Article: Dangers of a China-Japan Trade War

[LWPD]

There is a very real possibility that recent tensions between China and Japan could result in trade sanctions, and in a worst case scenario, some form of military conflict. The article below takes a look at some of the potential ramifications.





Courtesy of The Diplomat
The Dangers of a China-Japan Trade War
By James Parker

Protests against the Japanese purchase of the Senkaku / Diaoyu Islands took place in various Chinese cities recently, including Beijing, Shenzhen, Luoyang and Xi’an amongst others. Japanese branded products, including numerous cars (and even a camera belonging to a protestor) were attacked and destroyed by the angry crowds. Panasonic and Toyota as well as Nissan reported damage to commercial properties (a factory and car dealerships respectively). Canon has also closed some facilities whilst Japanese clothing chain Uniqlo chose to shut several locations, and covered signs at others. Protestors have also targeted Chinese owned Japanese branded products - images of which cannot be encouraging for prospective customers. Meanwhile, some Chinese protestors are calling for consumer boycotts of Japanese branded products.

Consumer boycotts can be damaging and reflect a level of political risk inherent in doing business in foreign markets – they are by no means limited to China. This aspect of political risk is troublesome, but with the growing importance of China’s market, “political risk with Chinese characteristics” must be accepted as part of the business environment. Readers may remember previous rounds of anti-Japanese protests in the mid-2010s, as well as the targeting of Carrefour and MacDonald’s branches in 2008 in response to instability in Tibet and the Olympic torch protests. In a globalized world strong brands and their logos are often taken to represent a country as much as its embassies or flag. If a large brand is operating successfully in a foreign market, they may effectively be on the front-lines of disagreements over which they have no control.

Consumer boycotts can take various forms and be over various issues. In Europe and the U.S., they often occur over perceived immoral or unjust actions by companies, including safety concerns, actions in developing countries, poor environmental records, and the mistreatment of workers. Examples of these could be the boycotts against Nestle in the late 1990s and the more famous protests against Nike over its labor practices.

Japanese companies can expect a certain chill whilst doing business in China over the coming months, even if Beijing doesn’t take any public formal economic action against Japan. The Chinese media has been suggesting that formal action may be in the cards, and with China accounting for nearly 20% of Japan’s exports, there is a lot at stake. However, such measures can be troublesome under World Trade Organization (WTO) obligations and tend to damage a country’s reputation. The punishment of Japan through rare-earth export restrictions in 2010 is an example of the more extreme national level action, but the backlash against China was damaging. Other than private consumer led boycotts and formal national policy boycotts, however, China has a powerful third option.

Unofficial boycotts are possible in China because of the power of State Owned Enterprises (SOEs) and the wider public sector in the economy. Without announcing formal measures which are difficult given WTO rules, there has been a documented effect on trade and sales from nations as well as corporations which have displeased China. This can be in the form of web restrictions such as that currently affecting the free Bloomberg website in mainland China (after Bloomberg published a damaging expose on Xi Jinping’s extended family wealth) or in unpublished policies at state companies (there have been reports that sales of Bloomberg Terminals have plummeted in China).

In fact, two academics at the University of Goettingen in Germany published a discussion paper looking at the effect on trade when a foreign country angers Beijing by arranging official meetings with the Dalai Lama. Fuchs and Klann, the paper’s authors, find a definite pattern whereby a country’s exports to China will fall by 8.1% or 16.9% (depending on method of measurement) and will remain depressed for two years after such an event. The paper finds that heavy machinery and transport equipment are the sectors most consistently hit by such “unofficial” boycotts. Needless to say, these sectors in China involve many state owned players (transport and infrastructure development).

Yet despite China’s growing clout in international economics, the boycott/consumer action sword can cut both ways. Whilst Japan is the current target of action in the mainland and Hong Kong, companies from all nations are being made more aware of the particularities of political risk in China – and will also remember the recent experiences of Carrefour and MacDonald’s. Investment decisions are affected by risk, and a company’s costs are increased if insurance premiums rise. Even shutting down facilities for a week or two is damaging to a corporation.

Foreign firms do provide employment in China and also pay taxes, as well as deliver products which Chinese consumers usually seem keen to own. What’s more, Japanese consumers buy Chinese made products too; a tit-for-tat boycott war will harm both sides, and many companies (not just Japanese ones) considering investment in China may now be looking at other options. It is now well known that strong economic relationships before WWI didn’t stop the march to war, but they can’t have hurt. Let’s hope that cooler heads will prevail.

