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Freedom of the Seas and the Strait of Malacca

Sigma Investment Counselors

May 17, 2016

According to Wikipedia, “freedom of the seas” is a principle in international law and law of the sea.  It stresses freedom to navigate the oceans.

Like any law, enforcement is sometimes required.  Historically, during a period of relative peace (1815-1914), often referred to as “Pax Britannica”, the Royal Navy was, in effect, the guarantor of freedom of the seas.

Freedom of the seas is a concept that is important to investors.  A very high percentage of world trade is based on ocean transportation.  Any disruption of free movement of goods is likely to quickly affect economic activity.

Many of the obvious choke points, such as Gibraltar, Hormuz, and the Suez and Panama canals, to mention a few, are well known.  Perhaps, not so well know, is the Strait of Malacca.

From an economic and strategic perspective, the Strait of Malacca, located between the Malay Peninsular and Sumatra, is one of the most important shipping lanes in the world.

The strait is the main shipping channel between the Indian Ocean and the Pacific Ocean, linking major Asian economies.  Over 94,000 vessels pass through the strait every year, accounting for approximately one-fourth of the world’s trade goods, including oil.

The Spratly Islands, located in the South China Sea, are the subject of an ongoing territorial dispute.  Recently, China has been increasing the size of some of these Islands, through dredging and land reclamation, and is rapidly constructing military facilities.

All comments and suggestions are welcome.

Walter Kirchberger, CFA®

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