$118B: Apps
$10B: Music
$8B: Video
Hardware$111B
(24% of total)
$77B: Accessories
$25B: Wearables
$9B: Smart speakers
Services$37B
(8% of total)
$18B: Insurance
$12B: Repairs
$4B: Others
$3B: Storage

Largely driven by mobile advertising and app sales, content is by far the largest subcategory, accounting for 68% of revenues:

  • Mobile advertising surpassed TV as the largest advertising channel in 2019, partially thanks to the relentless growth of online video and social media, making ads virtually unavoidable on a smartphone.
  • Gaming apps are benefiting from the immense processing power of today’s smartphones—and will bring in over two-thirds of total app revenue in 2020. Apple’s app store brought in approximately $1.8 billion in sales between Christmas Eve and New Year’s Day alone.
    • If you’ve ever owned a pair of headphones or a powerbank, it’s easy to understand why accessories are the third-largest subcategory in the smartphone multiplier market. With more people ditching the cable for wireless headphones, this subcategory is also set to grow even more.

      The Next $1T Economy?

      In the U.S., 73% of adults go online several times a day or almost constantly, which makes it clear that they aren’t going to give up their smartphones anytime soon.

      As a result, smartphone multipliers will continue to evolve and flourish, presenting a unique opportunity for investors and businesses.

      Altogether, it’s expected that the smartphone multiplier market will grow between 5 and 10% annually through 2023, likely propelling the entire smartphone economy past the $1 trillion benchmark in the coming years.

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