[chewey]

It's amazing the level of nationalism that seems to control things in Asia. I once had a political science professor compare the emergence of China to that of Otto Von Bismarck's unification of Germany - completely upsetting the balance of power that had controlled the region for the latter half of the twentieth century. Let's hope the Bismarck analogy doesn't lead to the same result (i.e. another world war).

From experience living in the region and having many friends in China, I know that the younger Chinese are increasingly vocal with their patriotism as China grows stronger, and resent being told that they have been "brainwashed" by their communist leaders. That the incoming new regime in China is even willing to discuss nuking their own economy just to prove a point with Japan really speaks loudly to me as far as their willingness to placate their own vocal activists.

Today it may be anti-Japanese sentiment over the Diaoyu Islands for whatever oil may be found there.. tomorrow we'll be going back to the Spratly Islands which I personally find equally dumb.

[LWPD]

Sept 19, 2012 21:38:40 GMT -5 chewey said:

It's amazing the level of nationalism that seems to control things in Asia. I once had a political science professor compare the emergence of China to that of Otto Von Bismarck's unification of Germany - completely upsetting the balance of power that had controlled the region for the latter half of the twentieth century. Let's hope the Bismarck analogy doesn't lead to the same result (i.e. another world war).

From experience living in the region and having many friends in China, I know that the younger Chinese are increasingly vocal with their patriotism as China grows stronger, and resent being told that they have been "brainwashed" by their communist leaders. That the incoming new regime in China is even willing to discuss nuking their own economy just to prove a point with Japan really speaks loudly to me as far as their willingness to placate their own vocal activists.

Today it may be anti-Japanese sentiment over the Diaoyu Islands for whatever oil may be found there.. tomorrow we'll be going back to the Spratly Islands which I personally find equally dumb.

Good insights! It's unfortunate how history shows that economic links, which in a rational world should prevent war, often aren't enough to prevent conflicts from arising. The peaceful interests of trade partners tend to get trumped by the ways domestic institutions aggregate their political interests. When a conflict can be expedient, common sense policies end up paying the price.

On a related note, Stratfor had this interesting analysis on the South China Sea, China's territorial claims and the Nine-Dash Line policy.



Courtesy of Stratfor.com
The Paradox of China's Naval Strategy
By Rodger Baker and Zhixing Zhang

Over the past decade, the South China Sea has become one of the most volatile flashpoints in East Asia. China, Vietnam, the Philippines, Malaysia, Brunei and Taiwan each assert sovereignty over part or all of the sea, and these overlapping claims have led to diplomatic and even military standoffs in recent years.

Because the sea hosts numerous island chains, is rich in mineral and energy resources and has nearly a third of the world’s maritime shipping pass through its waters, its strategic value to these countries is obvious. For China, however, control over the South China Sea is more than just a practical matter and goes to the center of Beijing’s foreign policy dilemma: how to assert its historical maritime claims while maintaining the nonconfrontational foreign policy established by former Chinese leader Deng Xiaoping in 1980.

China staked its modern claim to control of the sea in the waning days of the Chinese Civil War. Since most of the other claimant countries were occupied with their own independence movements in the ensuing decades, China had to do little to secure this claim. However, with other countries building up their maritime forces, pursuing new relationships and taking a more active stance in exploring and patrolling the waters, and with the Chinese public hostile to any real or perceived territorial concessions on Beijing’s part, Deng’s quiet approach is no longer an option.

Evolution of China’s Maritime Logic

China is a vast continental power, but it also controls a long coastline, stretching at one time from the Sea of Japan in the northeast to the Gulf of Tonkin in the south. Despite this extensive coastline, China’s focus has nearly always turned inward, with only sporadic efforts put toward seafaring and even then only during times of relative security on land.

Traditionally, the biggest threats to China were not from sea, except for occasional piracy, but rather from internal competition and nomadic forces to the north and west. China’s geographic challenges encouraged a family-based, insular, agricultural economy, one with a strong hierarchal power structure designed in part to mitigate the constant challenges from warlords and regional divisions. Much of China’s trade with the world was undertaken via land routes or carried out by Arabs and other foreign merchants at select coastal locations. In general, the Chinese chose to concentrate on the stability of the population and land borders over potential opportunities from maritime trade or exploration, particularly since sustained foreign contact could bring as much trouble as benefit.

