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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Hey Sarah here. One of the best things about working

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Speaker 2: at Bloomberg is that we've got reporters everywhere. Today on

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Speaker 2: the Big Take, we're bringing you a story from our

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Speaker 2: colleagues in Hong Kong.

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Speaker 1: Today, the US and the Philippines kicked off one of

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Speaker 1: the largest military exercises in waters near the South China Sea.

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Speaker 1: We got our here united to open the Philippine US

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Speaker 1: Balkatan Exercise. Close to seventeen thousand military personnel from both

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Speaker 1: countries will train together in drills locally called Balikatan, which

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Speaker 1: translates to shoulder to shoulder. This exercise represents the essence

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Speaker 1: of unity, collective responsibility and during partnership. These joint military

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Speaker 1: drills take place annually, but this year's come amid rising

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Speaker 1: tensions in the South China Sea over who controls this

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Speaker 1: important body of water that's rich in energy reserves.

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Speaker 2: The controversy is really fueled right now by China's claims

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Speaker 2: across almost the entire waterway. They are staking a claim

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Speaker 2: to areas that are much closer to places like the

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Speaker 2: Philippines or Vietnam than they are to what you would

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Speaker 2: think of as traditional mainland China.

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Speaker 1: That's Bloomberg's Bill Ferries, a senior editor based in Singapore

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Speaker 1: covering geopolitics and US China relations. While there have been

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Speaker 1: long running disputes over which countries have rights to parts

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Speaker 1: of the territory, tensions between China and the Philippines have

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Speaker 1: escalated since Philippine President Ferdinand Marcos Junior took office in

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Speaker 1: twenty twenty two. His government has been drawing attention to

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Speaker 1: what it describes as Beijing's harassment of Philippine boats. The

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Speaker 1: Philippine president recently spoke to Bloomberg TV about the situation

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Speaker 1: in the South China Sea.

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Speaker 2: The threat has grown and since the threat has grown,

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Speaker 2: we must do more.

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Speaker 1: To defend our territory. The United States, meanwhile, has promised

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Speaker 1: to stand with the Philippines against what it calls provocative

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Speaker 1: actions by China, and it's criticized the Chinese use of

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Speaker 1: high powered water cannons against Philippine boats, and the United

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Speaker 1: States and other nations have a vested interest in making

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Speaker 1: sure there's no disruption to ships traveling through this waterway.

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Speaker 2: More than thirty percent of the maritime crude oil trade

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Speaker 2: is passing through the South China Sea every year. It

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Speaker 2: is literally trillions of dollars in total trade.

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Speaker 1: Today on the show Escalating Tensions in the South China

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Speaker 1: Sea and why who controls this vast body of water

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Speaker 1: matters for the world from Boomberg News. This is the

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Speaker 1: big tape. I'm one h Now, the name South China

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Speaker 1: Sea gives you a sense of the region we're talking about,

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Speaker 1: but you may not know all the countries that are

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Speaker 1: around these waters. So I asked Bill to give us

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Speaker 1: a mental map of the area.

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Speaker 2: Well, I'll see if I can come up with an

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Speaker 2: analogy that works for you. If you hold up your

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Speaker 2: right hand in front of your face, Okay, got that,

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Speaker 2: Where your fingers meet the palm, you can think of

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Speaker 2: that as the southern coast of China. Mmmm. Okay, and

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Speaker 2: everything basically down from that your palm down to your wrist,

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Speaker 2: that would be the region of the South China Sea.

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Speaker 2: Your thumb jutting off to the right there, you can

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Speaker 2: think of that as the Philippines.

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Speaker 1: Ah, Okay, I got it now. So if we continue

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Speaker 1: on from the base of the thumb, you have all

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Speaker 1: these other Southeast Asian countries surrounding the palm. Right, there's

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Speaker 1: Brunei where your wrist is. And if you continue going

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Speaker 1: back up the left side of your palm, you've got

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Speaker 1: Malaysia and then Vietnam right below the pinky.

