3-24. Suppose you are an executive for Toyota, which has extensive FDI in China and has targeted the Chinese market as critical to the company’s future growth.

What political risks do you face? What can you do to lessen these political risks? The South China Sea has long been a critical waterway in international commerce. Stretching from the Straits of Taiwan in the north to Singapore and the Straits of Malacca in the south, its fecund waters yield a tenth of the world’s commercial fish catch. It is transited by vessels accounting for half the tonnage of ocean-borne intercontinental trade. Yet squabbling over three small island chains—the Spratly Islands, the Paracel Islands, and the Pinnacle Islands—and two submerged shoals and reefs—the Macclesfield Bank and the Scarborough Shoal—threaten to undermine trade relations and escalate political conflicts among Brunei, China, Japan, Malaysia, Taiwan, the Philippines, and Vietnam, which have staked claims to part or all of these areas (Map 3.2).

The size of the territory at stake is small: no more than 10 square miles of land spread throughout the 1.4-millionsquare-

mile South China Sea. But the size of the islands underestimates their economic, strategic, and political importance.

Under the 1982 United Nations Convention on the Law of the Sea (UNCLOS), a nation’s territorial waters consist of those within 12 nautical miles of its coastal shores. These territorial waters are considered to be part of its sovereign territory, although foreign vessels are permitted innocent passage through them. UNCLOS also grants a nation an exclusive economic zone (EEZ) extending a maximum of 200 nautical miles from its coastal shores.

The presence of a continental shelf may also influence the boundaries of an EEZ. Each country controls all economic resources within its EEZ. However, Article 121 (3) of UNCLOS indicates that rocks “which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone.” It is not obvious that the island groups in dispute meet this threshold.