Two factors contributed to China’s experiments with naval development: a shift in warfare from northern to southern China and periods of relative national stability. During the Song dynasty (960-1279), the counterpart to the horse armies of the northern plains was a large inland naval force in the riverine and marshy south. The shift to river navies also spread to the coast, and the Song rulers encouraged coastal navigation and maritime trade by the Chinese, replacing the foreign traders along the coast. While still predominately inward-looking during the Yuan dynasty (1271-1368) under the Mongols, China carried out at least two major naval expeditions in the late 13th century — against Japan and Java — both of which ultimately proved unsuccessful. Their failure contributed to China’s decision to again turn away from the sea. The final major maritime adventure occurred in the early Ming dynasty (1368-1644), when Chinese Muslim explorer Zheng He undertook his famous seven voyages, reaching as far as Africa but failing to use this opportunity to permanently establish Chinese power abroad.

Zheng He’s treasure fleet was scuttled as the Ming saw rising problems at home, including piracy off the coast, and China once again looked inward. At about the same time that Magellan started his global expedition in the early 1500s, the Chinese resumed their isolationist policy, limiting trade and communication with the outside and ending most consideration of maritime adventure. China’s naval focus shifted to coastal defense rather than power projection. The arrival of European gunboats in the 19th century thoroughly shook the conventional maritime logic of Chinese authorities, and only belatedly did they undertake a naval program based on Western technology.

Even this proved less than fully integrated into China’s broader strategic thinking. The lack of maritime awareness contributed to the Qing government’s decision to cede its crucial port access at the mouth of the Tumen River to Russia in 1858, permanently closing off access to the Sea of Japan from the northeast. Less than 40 years later, despite building one of the largest regional fleets, the Chinese navy was smashed by the newly emergent Japanese navy. For nearly a century thereafter, the Chinese again focused almost exclusively on the land, with naval forces taking a purely coastal defense role. Since the 1990s, this policy has slowly shifted as China’s economic interconnectedness with the world expanded. For China to secure its economic strength and parlay that into stronger global influence, the development of a more proactive naval strategy became imperative.

Interpreting the ‘Nine-Dash Line’

To understand China’s present-day maritime logic and its territorial disputes with its neighbors, it is necessary to first understand the so-called nine-dash line, a loose boundary line demarcating China’s maritime claims in the South China Sea.

The nine-dash line was based on an earlier territorial claim known as the eleven-dash line, drawn up in 1947 by the then-ruling Kuomintang government without much strategic consideration since the regime was busy dealing with the aftermath of the Japanese occupation of China and the ongoing civil war with the Communists. After the end of the Japanese occupation, the Kuomintang government sent naval officers and survey teams through the South China Sea to map the various islands and islets. The Internal Affairs Ministry published a map with an eleven-dash line enclosing most of the South China Sea far from China’s shores. This map, despite its lack of specific coordinates, became the foundation of China’s modern claims, and following the 1949 founding of the People’s Republic of China, the map was adopted by the new government in Beijing. In 1953, perhaps as a way to mitigate conflict with neighboring Vietnam, the current nine-dash line emerged when Beijing eliminated two of the dashes.

China's Nine-Dash Line

The new Chinese map was met with little resistance or complaint by neighboring countries, many of which were then focused on their own national independence movements. Beijing interpreted this silence as acquiescence by the neighbors and the international community, and then stayed largely quiet on the issue to avoid drawing challenges. Beijing has shied away from officially claiming the line itself as an inviolable border, and it is not internationally recognized, though China regards the nine-dash line as the historical basis for its maritime claims.

Like other claimant countries such as Vietnam and the Philippines, China’s long-term goal is to use its growing naval capabilities to control the islands and islets within the South China Sea and thus the natural resources and the strategic position they afford. When China was militarily weak, it supported the concept of putting aside sovereignty concerns and carrying out joint development, aiming to reduce the potential conflicts from overlapping claims while buying time for its own naval development. Meanwhile, to avoid dealing with a unified bloc of counterclaimants, Beijing adopted a one-to-one negotiation approach with individual countries on their own territorial claims, without the need to jeopardize its entire nine-dash line claim. This allowed Beijing to remain the dominant partner in bilateral negotiations, something it feared it would lose in a more multilateral forum.