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Speaker 2: Yeah, And it basically takes up a big swath of

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Speaker 2: Southeast Asian coastline, and it's a region that's really bigger

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Speaker 2: than the Mediterranean Sea.

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Speaker 1: More than a handful of countries or governments claim parts

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Speaker 1: of the waterway, but for many years Beijing has asserted

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Speaker 1: that much of the sea is its territory.

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Speaker 2: They have used a nineteen forty seven map that showed

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Speaker 2: really kind of a vague nine dash line running through

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Speaker 2: that whole region, but very close to the coast of

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Speaker 2: all these other countries, so very close to the Borneo

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Speaker 2: coast and right up along the Philippine coast, and they

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Speaker 2: say that that is their traditional waterway. Now, all these

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Speaker 2: other countries have competing claims, there's a lot of overlap.

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Speaker 2: Sometimes three countries disagree about certain parts, but they're all

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Speaker 2: in a long running, decades old dispute about whose territory

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Speaker 2: that really is.

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Speaker 1: This vast body of water is dotted with mostly uninhabitable islands, reefs,

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Speaker 1: and shoals, which of course are shallow sandy areas. Are

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Speaker 1: these countries really fighting over rocks and reefs?

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Speaker 2: A lot of the fight is over rocks and reefs,

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Speaker 2: and it's partly because if you can claim that reef

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Speaker 2: that's exposed above the level of the ocean is your territory,

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Speaker 2: then you have the right to exploit the resources that

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Speaker 2: are there.

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Speaker 1: Many of these countries are eyeing new sources of energy

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Speaker 1: to fuel their growth, and underneath this vast body of

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Speaker 1: water lie huge reserves that can be tapped for natural

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Speaker 1: gas and oil.

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Speaker 2: Well. The US Energy Information Administration estimates the region could

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Speaker 2: contain three point six billion barrels of oil and more

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Speaker 2: than forty trillion cubic feet of natural gas in terms

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Speaker 2: of proved and probable reserves. So really kind of a

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Speaker 2: massive amount that has been locked up for years, but

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Speaker 2: no one really knows because the amount of exploration that

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Speaker 2: needs to go in to confirm all that, a lot

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Speaker 2: of that has been stalled, and a lot of the

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Speaker 2: production that these countries would like to have going has

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Speaker 2: also been stalled because companies get very nervous when you

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Speaker 2: have multiple countries disputing any one area. So Vietnam, for instance,

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Speaker 2: more than a decade ago discovered a field that they

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Speaker 2: called the Blue Whale. The rights to exploration and production

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Speaker 2: are controlled by Exonmobile that's in a contested area that

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Speaker 2: China says is actually their territory. This just a few

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Speaker 2: months ago was when Vietnam expected that Blue Whale project

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Speaker 2: to come online originally, Instead, nothing has happened. The main

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Speaker 2: offshore energy field that the Philippines uses, it provides about

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Speaker 2: twenty percent of the country's energy that is seen as

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Speaker 2: rapidly declining and there's been no real adequate replacement for that.

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Speaker 2: Filippines would like to be doing more exploration, more production offshore,

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Speaker 2: but it basically hasn't been able to get any of

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Speaker 2: that done because of these disputes.

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Speaker 1: And so for these developing Southeast Asian countries, finding new

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Speaker 1: sources of energy is key to their economic growth. Right.

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Speaker 1: You've got Vietnam and the Philippines, for example, with rolling

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Speaker 1: blackouts and brownouts throughout the year, and that really impacts

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Speaker 1: electricity in homes and factories for hours.

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Speaker 2: Well, and that's a situation that's expected to worsen in

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Speaker 2: a place like the Philippines if they can't find better

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Speaker 2: sources of fuel. And you know, nothing puts off investors

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Speaker 2: more than the question of whether there'll be sufficient energy

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Speaker 2: to run the factories. So when you're looking at how

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Speaker 2: you diversify your supply chains out of China, one of

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Speaker 2: the things you're going to look at is how reliable

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Speaker 2: is the energy supply if I go to this country.

