|Sekiyama Takashi. The New Trend of Japanese Economic Activities in East Asia|
The New Trend of Japanese Economic Activities in East Asia and its Implication to PoliticsThe liberal school of international relations argues that increased economic interdependence between countries reduces the chances of them engaging in conflict. The notion that economic interdependence encourages international collaboration is nothing new. As trade ties deepen, any conflict-induced interruption in commercial activity will have higher costs, so states have an added incentive to avoid military confrontation.
However, deepening economic interdependence does not appear to have stabilized Japan-China relations. Japan-China relations seriously deteriorated over the Senkaku issue last year, adversely affecting the activities of Japanese companies in the Chinese market. Improving bilateral ties, thus, will be a key priority of the Shinzo Abe cabinet.
Does this mean that economic ties cannot encourage peaceful relationship between Japan and China? I consider this question by viewing the Japan-China economic relationship in a broader context that goes beyond bilateral interdependence.
Honeymoon between Japan and China
Japan and China were indispensible trading partners even before the 1972 normalization of diplomatic ties. Japan was already China's largest trade partner in 1972, accounting for 12% of China's exports and 22% of imports. Especially after Deng Xiaoping came back to power in the late 1970s, China recognized Japan as the most important provider of fund and technology for his Open and reform Policy.
On the other hand, also as for Japan, China had been an important economic partner as a potential huge market that complemented the U.S. and Europe, as well as one of supply sources of resources ever since the 1970s.
In short, both of Japan and China wanted to strengthen the bilateral economic tie at that time.
Economic interdependence has deepened significantly over the four decades since then. For example, the volume of Japan-China bilateral trade between 1991 and 2011 expanded six fold. By contrast, Japan-US trade declined by 20% over the same 20 years. Direct investment from Japan to China also jumped 60-fold from 230 million yen in 1991 to 12.6 billion yen in 2011. Along with the expansion of trade, the number of visitors also grew. While 170,000 Japanese traveled to China in 1980, the figure in 2010 was 3.4 million. And the number of Chinese visiting Japan swelled from a mere 20,000 in 1980 to 1.4 million in 2010.
Changes in Relative Economic Importance
However, the economic honeymoon between Japan and China has been changing recently.
Figure 1 shows the shares of China's trade by country/region over a 60-year period from 1950 to 2011. As the graph shows, Japan has been claiming smaller shares of China's total trade since the late 1980s, though it remained the biggest trading partner until 2004, when it was overtaken by the United States. In terms of exports, Japan was surpassed by the Association of Southeast Asian Nations in 2009 and now represents only the fifth largest market for Chinese goods. And as for imports, Japan is now China's third-biggest partner, falling behind the European Union in 2011 and ASEAN in 2012.
For Japan, by contrast, China's economic importance had been rising dramatically until very recently. As is clear from Figure 2, the share claimed by China in Japan's total trade grew steadily from the mid-1990s, eventually topping the United States in 2007. The country is now Japan's biggest trading partner, accounting for 20% of total trade value.
However, such China's economic importance is downgrading in the last couple of years. For example, the volume of Japan's export to China has been decreasing since the second half of 2011, and the United States once again replaced China as Japan's largest exporting market in the first half of 2013. As for foreign direct investment from Japan, the volume toward Southeast Asia has always exceeded the volume toward China since 2009. In the first half of 2013, Japan's investment to Southeast Asia increased by 55% over the same period of the previous year, marking 10.3 billion US dollar. On the other hand, Japan's investment to Southeast Asia increased only by 31% over the same period, marking 4.9 billion US dollar. The gap became almost twice.
Moreover, the downgrade of China's economic importance for Japan seems to continue for the time being. According to a questionnaire conducted by Mizuho Research Institute in 2013 February, now Southeast Asia is the most important region for Japanese manufacturers. In the questionnaire, 45% of the 1303 respondent companies raised Southeast Asia as their most important business target, while 37% of the respondent raised China. It was the first time that China slipped down from the top in the annual questionnaire since 1999.
Negative Effect on the Political Relations
It seems that the change in Japan-China economic relations has negative effect on the bilateral political relations.
One reason that economic ties remained relatively unscathed by periods of political tension in the postwar era-such as the years of "cold politics and a hot economy" in the early 2000s, when Jun'ichiro Koizumi was prime minister-was because there was real demand in the private sector for the goods that each side was able to supply. The two governments, moreover, did not want to see the political dimension of the relationship dampen the robust economic ties.
