Sino-Japanese Economic Ties: Today and Tomorrow
A country’s self-reliance – or lack thereof – is also reflected in its trading relationships. As Sino-Japanese trade has fallen, the true extent of Japan’s reliance on Chinese imports has been revealed. For instance, over 80 percent of the volume of rare earth minerals used in Japan is imported from China. As a major raw material in the manufacture of high-tech products, rare earths are indispensable to Japanese industry. Therefore a falling out between China and Japan can seriously affect the latter’s economic prospects. In 2010 when Japanese and Chinese ships collided and the Japanese side arrested the captain of the Chinese vessel, the Chinese government suspended rare earth exports to Japan. This triggered panic in Japanese economic circles. In terms of the Diaoyu Islands issue, China has been relatively restrained in the economic action it has taken.
The Chinese side is not nearly as reliant on Japanese imports, which are mainly automobiles and electronic products. For sure, Japanese cars, sound systems and tourism are attractive, but they are far from indispensable. They are, in fact, fully replaceable – in the seven-day National Day vacation last October, for instance, many Chinese tourists cancelled tours to Japan and chose instead to head to South Korea.
Though China is not heavily reliant on Japanese imports, the country would not be unaffected if bilateral trade plummets further. Against the backdrop of global economic gloom in 2012, China’s exports faced hard times. From January to October, the country’s international trade volumes amounted to US $3.16 trillion, up only 6.3 percent. Trade with Japan, though showing a decrease year by year, still represented about 10 percent of China’s total foreign trade.
Interdependency
While the proportion of Japanese goods in China’s overall import mix has fallen, Japanese foreign direct investment (FDI) in China has stayed strong. According to 2011 statistics, Japan’s FDI in China’s mainland stood at US $6.348 billion, accounting for 5.5 percent of total FDI in China, next only to Hong Kong (US $77.011 billion) and Taiwan (US $6.727 billion), and higher than the U.S. (US $2.995 billion), Britain (US $1.61 billion) and France (US $802 million).
China has become a hot spot for foreign investment since it carried out a series of preferential reform policies in the late 1970s. It also benefited from its large supply of relatively cheap labor. Since the 1980s, Japanese investment in China has soared. Cheap labor cut costs, making Japanese companies more competitive in the international market and yielding huge profits that could not be realized in Japan’s domestic market. Meanwhile, Japanese enterprises brought job opportunities, tax revenues, and advanced management practices to China.
After Japan provoked the dispute over the Diaoyu Islands, Chinese consumers voluntarily staged a countrywide boycott of Japanese products. The sales of Japanese cars plummeted by 40 percent in September 2012 and by about 60 percent in October. For the first time, the share of Japanese cars in the Chinese market fell below 10 percent. Several Japanese automakers reduced production in China or put in place plans to relocate to other markets. If production is reduced permanently, and especially if firms start withdrawing from the Chinese market, it will be a “lose-lose” situation for both countries. Japanese enterprises will lose the valuable Chinese market, and China will lose tax revenues and jobs.
Japan is well aware of its economic dependence on China. In recent years, policymakers and businessmen have sought to reduce this dependence. Strategies like “China+1” and “De-scinicize” have been promoted. One reason for this shift is that the cost of Chinese labor has been increasing. But a more important factor is geopolitics.
There has been a recent acceleration in Japanese firms’ transfer of their industrial chains to Southeast Asia. But it is doubtful this transfer will be a large-scale industry trend. First of all, though the Chinese economy is slowing, it still tops the world in growth and as a destination for foreign investment. Second, Southeast Asian nations are not comparable to China in terms of labor force quality and quantity. Infrastructure in particular is lackluster in many ASEAN countries.
In terms of China’s investment in Japan, FDI stayed below US $100 million for a long time. This has changed in the last few years. In 2010, Chinese FDI in Japan reached US $210 million. Total Chinese investment stock in Japan reached US $1.11 billion, accounting for 3.7 percent of China’s total overseas investment stock.
Chinese FDI in Japan is still small, however, and has minimal influence on the Japanese economy. But on the other side of the sea, Japanese investment, while still a significant boost to the Chinese economy, is not as important as it once was. China is not short on capital – indeed, it has the largest foreign exchange reserves in the world. Today, Japanese investment means advanced technology, management expertise and employment.
On the other hand, proceeds from overseas investment have offered critical buoyancy to Japan’s national economy in the two decades of stagnation. It is infeasible and unlikely that Japan would withdraw its capital in China in the short term.
Lose-Lose
On the basis of this argument, should the undesirable happen and an economic trade war between the two countries break out, China would find itself – economically, at least – in significantly better stead than Japan. Both countries, however, would be affected. There are no winners in war, especially when that war is economic, rather than the military variety.
Where lives are lost in a military confrontation, economic battle would result in the loss of hundreds of thousands of jobs and income sources. Cooperation between two economies is always more beneficial than animosity and autarky. Economic war, in this sense is even more costly – it means forgoing the opportunities to be found in cooperation.
When the relationship between China and Japan remains tense, the opportunities the two countries have for cooperation should be a cause for optimism. Both countries have comparative advantages. China is an emerging country, with a huge consumption market and relatively cheap labor. Japan is a developed country and the producer of many state-of-the-art technological goods. The two countries have, in many ways, complementary economies. Cooperation would benefit both.
Besides trade and industrial investment, there is also the potential for China and Japan to cooperate in the world of finance. Both the Japanese Yen and the Chinese RMB have been historically undervalued against the US dollar, and the two countries have accumulated large US dollar assets. But they face the real threat of shrinking significantly in the wake of the US Federal Reserve’s decision to engage in massive quantitative easing. Greater RMB or Yen denominated bilateral trade has the potential to free the countries from worrying about US dollar fluctuations.
On June 1, 2012, direct trade between RMB and Japanese Yen was launched. This is a positive development that should help to reduce the two sides’ dependence on the U.S. dollar.
From the economic viewpoint, cooperation is better than confrontation for both peoples. But the confrontation sentiment stoked by actions of Japanese right-wing nationalists has scuttled cooperation efforts and reduced them to mere good wishes.
In April 2007, Premier Wen Jiabao visited Japan during a low ebb in the bilateral relationship. The visit was a response to an ice-breaking trip to China by then Prime Minister Shinzo Abe, and was hence called by Wen the ice-melting journey. In a speech to Japanese congressmen, the premier stated: “Peace brings mutual benefits, while confrontation guarantees a lose-lose situation for both China and Japan.”
It is a pity that the ice has remained intact over the following years, though China has made efforts to remove it. In October 2012, Shinzo Abe, as leader of the Liberal Democratic Party (LDP), paid a visit to the controversial Yasukuni Shrine. High-level politicians in the country, whether they are members of the ruling party or the opposition, seemed to compete with each other over who is “tougher” on China. The current situation, featuring “cold politics” plus “chilly economy,” looks likely to continue for some time.
It is not only the Chinese and Japanese economies that are at stake in this face-off. The consequences could be felt by the rest of the world. If economic confrontation ensues, it will be a disaster for the fragile recovery of world economy. China and Japan, after all, are the world’s second and third largest economies. The two countries need to cooperate, not just for their own sake, but for the sake of the world.
XIE JIU is a chief commentator with Life Week magazine.