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Speaker 2: How reliable is the water supply? All these things affect,

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Speaker 2: you know, the investment climate that these countries are looking

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Speaker 2: to create.

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Speaker 1: Now. To be fair, China's aggressive actions in the South

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Speaker 1: China Sea aren't the only reasons why energy projects haven't

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Speaker 1: been able to get off the ground. These projects are

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Speaker 1: also battling red tape, corruption and shifting market demands. Bill

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Speaker 1: This jockeying over the South China See by various countries

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Speaker 1: goes back decades, and China has been exerting control over

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Speaker 1: these waters for years. What's new in this dispute right now?

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Speaker 2: Several years ago, the Philippine president at the time, Rodrigo

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Speaker 2: de Terte, was really turning away from his nation's alliance

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Speaker 2: with the US and trying to get closer to China,

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Speaker 2: So he really downplayed a lot of these differences and

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Speaker 2: disputes over some of this territory. Come just a year

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Speaker 2: or two ago, you had a new president, fernand Marcos Junior,

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Speaker 2: who took over in the Philippines, and he basically went

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Speaker 2: in the opposite direction, and he started being much more

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Speaker 2: forward about pushing what he viewed as the Philippines traditional claims.

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Speaker 2: So we started sending more resupply missions out to some

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Speaker 2: of these isolated outposts where there were a few Philippine

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Speaker 2: troops stationed, and he started trying to send the Philippines

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Speaker 2: Coastguard out to some of these islands that the Philippines claimed,

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Speaker 2: but that China was also claiming.

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Speaker 1: So with new leadership in place, we're seeing the Philippines

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Speaker 1: get more aggressive about patrolling these waters and claiming it sovereignty.

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Speaker 1: Are we also seeing more Chinese ships out there in

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Speaker 1: these waters too.

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Speaker 2: Absolutely, China has what analysts talk about as their maritime militia,

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Speaker 2: So at one level, these essentially are like fishing fleets,

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Speaker 2: but they're not necessarily doing a lot of fishing. They're

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Speaker 2: out there to swarm any other boats that try to

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Speaker 2: come out and get to some of these disputed areas.

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Speaker 2: So if the Philippines tries to send a Coastguard cutter

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Speaker 2: out to a disputed island, it might find itself completely

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Speaker 2: surrounded by what might look like a fleet of Chinese

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Speaker 2: fishing vessels, but those vessels are backed by a coastcard

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Speaker 2: that is either right there or looming in the distance,

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Speaker 2: helping coordinate that action.

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Speaker 1: Here's what this kind of confrontation can sound like. This

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Speaker 1: is sound from video taken by the Armed Forces of

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Speaker 1: the Philippines. It's from March fifth, when two Chinese Coast

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Speaker 1: Guard ships turned high powered water cannons directly at a

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Speaker 1: Philippine ship in a contested shroal. The incident left several

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Speaker 1: Filipino crew members injured. There have been at least six

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Speaker 1: incidents like this in eight months.

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Speaker 2: It really is the front lines of what a lot

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Speaker 2: of geopolitical analysts say is one of the biggest flash

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Speaker 2: points in the world at this point, but particularly in

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Speaker 2: the US China Southeast Asia relationship, because any of these incidents,

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Speaker 2: if something goes badly wrong, it could really spiral into

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Speaker 2: a much broader conflict.

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Speaker 1: After the break, we'll hear how countries are bracing for

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Speaker 1: a potentially bigger conflict in the South China Sea. This week,

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Speaker 1: military personnel from the US and the Philippines are conducting

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Speaker 1: joint military exercises off the coasts of the Philippines near

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Speaker 1: the South China Sea.