Despite the lack of legal recognition for the nine-dash line and the constant friction it engenders, Beijing has little ability now to move away from the claim. With the rising international attention and regional competition over the South China Sea, the Chinese public — which identifies the waters within the nine-dash line as territorial waters — is pressuring Beijing to take more assertive actions. This has left China in an impossible position: When Beijing attempts to portray joint developments as evidence that other countries recognize China’s territorial claims, the partner countries balk; when it tries to downplay the claims in order to manage international relations, the Chinese population protests (and in the case of Chinese fishermen, often act on their own in disputed territory, forcing the government to support them rhetorically and at times physically). Any effort to appeal to Beijing’s domestic constituency would risk aggravating foreign partners, or vice versa.

Developing a Maritime Policy

The complications from the nine-dash line, the status of domestic Chinese developments and the shifting international system have all contributed to shape China’s evolving maritime strategy.

Under former leader Mao Zedong, China was internally focused and constrained by a weak navy. China’s maritime claims were left vague, Beijing did not aggressively seek to assert its rights and the independence struggles of neighboring countries largely spared China from taking a stronger maritime stance. China’s naval development remained defensive, focused on protecting its shores from invasion. Deng Xiaoping, in concert with his domestic economic reforms in the late 1970s and early 1980s, sought the more pragmatic joint economic development of the East and South China seas, putting aside claims of territorial sovereignty for another time. China’s military expenditures continued to focus on land forces (and missile forces), with the navy relegated to a largely defensive role operating only in Chinese coastal waters.

To a great degree, Deng’s policies remained in place through the next two decades. There were sporadic maritime flare-ups in the South China Sea, but in general, the strategy of avoiding outright confrontation remained a core principle at sea. China’s navy was in no position to challenge the dominant role of the U.S. Navy or to take any assertive action against its neighbors, especially since Beijing sought to increase its regional influence through economic and political means rather than through military force.

But joint development proposals for the South China Sea have largely failed. China’s expanded economic strength, coupled with a concomitant rise in its military spending — and more recently its focus on naval development — has raised suspicions and concerns among neighboring countries, with many calling on the United States to take a more active role in the region to counterbalance China’s rise. The issue of the nine-dash line and territorial claims have also risen in significance because countries had to file their maritime claims under the U.N. Convention on the Law of the Sea, bringing the competing claims a step closer to international arbitration. China, which was a signatory to the treaty largely due to its potential maritime gains in the East China Sea, found itself forced to file numerous counterclaims in the South China Sea, raising alarm in neighboring countries of what was seen as an outright push for regional hegemony.

It was not only counterclaimant nations that considered the Chinese moves troubling. Japan and South Korea are heavily dependent on the South China Sea as an energy transit corridor, and the United States, Australia and India among others depend on the sea for trade and military transit. All these countries saw China’s moves as a potential prelude to challenging free access to the waters. China responded with increasingly assertive rhetoric as well as a larger role for the Chinese military in foreign policy decisions. The old policy of nonconfrontation was giving way to a new approach.

The Foreign Policy Debate

In 1980, Deng expressed the shape of Chinese foreign policy as one in which China should observe the world, secure its position, deal calmly with foreign affairs, hide its capabilities and bide its time, maintain a low profile and never claim leadership. These basic tenets remain the core of Chinese foreign policy, either as guidelines for action or excuses for inaction. But China’s regional and domestic environment has shifted significantly from the early days of Deng’s reforms, and China’s economic and military expansion has already passed Deng’s admonition to hide capabilities and bide time.

Beijing understands that only through a more proactive policy can China expand from a solely land-based power to a maritime power and reshape the region in a manner beneficial to its security interests. Failure to do so could enable other regional states and their allies, namely the United States, to contain or even threaten China’s ambitions.

At least four elements of Deng’s policies are currently under debate or changing: a shift from noninterference to creative involvement; a shift from bilateral to multilateral diplomacy; a shift from reactive to preventative diplomacy; and a move away from strict nonalignment toward semi-alliances.

