What Happens to China's Economic Relationship with Japan?
The alarming pictures coming out
of China over the past fortnight, as mobs reminiscent of the Red Guards overturned
Japanese cars and even beat Chinese drivers of them, as well as forcing the
temporary closure of Japanese factories in China, raise disturbing questions.
Japanese companies including
Honda, Mazda, and Nissan have all were forced to suspend operations. Toyota and
Honda reported damage to dealerships in Qingdao. The factories have now
cautiously reopened as the Golden Week holiday starts Oct. 1, meaning millions
of Chinese will return to their families, and tension can be expected to abate
markedly.
But the mobs descending on
Japanese establishments of all kinds were triggered not by any major incident
but by a confrontation over a few islets equidistant from the two countries and
a long way from anywhere. Their strategic importance appears to have been
significantly outweighed by their domestic political importance. The leadership
in Beijing, headed for a major change sometime in October, and heading a
country enmeshed in growing economic turmoil, appears to have deliberately
unleashed the mobs to take their minds off various Chinese troubles.
The fact is that whatever
lingering outrage there is 65 years after the end of World War II, Japan and
China are two of the most important trading partners in the world. The squabble
over the islands, known to the Japanese as the Sneaks and to the Chinese as the
Diaoyu, stands a chance of disrupting that bilateral relationship, which
probably wouldn’t do either country any good. Japan’s Ministry of Finance
estimates trade between the two countries was nearly US$350 billion, almost
double two-way trade with the United States.
The immediate impact may not be
that big. China’s headlong growth, even if it has slowed in recent months,
still means it remains attractive as an end market for Japanese consumer
companies. The significant investment that Japanese companies have made in
China can’t be reversed overnight, and probably won’t be unless the Chinese
leadership decides it can afford to rev up the animosity agaom. The supply
chains between the two countries are complicated to the point where disruption
would hurt them both too badly.
China accounts for 21 percent of
Japanese exports and 20 percent of its imports. As with the confrontation last
year over the same islands, when Beijing cut back on exports of rare earths,
the metals used in the manufacture of everything from computers to cars to
airplanes to wind turbines, any disruption in the trade process means trouble
for Japan. But the process cuts both ways, Japan is China’s second-largest
trading partner after the US. A loss of a major portion of Japan-bound trade
would be difficult for China’s export-oriented economy to absorb, flagging as
it is already because of falling exports to both the Eurozone and the United
States.
Nearly two fifths of Japan's
exports to China consist of intermediate goods, which are then assembled and
re-exported as core components in Chinese exports to the rest of the world.
Japan is estimated to produce 20 percent of the world's electronic components,
which are strategic inputs in electronic and auto manufacturing, accounting for
57 percent (US$32.4 billion) of China's parts and components imports from
Japan. Another US$8.2 billion in component imports went to China’s transport
equipment industry.
If the trouble were to metastasize,
Japanese industry could consider moving operations to other countries across
Southeast and South Asia. That is not a new idea. Japanese industry is used to
it. After the drastic upward valuation of the yen in the mid-1980s, called the
endaka period, which cut into the competitiveness of Japanese exports, Japanese
industry quickly exported a major portion of its industrial plant offshore. The
beneficiaries were Singapore and Malaysia, which became electronics assembly
centers, and Thailand, which became the auto assembly center of the region. The
exodus of Japanese investment played a major role in driving a new East Asian
miracle and rescuing the countries from the mid-1980s recession.
As Asia Sentinel reported on 12
October 2011, the unprecedented 9.0 Fukushima earthquake of March 11, 2011,
sent Japanese government officials and many owners of Japan’s small and medium
overseas, looking for new locales for ancillary manufacturing operations,
offshoring to move closer to their assembly satellites in Thailand, Singapore
and China.
The October, 2011 floods in
Thailand derailed that effort. However, with plant managers in China growing
more concerned about the potential for violence, they may be ready to seek out
other countries. Growing wage inflation in China, labor disputes such as the
frenzy that hit Foxconn’s factory this week, corruption and regulatory risk all
play a role.
Nonetheless, in 2011, the 10
Asean countries were beneficiaries of US$19.6 billion in foreign direct
investment from japan, double the rate of the previous year, with at least part
of that being driven by the Fukushima effect. Japanese FDI the Asean region, at
US$74.1 billion, isn’t that far behind China, at US$83.4billion.
The increased investment could
also at have a positive effect on Japan-Asean trade. FDI flows to Vietnam have
risen by 30 percent over the past decade. As with the effect from the endaka
period, a relatively moderate increase in Japanese trade flows and investments
could resulted in rising exports and lift economic growth during a period when
global trade and investment flows have flagged.
There is also the potential
impact of deteriorating China-Japan relations on foreign direct investment
flows. Japan was China's third largest source of FDI after the United States
and Hong Kong in 2011, investing US$12.7 billion.
The figure represents
approximately 11 percent of total Chinese FDI inflows, which hit a record high
of US$116 billion last year. Japan's investment in China has grown at a
combined annual rate of 19 percent since 2001.
Japan's FDI outflows into China
reached 11 percent in 2011, up from 2 percent in 1999, making China the third
largest recipient of Japanese outward FDI, following the United States at
US$14.7 billion and the United Kingdom at US$14.1billion.
Japanese consumer companies,
facing dwindling domestic demand, are also following their manufacturing
brethren into China. According to the Teikoku Databank, approximately 14,400
companies were operating in China by last August. Although manufacturing led
the list, with 41 percent or 5,950 companies, many of them auto-parts
suppliers, apparel came in second, with 5050 companies, which comprised 35.1
percent. How long it is going to take for the China-Japan relationship to
really turn sour remains to be seen. But Asean countries, particularly
Indonesia and Vietnam, are eager to take advantage of the situation.
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