By Anthony Rowley
Diplomatic relations between Japan and China have foundered. But the economic fates of the two countries have never before been so closely entwined
Earlier this year, Japan’s minister for defence, Yoshinori Ohno, commented that economic relations between Japan and China were “hot” while political and diplomatic relations were “cold”. This was an accurate enough assessment at the time, but recently a chill wind has begun to blow over economic relations also – leading some to wonder whether confrontation between the two giant east Asian neighbours is inevitable.
Top political leaders from Japan and China have not met since October 2001, and relations are marked more often by angry exchanges than by diplomatic summitry. Tokyo and Beijing are also perceived to be in competition as regional powers, with China having reached agreement with Asean on a joint free trade area while Japan will propose its own east Asian economic “zone” in Kuala Lumpur during a special summit there in December.
Japan has warned repeatedly about China’s military build-up, and the two have also clashed over exploitation of oil and gas reserves in the east China Sea – a symbol of their growing global rivalry for energy resources. Japanese officials have meanwhile unleashed a tirade of criticism about aspects of China’s economic behaviour, ranging from infringement of patents to exploitation of Japan’s agricultural markets.
Japan’s Ministry of Economy, Trade and Industry (Meti) has even taken to warning firms against over-investing in China. “We believe there are many risks that may prevent Japanese firms from keeping their operations in China,” says Susumu Okamoto, in Meti’s trade policy bureau. The Japan External Trade Organization (Jetro) added its voice by urging Japanese firms to focus more on markets such as India, Russia and Brazil and less on China.
Partners in trade
The situation is quite bizarre given that this year China overtook the US as Japan’s leading trading partner, and it is mainly a surge in exports to China in recent years that has pulled Japan’s economy out of its long stagnation. Japanese businessmen have become alarmed over the situation and blame the “nationalist” policies pursued by some politicians. Japan’s new government must give priority to mending Sino-Japanese ties, they say.
It is easy to understand their anxiety. After getting off to a fairly slow start compared to their counterparts in the US and Europe, Japanese businessmen began pouring new investment into China from the late 1990s onward. From less than ¥55 billion in 1990, Japan’s foreign direct investment outflows to China hit ¥460 billion in 2003 while the cumulative amount of these investments rocketed from ¥59 billion to ¥21 trillion.
While the stock of Japanese FDI in China remains smaller than elsewhere, the trade it has generated is phenomenal. By 2004, Japan’s imports from China outpaced those from the US ($94 billion vs $63 billion), while at $74 billion, Japan’s exports to China had virtually doubled in the space of two years and were fast closing the gap with those to the US. Then, this year, China overtook the US as Japan’s most important partner in total trade terms.
The huge surge in investment-related trade highlights the enormous economic importance China has assumed. China has become part of a complex production network in which Japan supplies China with machinery and capital goods for assembling finished goods that are then imported into Japan for export to the US and other destinations. China too has become a mega market for Japanese steel, chemicals, ships and other products.
As Japan’s former vice finance minister for international affairs, Eisuke Sakakibara, notes, “No less than 53% of all components imported into China come from Japan,” where they are assembled into finished products for consumption in the domestic market or for re-export. The two economies, says Sakakibara, have become so interconnected that any disruptions to the ongoing process could do considerable damage to both.
Given this rapidly evolving dependence between the two countries, it might be expected that political relations would evolve at a similar rate. But the opposite is true. Relations have sunk to the level where violent anti-Japanese protests broke out in China during May, damaging Japanese commercial interests and assets, and millions of Chinese signed an on-line petition opposing Japan’s bid for a permanent seat on the UN Security Council.
Military might
A Japanese defence White Paper last year identified China for the first time as a potential military threat, and this year the document openly suggested that China’s military build-up appeared to have more than just defensive connotations. Japan also embarked on a joint project with the US to equip itself with a theatre missile defence system, while accusing China of aggressive incursions into its territorial waters by a submarine and other vessels.
Relations had reached a nadir when, on a visit to Tokyo, Malaysian prime minister Abdullah Ahmad Badawi noted that “if ever there was a time for historic statesmanship in east Asia, that time is now.” Its absence could see east Asia take a wrong turn and “skid down a slippery slope,” he said. Singapore prime minister Lee Hsien Loong added that Japan and China have not come to terms with the history of the Second World War.
Things continued to go from bad to worse, and in June Chinese deputy premier Wu Yi skipped a scheduled meeting with Japanese prime minister Junichiro Koizumi, an action she later admitted was in protest at Koizumi’s repeated visits to the Yasukuni Shrine in Tokyo, where the names of Japanese wartime figures designated by post-war US occupation forces as “Class A War Criminals” are inscribed.
China was further enraged when Japanese education authorities adopted revised school history textbooks that gloss over the Rape of Nanking and other Japanese atrocities in China. Disputes flared too over island territories claimed by Japan and China. These came to a head when Japan granted Teikoku Oil (originally a state-owned firm, now privatized) rights to drill for oil and gas in part of the East China Sea where Chinese oil and gas producing company CNOOC is due to begin commercial operations this year.
A few months after the anti-Japanese protests, a Jetro survey found that 37% of Japanese firms operating in China had already been affected by anti-Japanese sentiment and one-third expected to be affected in future. Japanese firms began scaling back investment plans in China, and while Chinese authorities then sought to cool the dispute, Japanese officials seemed intent on underlining problems in the Japan-China relationship.
China plus one
Jetro’s chairman and CEO Osamu Watanabe has stressed that Japanese businessmen should adopt a “China plus one” policy on foreign investment – meaning they should focus upon at least one other major Asian destination in addition to China. Watanabe has also pointed to the fact that patent and copyright infringements in China are costing Japanese manufacturers more than ¥9 trillion a year in lost sales. Meti, meanwhile, has cited a litany of problems in China ranging from economic overheating to social instability in order to alert Japanese businessmen to risks.
When China decided to liberalize its exchange rate regime and to revalue the yuan, Japan’s economics minister Heizo Takenaka felt bound to point out that “in the medium to long term it will have an impact on Japanese corporations’ behaviour.” This was echoed by Hiromi Oki, director of international economic research at Jetro, who said: “If the yuan rises further, it would increase Japanese firms’ operating costs while making Asean countries more attractive.” At no time in the past has the economic fate of the two countries been so closely intertwined as it is today.