However, both of Tokyo and Beijing is likely to lose motive to quickly and harmoniously improve the deteriorated political relations, since they no longer put the top priority on strengthening economic ties between the two countries.
Moreover, Beijing seems to have a prejudice that Japanese economy needs China more than vice versa. On the basis of the prejudice, Beijing may be tempted to take advantage of the asymmetrical trade relationship to pressure Japan into making political concessions. For example, following the trawler collision incident near the Senkaku Islands in 2010, media reports noted that China restricted exports of rare earths to Japan. And there were also reports that Chinese customs inspections for imports from Japan were delayed in the wake of Senkaku's nationalization. Unluckily to Beijing, Tokyo made no compromise even facing the economic sanctions.
Needless to say, it is not true that Japanese economy no more needs China vice versa. China is still Japan's largest trading partner. For China also, trade with Japan is still indispensable. Japan's exports to China consist largely of electrical machinery, including semiconductors and integrated circuits (23.7% of total exports to China in 2012), general machinery, such as machine tools and car engines (23.2%), chemical products, including plastic (13.9%), and industrial products like steel and nonferrous metals (12.3%). Using these parts, materials, and machinery from Japan, China exports finished products to the United States, Europe, and other consumer markets. According to data for 2011, 21.8% of China's imports of iron and steel products, 19.6% of machinery, 19.0% of transport equipment, and 10.4% of electrical machinery were from Japan (see table).
These facts show that any economic sanctions between Japan and China would likely be a double-edged sword that could hurt not only the counterpart but also themselves.
A lesson from the recent Japan-China relations is that bilateral economic ties cannot automatically lead to peaceful relationship.
Until recently, both of Japan and China wanted to strengthen the bilateral economic tie. On one hand, China recognized Japan as the most important provider of fund and technology for its Open and reform Policy. On the other hand, also as for Japan, China had been an important economic partner as a potential huge market as well as supplier of resources. Reflecting the economic honeymoon, the two governments did not want to see the political dimension of the relationship dampen the robust economic ties.
Today, however, both of Tokyo and Beijing is likely to lose motive to quickly and harmoniously improve the deteriorated political relations, since they no longer put the top priority on strengthening economic ties between the two countries. The economic honeymoon in the 1970s is unlikely to come back. It is more possible that political confrontations over Senkaku Islands and other historical issues continuously come up between Tokyo and Beijing.
Even under this situation, we should not forget the fact that any economic sanctions between Japan and China would likely be a double-edged sword. Once the deeply interdependent economic transactions are restricted by political confrontation between Japan and China, it could hurt both economies.
Deteriorated political relations should not affect on the interdependent economic relations. The whole Japan-China relations could be stuck if we every time allow the political tensions between the governments to damage transactions and communications in private sector. It is important for Tokyo and Beijing to share the lesson as a principle. And, researchers should insist on stable economic transactions and active private communication even when the governments politically confronts.
 For example, see Bruce Russett and John Oneal, Triangulating Peace: Democracy, Interdependence, and International Organizations (New York: Norton, 2001).
National Bureau of Statistics of China, China Statistical Yearbook, 1981.
Deng told Japanese policymakers and business leaders "Although China has good relations with many countries, Japan is the most important. We would like to daringly adopt Japanese technologies." (Asahi Shinbun, September 4, 1979)
Mizuho Research Institute, Mizuho Report, May 24, 2013.
 Robert Gilpin notes that imbalances in the level of trade dependence are often used as tools of external political manipulation. Robert Gilpin, The Political Economy of International Relations (Princeton University Press, 1987).
 One example is "China Lifts Rare Earth Export Ban to Japan: Trader," Reuters, September 29, 2010.
 Examples include "Chugoku, Nihon seihinkensakyoka: Senkakuhofukusochika" (China Strengthens Inspections of Japanese Products: A Retaliation Measure for Senkaku?), Yomiuri Shimbun, September 21, 2012, evening edition; "Nihon seihin no zeikankensakyoka: Chugoku, Tenshin, keizanseisai no ugokika" (Japanese Products Subject to Stiffer Customs Inspections in Tianjin, China: Outcome of Economic Sanctions?), Asahi Shimbun, September 21, morning edition; and "Chugoku, Nikkei kigyo no tsukangenkakuka" (China Strengthens Customs Clearances Standards for Japan-Affiliated Companies), Sankei Shimbun, September 21, 2012, morning edition.
JETRO, Japan-China Trade in 2012.
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