Sino-Japanese Economic Ties: Today and Tomorrow

By XIE JIU

CHINA and Japan are neighbors and should be ideal trading partners. However, historical factors and the recent disputes over the Diaoyu Islands have affected the economic relationship between the two countries. Should an economic war break out between the world’s second and third largest economies, who would prove the winner?

The island dispute led to a plummet in Japanese car exports to China last September. The picture shows Japan-made automobiles at the Port of Yokohama.

Times Change

Bilateral diplomatic relations between China and Japan were normalized in 1972. Looking back, one of the most distinctive trends since normalization is that Japan, once China’s largest trading partner, has become less important to the country’s economic well-being. On the other hand, China has become Japan’s largest and most important trading partner.

From 1993 to 2003, Japan had been China’s largest trading partner. But as the Japanese domestic economy has struggled and emerging countries have grown richer, Japan has been sliding down China’s trading partner rankings.

In 2004, the EU and the U.S. became China’s top two trading partners. In 2011, the ASEAN bloc surpassed Japan to become China’s third largest trading partner. If a long-term trade confrontation plays out between the two countries, Japan would likely be nudged further downed the chart by the Republic of Korea and Australia, as China’s trade with those two countries continues to increase. At the same time, China has become of paramount importance to Japan – it replaced the U.S. as the country’s largest trading partner in 2007, and has remained so since.

Developments in countries’ bilateral trade relationships are an important barometer of overall economic relationships. In the early 1980s, Sino-Japanese trade stood at over US $8 billion, accounting for as much as 24 percent of China’s total foreign trade volume, but only about three percent of Japan’s. In 2011, the value of bilateral trade had shot up to US $340 billion, accounting for 9.4 percent of China’s international trade and 20.6 percent of Japan’s. In three decades the two countries had switched places. And this trend shows no sign of slowing.

In the bilateral trade, furthermore, Japan has maintained a trade surplus. This is worth noting, since China is often regarded as a “trade surplus country.” The country’s surplus, however, primarily arises from its trade with the U.S. and the EU. It experiences a trade deficit with many countries, including Japan. Every year from 2002 to 2011, Japan enjoyed a surplus in the two countries’ trade relations which actually grew from US $5 billion to over US $50 billion.

Generally speaking, a country running trade surpluses is dependent on the country running deficits in bilateral trade. Hence, should significant changes occur in the Sino-Japanese economic relationship, Japan will feel the effects more than China.

In 2011, Japan had an overall trade deficit of US $32 billion due to disastrous twin natural disasters – the earthquake and tsunami that struck the country, and the slowdown in the EU and American economies. But it maintained a surplus of US $46 billion with China. Without support from the Chinese market, Japan’s trade deficit and GDP growth figures would have been much worse.

In 2012, China’s imports shrank as it lowered its economic growth targets. From January to September, imports from Japan decreased by 6.5 percent compared with the corresponding period of the previous year. After September 11, 2012, when the Japanese government “bought” the Diaoyu Islands, Chinese orders from Japan plummeted: the October statistics showed a year-on-year decrease of 10.2 percent.