Creative involvement is described as a way for China to be more active in preserving its interests abroad by becoming more involved in other countries’ domestic politics — a shift from noninterference to something more flexible. China has used money and other tools to shape domestic developments in other countries in the past, but an official change in policy would necessitate deeper Chinese involvement in local affairs. However, this would undermine China’s attempts to promote the idea that it is just another developing nation helping other developing nations in the face of Western imperialism and hegemony. This shift in perception could erode some of China’s advantage in dealing with developing nations since it has relied on promises of political noninterference as a counter to Western offers of better technology or more development resources that come with requirements of political change.

China has long relied on bilateral relations as its preferred method of managing its interests internationally. When China has operated within a multilateral forum, it has often shaped developments only by being a spoiler rather than a leader. For example, China can block sanctions in the U.N. Security Council but has rarely proffered a different path for the international community to pursue. Particularly through the 1990s, Beijing feared its relatively weak position left it little to gain from multilateral forums and instead put China under the influence of the stronger members. But China’s rising economic power has shifted this equation.

China is pursuing more multilateral relationships as a way to secure its interests through the larger groups. China’s relations with the Association of Southeast Asian Nations, its participation in the Shanghai Cooperation Organization and its pursuit of trilateral summits are all intended to help Beijing shape the policy direction of these blocs. By shifting to the multilateral approach, China can make some of the weaker countries feel more secure and thus prevent them from turning to the United States for support.

Traditionally, China has had a relatively reactive foreign policy, dealing with crises when they emerge but often failing to recognize or act to prevent the crises before they materialize. In places where Beijing has sought access to natural resources, it has often been caught off-guard by changes in the local situation and not had a response strategy prepared. (The division of Sudan and South Sudan is one recent example). Now, China is debating shifting this policy to one where it seeks to better understand the underlying forces and issues that could emerge into conflict and act alone or with the international community to defuse volatile situations. In the South China Sea, this would mean clarifying its maritime claims rather than continuing to use the vague nine-dash line and also more aggressively pursuing ideas for an Asian security mechanism, one in which China would play an active leadership role.

China’s stance on alliances remains the same as that put forward by Deng in the 1980s: It does not engage in alliance structures targeted against third countries. This was both to allow China to retain an independent foreign policy stance and to avoid international entanglements due to its alliances with others. For example, Chinese plans to retake Taiwan were scuttled by its involvement in the Korean War, and thus its relations with the United States were set back by decades. The collapse of the Cold War system and the rise of China’s economic and military influence have brought this policy under scrutiny as well. Beijing has watched cautiously as NATO has expanded eastward and as the United States has strengthened its military alliances in the Asia-Pacific region. Beijing’s non-alliance policy leaves China potentially facing these groups alone, something it has neither the military nor the economic strength to effectively counter.

The proposed semi-alliance structure is designed to counter this weakness while not leaving China beholden to its semi-alliance partners. China’s push for strategic partnerships (even with its ostensible rivals) and increased military and humanitarian disaster drills with other nations are part of this strategy. The strategy is less about building an alliance structure against the United States than it is about breaking down the alliance structures that could be built against China by getting closer to traditional U.S. partners, making them less willing to take strong actions against China. In its maritime strategy, Beijing is working with India, Japan and Korea in counterpiracy operations and engaging in more naval exchanges and offers of joint exercises and drills.

Looking Forward

China’s world is changing. Its emergence as a major economic power has forced Beijing to rethink its traditional foreign policy. Closest to home, the South China Sea issue is a microcosm of China’s broader foreign policy debate. The ambiguity of China’s maritime claim was useful when the region was quiet, but it is no longer serving China’s purposes, and coupled with the natural expansion of China’s maritime interests and naval activity it is instead exacerbating tensions. Old policy tools such as trying to keep all negotiations bilateral or claiming a hands-off approach are no longer serving China’s needs. The policy of joint development inherited from Deng has failed to bring about any significant cooperation with neighboring countries in the sea, and the assertion of the nine-dash line claims amid the U.N. sea treaty filings has simultaneously increased domestic Chinese nationalism and countermoves by neighboring countries.

Despite the lack of clarity on its maritime policy, China has demonstrated its intent to further consolidate its claims based on the nine-dash line. Beijing recognizes that policy changes are needed, but any change has its attendant consequences. The path of transition is fraught with danger, from disgruntled domestic elements to aggressive reactions by China’s neighbors. But by intent or by default, change is happening, and how the foreign policy debate plays out will have lasting consequences for China’s maritime strategy and its international position as a whole.