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Speaker 2: We're talking about dropping bombs, launching missiles, launching torpedoes. As

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Speaker 2: close to real war practice as you can get. The

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Speaker 2: communication systems. How do the two sides talk to each

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Speaker 2: other when they've built different systems, How do they coordinate

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Speaker 2: if there's an attack in one area, what's the strategy

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Speaker 2: to get over there. They're not really looking to provoke

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Speaker 2: the Chinese into a reaction, but they don't mind the

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Speaker 2: Chinese getting a chance to watch their exercises and how

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Speaker 2: they would respond in a crisis.

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Speaker 1: And that's because there's a mutual defense treaty between the

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Speaker 1: US and the Philippines, right right.

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Speaker 2: That's really kind of the core of the US Philippine alliance.

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Speaker 2: They have this nineteen fifty one treaty that says the

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Speaker 2: two sides will come to each other's aid in case

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Speaker 2: of attack. There's always been a lot of questions about

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Speaker 2: what constitutes an attack. The Philippines has tried to in

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Speaker 2: some way sidestep that a little bit. A lot of times,

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Speaker 2: when it sends resupply boats, for instance, out to this

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Speaker 2: small garrison of troops, it keeps on one of the reefs.

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Speaker 2: It charters civilian vessels to do that, so when those

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Speaker 2: vessels get pushed back on by the Chinese, you don't

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Speaker 2: have a situation of a Chinese military vessel going against

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Speaker 2: a Philippine military vessel. But the big question is at

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Speaker 2: what point would the US feel obligated to come to

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Speaker 2: the Philippines defense if there was a bigger crisis.

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Speaker 1: How real is that threat? Is the US really going

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Speaker 1: to fight China over islands in the South China Sea?

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Speaker 2: Yeah, I think all sides concerned would like to avoid that.

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Speaker 2: I mean, in the end, you really would have a

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Speaker 2: conflict going up over some reefs and shoals. They're important

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Speaker 2: to all the nations involved, but I think everyone would

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Speaker 2: like to avoid kind of a full scale war. What

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Speaker 2: the Philippines president has said is that he's not trying

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Speaker 2: to poke the bear referring to China. The Philippines strategy

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Speaker 2: here has been to try to publicize this in some ways,

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Speaker 2: like a name and shame when they go out. Now

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Speaker 2: they are filming, they're trying to put drones in the air.

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Speaker 1: And how much of an advantage does China have here

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Speaker 1: in this dispute? It seems like it's really using its

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Speaker 1: military militia to assert control in these contested areas well.

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Speaker 2: China has a big head start and it's very hard

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Speaker 2: to see them backing down from this. They have been

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Speaker 2: building up some of these claims, they've been building up

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Speaker 2: these islands for more than a decade now, and a

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Speaker 2: lot of other countries took a less confrontational approach and

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Speaker 2: don't have that kind of footprint in the region. Until

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Speaker 2: there is some sort of a diplomatic breakthrough, it's going

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Speaker 2: to be very hard to see how these resources to

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Speaker 2: the Philippines close to Vietnam, how those get out of

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Speaker 2: the ground, and what the framework, what the agreement that

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Speaker 2: would bring all those sides together to get those projects going.

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Speaker 2: It's hard to see at this point. It's really a

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Speaker 2: stalemate and it's not clear that it's going to get

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Speaker 2: any better.

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Speaker 1: Bill, thank you so much for the insight.

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Speaker 2: Thank you for having me.

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Speaker 1: This is the big take from Bloomberg News. I'm wan ha.

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Speaker 1: This episode was produced by Naomi Un Young Young and

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Speaker 1: Jessica Beck. It was edited by Caitlin Kenney and Bill

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Speaker 1: Ferries and mixed by Alex Suguira. It was fact checked

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Speaker 1: by David Fox. We had additional reporting from Philip Hymon's

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Speaker 1: Andreo Colonso and Cliff Venzon. Our senior producer is Naomi Shaven,

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Speaker 1: Senior editor is Elizabeth Ponso. Nicole beemster Bower is our

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Speaker 1: executive producer, and Sage Bauman is Bloomberg's head of podcasts.

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Speaker 1: Thanks for listening to The Big Take. We'll be back

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Speaker 1: tomorrow

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Speaker 2: As