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Friday, Nov. 2, 2012

Japan, China pay a high price

Special to The Japan Times

HONG KONG — Confirmation of the costly economic consequences of the continuing spat between Japan and China over who owns a tiny string of remote uninhabited rocky islets in the East China Sea came with the publication of Japan's September trade figures. They showed an unprecedented deficit of $7 billion as exports dropped by 10.3 percent, thanks to the global slowdown and to Beijing's determination to teach Tokyo a lesson.

Can China and Japan really be contemplating the madness of going to war over who owns this small real estate? Two months ago, most commentators expressed confidence that the row would soon blow over, but it is continuing with new bellicose words, provocative actions and political tensions between the once and future economic powers. New leaders settling in in Beijing dare not risk being seen as weak, and Tokyo's nationalists will keep up the pressure. When and how will it end?

As the trade figures show, Japan has already felt some of the economic consequences of China's wrath. Its carmakers have seen sales plummet and tourism has been badly hit by mass cancellations of bookings by Chinese visitors. Japanese airlines have sharply reduced flights to China.

In the short term Japan is likely to suffer more since it is more vulnerable both to a Chinese boycott — as the car sales and drop in tourists have shown — as well as to Beijing's official inspiration and orchestration of such a boycott. In Japan, it is not so easy for politicians to rouse patriotic fervor by telling people not to buy Chinese products — and it would be a dangerous and provocatively totalitarian step if they did. Chinese products are ubiquitous on Japanese shop shelves, up to a third cheaper than Japanese-made equivalents, even if consumers could find home-grown versions.

China is also an integral and well-integrated part of the supply-chain of many Japanese manufacturers, so that they could not boycott China without threatening their production line. These factors probably inspired Beijing to try to teach Japan what it hoped was a short sharp lesson.

In the medium term, China also stands to lose both directly and indirectly, and Japan may gain from reassessing and redirecting its supply chains. But the real danger is not merely to the two protagonists but to Asian growth and stability, as well as to the whole global economy as growth slows, if antagonism between the world's second and third biggest economies remains the order of the day.

In the 40 years since the re-establishment of diplomatic relations between China and Japan, which was supposed to be celebrated in September, the two countries have expanded their investment, trade and economic relations to the point where they have become mutually dependent. Trade between China and Japan reached a record $345 billion in 2011, according to Chinese figures. China became Japan's biggest export market in 2009. China takes almost 20 percent of Japan's exports, compared to less than 7.7 percent a decade ago.

On its side, Japan is China's third biggest trading partner, after the European Union and United States. Japanese investment has poured into China at a massive rate. Chinese statistics show that by October last year there were 33,400 Japanese companies and affiliates operating in China, a huge 75 percent rise from the already high figure of the year before. Already in 2010, Chinese statisticians reported, Japanese companies employed three million Chinese and accounted for 16 percent of all foreign companies in China.

This is not a relationship of Siamese twins. Statistics compiled by Reuters show that Japan's investment in China topped ¥1 trillion or almost $13 billion last year, a rise of 60 percent from the year before. Altogether, Japanese companies have invested almost $1 trillion in Chinese factories in the past 20 years. On the other hand, China's direct investment in Japan is more modest. It fell last year to ¥8.9 billion, from ¥27.6 billion in 2010, but even the 2010 figure is far below the money that Japan has been pouring into China.

The pattern is clear: Japanese companies squeezed by high labor costs and the rising yen have increasingly moved production offshore to China. It has allowed them to be more than competitive on the world market, and indeed Bank of America Merrill Lynch in a recent study estimated that China was responsible for 25 percent of the net profits of Nissan Motor, 21 percent of Toyota's and 16 percent of Honda's. China has been attractive for Japan because of the lower wages, the educated and disciplined labor force, the physical proximity and the potential attractions of the growing Chinese market. Whisper it, but the shared cultural history and writing systems have also added to the Japanese feeling of comfort in China.

Not everyone is happy. Picky Japanese consumers often say they don't trust the quality or safety of Chinese products, but when garlic or green vegetables grown in Japan cost three times as much as Chinese produce, price counts.

Some high-tech Japanese manufacturers have also lamented providing China with their latest technology, complaining that China is too quick to copy and does not respect intellectual property rights. As just one example, China's new superfast trains bear a striking resemblance to those in Japan.

The ongoing spat will no doubt provoke further examination of the wisdom of Japan putting so many of its investment eggs in the China basket. But it is not easy to switch an established production line, and other possible markets — India immediately springs to mind — offer their own difficulties, such as labor discipline and litigious attitudes, as Suzuki found in its Maruti plants in India.

By Beijing's careful calculations, it may feel it will have less to lose in an economic fight with Japan. But loss of Japanese confidence and gradual withdrawal of modern Japanese technology would be a high price to pay for Beijing's aspirations to create a modern superstate. If tensions continue and China is perceived as bullying Japan, the U.S. might be sucked in and manufacturers from other countries might be more cautious of investing in China.

This is difficult to be certain about — and Lenin's comment that capitalists are so greedy that they would sell the government the rope with which they would be hanged comes to mind. But a Reuters' survey of Japanese companies found that they were reassessing their relations with China. "China is very convenient, but gradually that convenience has been fading," Yoshihisa Ejiri, president of Honeys Co., the clothing chain, told Reuters. Even so only minorities were considering planning to delay investment in China, 24 percent, or shifting production elsewhere, 18 percent.

The biggest problem tying up this issue is politics. Beijing and Tokyo have now invoked the dangerous concept of "sovereignty" to support their claim to the Senkaku Islands. Sovereignty is priceless. (It would be interesting to get an estimate of the value of the fishery and oil and gas resources supposedly hidden under the waters of the islands, and calculate the maximum realizable assets against the cost of increased military spending.)

Globally, the last 60 years has seen the triumph of economics and trade over politics. Open economies and trade have allowed countries to grow faster than ever, to create jobs and increase prosperity all round. What Beijing risks, with Tokyo playing a supporting role, is a dangerous return to the bad old days where politics and military spending take priority, and the prosperity and well-being of ordinary people gets squeezed out.

Kevin Rafferty is editor in chief of PlainWords Media

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