(Project of the Kajima Institute of International Peace)
Does Economic Interdependence not Encourage Collaboration? ―Thinking Japan-China Relations from an Economic Perspective―
Ph.D., Toyo University
The 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 (Russett & Oneal 2001). As trade ties deepen, any conflict-induced interruption in commercial activity will have higher costs, 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 have seriously deteriorated over the Senkaku / Diaoyu issue since 2012, adversely affecting the activities of Japanese companies in the Chinese market. Does this mean that economic ties cannot encourage a peaceful relationship between Japan and China?
This paper considers such a question by viewing the Japan-China economic relationship in a broader context that goes beyond bilateral interdependence. The first section overviews changes in Japan-China economic relations. Taking this in mind, the second section examines influences of changes in economic relations on political relations. The conclusion of this paper is that bilateral economic ties cannot automatically lead to a peaceful relationship.
Honeymoon between Japan and China
Japan and China were indispensable 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 (NBSC 1981). Especially after Deng Xiaoping came back to power in the late 1970s, China recognized Japan as the most important provider of funds and technology for its Reform and Open-up Policy.1 On the other hand, also for Japan, China had been an important economic partner as a potential huge market that complements the U.S. and Europe, as well as a supply source of resources ever since the 1970s. In short, both Japan and China wanted to strengthen bilateral economic tie at that time.
Economic ties have deepened significantly over the past four decades. For example, the volume of Japan-China bilateral trade between 1988 and 2016 expanded more than 10 times. Direct investment from Japan to China also jumped from 230 million yen in 1991 to 8.6 billion yen in 2016. Along with the expansion of trade, the number of visitors also grew. While 170,000 Japanese traveled to China in 1980, the figure in 2015 was 2.5 million. And the number of Chinese visiting Japan swelled from a mere 20,000 in 1980 to 6.4 million in 2016.
Changes in Relative Economic Importance
Economic relations between Japan and China have changed in the first decade of the 2000s. 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 a smaller share 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, China's economic importance is declining 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 2013, Japan's investment to Southeast Asia doubled over the previous year. On the other hand, Japan's investment to China decreased by approximately 30% over the same period. The former investment was almost twice of the latter one in volume.
Figure 1. China's Foreign Trade by Country, 1950–2011
Figure 2. Japan's Foreign Trade by Country, 1950–2011
Negative Effect on the Political Relations
It seems that the change in Japan-China economic relations had a 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 Tokyo and Beijing are likely to lose the motivation 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 biased view that the Japanese economy needs China more than vice versa. Based on this biased view, Beijing may be tempted to take advantage of the asymmetrical trade relationship to pressure Japan into making political concessions.2 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.3 There were also reports that Chinese customs inspections for imports from Japan were delayed in the wake of Senkaku's nationalization.4 Unfortunately for Beijing, Tokyo made no compromise even facing the economic sanctions.
Is it not true that economic ties can encourage peace among countries? A lesson from recent Japan-China relations is that bilateral economic ties cannot automatically lead to a peaceful relationship. It is important to carefully look at the recent trend of changes in the relative degree of economic importance rather than in the bilateral absolute volume of economic transactions.
A man won't feed bait to a fish he's caught. When people want to make the relationship tighter, they can be gentle and patient. Once the relationship becomes deep and stable, however, people often lose enthusiasm for maintaining the relationship. Until they once again realize the importance of their ties, they may not stop quarreling. Such quarrels might, in some cases, result in a fierce fight in some cases.
Similarly once the economic interdependence becomes deep and stable, countries may lose enthusiasm for maintaining the relationship. Until they once again realize the importance of their ties, they may not stop diplomatic quarrels. Such rivalries might further serve to deteriorate bilateral relations and in some cases result in a fierce fight.
Until recently, both Japan and China wanted to strengthen bilateral economic ties. On the one hand, China recognized Japan as the most important provider of funds and technology for its Reform and Opening-up Policy. On the other hand, also for Japan, China had been an important economic partner as a potential huge market as well as a 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 Tokyo and Beijing seem to lose the enthusiasm to quickly and harmoniously improve the deteriorated political relations, since they no longer put a 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 the Senkaku Islands and other historical issues will 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.
Deteriorating political relations should not affect the interdependent economic relations. The whole Japan-China relations could become stuck if we every time allow the political tensions between the governments to damage transactions and communications in the private sector. It is important for Tokyo and Beijing to share this lesson as a principle. And, researchers should insist on stable economic transactions and active private communication even when the governments are involved in political confrontations.
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