Jul 1, 2014

China - A Smart Policy

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China and Japan should enhance economic cooperation in spite of political differences

Trade between China and Japan hit a record high of $340 billion in 2010, but has been declining ever since. In 2013, bilateral trade shrank to about $315 billion. It was understandable as a consequence of disputes over the Diaoyu Islands; yet it still was an unusual state between two political and economic powers with close ties. Decreasing economic cooperation will end up damaging both sides. Leaders of China and Japan should seriously consider how to manage the economic relationship between the two countries, and what policy should be adopted.

Rethinking the standoff

In an economic confrontation, the country with less economic strength always loses more than the one with a stronger economy. China and Japan are likely of equal economic strength. Although China's GDP has doubled that of Japan's, it still relies on Japan in fields like investment, advanced technology and equipment. On the flip side, Japan relies heavily on China's huge market. Any economic confrontation between them inevitably will result in a no-win situation. Major countries in the world are devoted to developing their economies while promoting connections between each other so as to increase economic cooperation. Against this backdrop, if China and Japan continue confronting each other economically, they are sure to fall behind other countries' economic development and the world's globalization process.

The Diaoyu Islands issue is unlikely to be resolved anytime soon. Considering the stubbornness of territorial conflicts, China and Japan's economic confrontation will continue into the long term if they choose it as a method to deal with disputes over the islands. A full conflict between China and Japan, including economic confrontation, would be simply irrational and unproductive.

Economic sanctions are effective only when there is a wide gap between the countries' economic strength. If the two countries sanctioning each other are of equal strength, they can easily find substitute products or markets. For example, China can import more hi-tech products it needs from Europe and the United States, while Japan can enlarge exports and investment to ASEAN countries. In the event of failed sanctions, both sides face a lose-lose situation.

Abenomics, the economic stimulus policy that Japanese Prime Minister Shinzo Abe is implementing, is running into a dead end. Large-scale quantitative easing, bold public investment and the depreciation of the Japanese yen have stimulated Japan's economy so intensely that it may bring about a serious economic imbalance if these policies continue. Meanwhile, China's economic slowdown is also threatening the country's healthy development. Under these circumstances, China and Japan must adjust or abandon their mutually contradictory economic policies, for their own benefit and development.

In fact, Japan's tactic of exploring the Indian market as a replacement for China has had lackluster results, in part because Japanese investors frequently encounter obstacles in the Indian market, which is not nearly as mature as China's. The situation in the ASEAN market is only slightly better. However, instability in ASEAN nations caused by corruption and internal turbulence is not beneficial for Japanese investors, who can always gain enormous profits in China.

Thus far, neither Beijing nor Tokyo has found a solution to their territorial disputes. At the same time, Abe's right-wing administration insists on misguided acts and statements, aggressive diplomatic propaganda and military preparation targeted at China. Consequently, China scarcely has a chance to come to terms with Japan in politics, security and military areas. Therefore, the political stalemate between the two East Asian neighbors will not only be inevitable, but also long-lasting. The two governments must handle bilateral economic relations and policies amidst a long-term political standoff.

Let's talk business

Close economic cooperation surely can deepen ties and communication in various areas, promote mutual exchanges and understandings, and provide economic and popular support for ameliorating future bilateral relations. But enhancing bilateral relations never is a corollary of increasing economic cooperation. Chinese and Japanese governments should make more efforts to develop bilateral economic relations, and treat it as a practical approach to gaining profits for their own.

Japanese leaders have no fantasy of promoting bilateral relations by intensifying economic links. On the contrary, they often express their fear of a close China-Japan economic relationship. But China usually magnifies the function of boosting economic relations. Currently, both countries' attitudes are inadequate. Japan's fear of deeper economic cooperation actually means giving up major practical economic interests from China. Its choice to seek interests in India and ASEAN nations is a policy that requires long-term input but leads to small output.

China's expectation of economic relations is impractical, and ignores the fact that a close economic relationship alone cannot be decisive due to the complicated and profound territorial and historical disputes between China and Japan. By approaching bilateral economic cooperation in a more practical fashion, Japan could cease seeking out misguided alternatives to the lucrative Chinese market, while China would be able to maximize potential economic benefits.

To protect their respective national interests, China and Japan should separate their economic bonds from bilateral political, security and military relations. In this way, while insisting on their opposing principles, stances and acts in the political field, the two neighbors will still be able to deepen their economic cooperation. Neither of them will feel as though they are stooping to compromise, but will rather believe they have defended their national interests through economic cooperation. Moreover, such a policy satisfies popular emotions and material demands. Therefore, it is the second best choice that can meet both immediate and long-term needs in spite of difficult political relations.

They also need to promote cooperation in big economic projects, particularly to advance the building of a China-Japan-South Korea free trade area. Meanwhile, leaders of the two sides should maintain contact in order to practically boost economic cooperation. During their meetings, leaders of the two countries can choose to focus on economic cooperation, without mentioning political, security and military topics, or expressing their political, security and military principles and stances. Such an interaction pattern will push forward bilateral economic cooperation, while achieving consistent economic goals.

Japan's diplomatic activity with China is usually courteous but lacking in sincerity, which is a flexible way of interacting. The government treats diplomatic exchanges with China as a publicity stunt, because it at least can win popular domestic support when no diplomatic achievement is made. China, which generally conducts diplomatic activity solemnly and holds high expectations, often feels disappointed when diplomacy fails to create positive outcomes. Now China is changing its attitude, and lowering political, security and military expectations when meeting with Japanese leaders. This more realistic approach may be helpful in easing up bilateral and regional tensions.

Zhou Yongsheng

Business & Investment Opportunities 

Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. 

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