A Costly China-Japan Stalemate

By+Mei+Xinyu

To ask which side suffers more in the China-Japan stalemate is a fruitless question—as the worlds second and third largest economies， the potential losses of each party are clear. And besides disrupting the economic development of East Asia， the jarring dispute between China and Japan has had an impact on the global economy.

Undoubtedly， however， Japans foreign trade dependency on China—which is several times that of Chinas on Japan—makes the situation especially difficult for the Japanese Government. Despite attempts to modify its China policy， therefore， the Abe administration cannot ignore the fact that the two countries share a crucial economic relationship.

Trade talk

China and Japan enjoy a solid trade foundation， but bilateral trade has been trending downward in recent years. In 2013， bilateral trade volume totaled $312.55 billion， down 5.1 percent year on year. Of these， Chinas exports to Japan went down 0.9 percent year on year， while Japans exports to China dived 8.7 percent. Seen from a longer time frame， then， Japan is likely to suffer the worst of the decline in foreign trade.

Since 1990， most significant trade disruptions between China and Japan have in fact been connected with the missteps of the Japanese Government. Furthermore， bilateral political relations will continue to heavily affect China-Japan economic relations in the future. Given the asymmetrical nature of trade between the two sides， it can be concluded that Japan could pay an even steeper price in any ensuing trade war.

Meanwhile， Chinas share of the global economy continues to grow rapidly： Chinas GDP in 2013 was nearly double that of Japans， and it had long before established itself as the worlds second largest and fastestgrowing importer in the world. From 2005 to 2009， the average growth rates for U.S. and Japanese imports stood at 7 percent and 6 percent respectively， while that of Chinas was as high as 22.4 percent. From developed economies such as Canada， Australia and Germany to developing countries including Brazil， Sudan and ASEAN nations， more and more trade partners have benefited from Chinas burgeoning demand. The $10-trillion import plan China proposed last year provides additional fresh opportunities for its trade partners. The China-Japan political stalemate will take a toll on the current economic development of both sides and will certainly pose a greater threat to Japans position in the global economy.endprint

The Japanese industry is currently undergoing a period of challenging transformation and upgrading， and the prospects of its success could be severely damaged if Japanese businesses fail to secure long-term and profitable investment in China.

The Japanese home appliance industries—once a demonstration of Japans manufacturing prowess—have suffered enormous losses due to rising production and labor costs and the new wave of technological innovation. They are in dire need of seeking overseas manufacturing bases to overcome the problems at home. China is undoubtedly the ideal destination， as it possesses unparalleled advantages in market size， labor resources， infrastructure， public services as well as supporting industries.

Furthermore， as the fastest growing economy among major powers， any enterprise or industry that hopes to lead the world market must first succeed in the Chinese mainland market. To this point， Taiwanese enterprises Master Kong and Want Want China Holdings Ltd. are good examples. Germanys time-honored engineering brand Schaeff， which failed to nail a joint-venture agreement with Chinese companies in the 1990s， is now itself a target for Chinese bidders.

China will also pay a price for continuing bilateral political friction. Japan has the comparative advantage in auto and electronics products， for which replacements from other countries are difficult to rely on， as evidenced by the disruption in the global electronic products market following a devastating tsunami which hit Japan in 2011. Against this backdrop， boycotting the imports of certain Japanese products will have an unintended impact on the Chinese economy， industries， exports and employment

Generally speaking， Chinas achievement in manufacture and export owes partly to its role in the international industrial chain. For instance， Japan supplies core components， which China then manufactures before exporting to the global market. Meanwhile， in the new wave of global industrial transfer and Chinese industrial upgrading， China has become a popular investment destination for international emerging industries and transferring destination for overseas advanced manufacture.

Forward-looking FTA

Currently， although the China-South Korea FTA is making significant progress， the FTA among China， Japan and South Korea has stagnated due to political confrontation between the three. Undoubtedly， all the political leaders and elites from the three countries understand that they share extensive common interests. Competition between the three sides should not allow for aggression， and instead emphasize benign economic interaction.endprint

At present， uncertainties over the world economy—particularly emerging economies—are on the rise， and the whole East Asian region is facing an economic slowdown. Under these circumstances， the best way for the three leading economic powers of China， Japan and South Korea to pull through is to exercise cooperation to reduce their vulnerability to international financial crises. To this end， efforts should be made to accelerate financial cooperation in the region. In order to enhance the ability of East Asia to cope with economic crises， all parties should integrate the cooperation into the building of a China-South Korea FTA as well as a China-Japan-South Korea FTA. Once completed， the China-Japan-South Korea FTA will inject new vitality into the development of the regional economy. Setting aside historical and territorial disputes in favor of the pursuit of common economic interests will help create a stronger Northeast Asia.

In actual fact， China has the capacity to achieve sustainable growth of foreign trade and economy on its own by promoting domestic consumption. However， China would prefer to attract more partners to further promote regional economic stability and share the benefits of economic expansion.

Currently， the overdependence of East Asian economies on the U.S. and European markets has not only affected their economic autonomy but also hampered their efforts to reduce excessive reliance on the U.S. dollar.

To settle all these problems， East Asian countries need to further strengthen regional economic integration， moving away from the U.S. and European markets to focus on their own regional market. Thus， the importance of the China-Japan-South Korea FTA for regional economic integration is self- evident.endprint