East Asia

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Japan-China Island Dispute Brings Economic Problems



The political and military threats from the Japan-China island dispute seem to be over.  As sales and trade plummet between the two nations, China and Japan look to a free trade agreement to curb the economic fallout from the island dispute.



The economic fallout of a dispute this large between Japan and China can be quite serious.  China and Japan, the world’s second and third largest economies respectively, shared a trade relationship that totaled over US$340 billion in 2011.  Due to the strained military and political relationships, the economic bond between the two nations has been weakened.


This reached a climax this last September and October.  Third quarter numbers for the Japanese economy were bleak at best.  Data from Japan’s Finance Ministry showed “exports of goods to China down 14.1% from a year earlier in September to ¥953.8 billion ($11.97 billion.”  The auto industry, with many factories, sales, and exports to China, suffered the biggest decline in exports of 44.5%.


Amid the anti-Japanese protests that erupted this past summer in China, several Japanese firms shut down factories based in China.  Koito Manufacturing Co., a supplier for Toyota halted their project to triple output from the Chinese plant.  Several other Japanese parts-manufacturers, Sumitomo Electric Industries Ltd. and Toyo Tire & Rubber Co have reconsidered expansion plans in China.  Chinese protestors vandalized and damaged cars and showrooms in China.  This local Chinese backlash over Japan’s claim on the islands added to an overall sales drop of more than a third by Toyota, Honda, and Nissan.


Japan’s tourism sectors have also been struggling as a result of the tensions over the island dispute.  There has been a significant decline in Chinese tourism to Japan, with many Chinese directly citing the island dispute as the reason for cancelling their travel plans to Japan.

The IMF has warned of the possibility of a global recession.  The Japanese and Chinese economies have outputs that total about 1/5th of the global economic output.  Between the two nations, Japan is set to suffer more economic turmoil than the Chinese economy.  Analysts report that China purchases 20% of Japan’s exports but Japan buys less than 10% of China’s.  With the Euro Crisis in full swing and other economic problems around the world, this issue only complicates the already delicate balance of the world economy.


Despite these problems Japan is looking to get things back on track as soon as possible.  Reports are emerging of negotiations to launch a three-way free trade agreement between Japan, China and South Korea.  This is a move seen to directly mend the damaged relationship between Japan and China.  The Chinese Commerce Minister Chen Deming was quoted in the Wall Street Journal expressing his concern over the damages to both the Chinese and Japanese economies and said that, “we do not want to see this situation again.”



[ – ] Considering the other crisis and issues that Japan has faced from the 2011 Tohoku earthquake and tsunami, Japan may try to stabilize the economic and trade relationships with China as quickly as they can.  This is already happening with the emerging details of the Free Trade Agreement (FTA) between Japan, China and South Korea.  If negotiations continue to move forward without serious delays, the Japanese economy may avoid a serious recession.


[ + ] The Chinese economy cannot afford to ignore a trading partner as large as Japan.  China is seeing the negative effects of local protests, violence, and vandalism of Japanese factories and economic interests in China on the Chinese economy.  Analyst Colin Moreshead sees this as an opportunity for China to show its diplomatic maturity by keeping the political and economic matters separate.  It seems that China is showing their goodwill towards Japan as they meet for the FTA negotiations.  The language from the Chinese Commerce Minister Chen Deming is promising and points to possible intent of the Chinese to take real steps to repair the damage and strengthen Sino-Japanese relations.


[ + ] The United States is looking for an outcome that will help stabalize the global economy and prevent a global recession.  They have been vocal about their support of the Trans-Pacific Strategic Economic Partnership (TPP), but may also look favorably upon solutions reached through diplomacy like the FTA negotiations.


Previous Analysis >> Joint U.S. and South Korea Drill Brings Heightened Tension to the Region


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