ASIA: China Gives Japan ‘Shock and Awe’ in Economics

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Mar 27 2003 (IPS) - China’s edging out of the United States as Japan’s top trading partner highlights how Beijing’s economic clout has grown in recent years, a factor that is likely to colour touchy bilateral ties and the two countries’ rivalry in Asia.

China’s emerging power is proving a serious challenge to Japan’s traditional postwar leadership in Asia, analysts say.

”China’s rise can be compared to the current ‘shock and awe’ attack operation on Iraq,” says Koichi Ishiyama, a business writer.

The shock comes from the fact that ”China produces everything from technological to other goods at one half the price. Japan cannot complete,” he explains. ”Awe translates into the economic advantage of China to improve its old communist image.”

”With this gone and the popularity of its special economic zones, China has turned into a formidable rival, becoming the second largest economic power next to the United States,” he adds.

Indeed, Akira Koijima, a professor of business and commerce at prestigious Keio University says, ”China appears keen to seize the diplomatic initiative not just in South-east Asia but in the whole East Asian region. China’s rapid economic development has resulted in the argument for a need to ‘quell China as a threat’.”

For the first time in 2002, China became the largest exporter to Japan. Japan imported 61.7 billion U.S. dollars in 2002 from China, compared to 57.5 billion worth of goods from the United States.

This was a reversal of the picture in 2001, when Japan bought more goods from the United States than from China.

Last year, China marked a trade surplus with Japan – exports to Japan was 70 billion dollars compared to Japanese imports at almost 48 billion dollars.

Likewise, China-Japan trade increased 13.8 percent to 101.5 billion dollars last year, posting an annual record high for the fourth straight year, according to figures from the Japan External Trade Organisation (JETRO).

”The new statistics imply that Japan and China are increasingly dependent on each other as economic powers,” says Kenichi Imai, China expert at the Institute of Developing Economies, a quasi-governmental think tank.

This interdependence means that Japan must come to grips with China’s ascendance and develop a more balanced, friendly relationship with China.

”The two countries, historically at odds, have to learn to walk the tightrope in bilateral diplomacy as friction lies ahead,” adds Imai.

There are other signs of deepening economic links. For instance, imports of China’s low-cost products are now mainly in machinery such as in office machines and audio equipment, which increased by 29.4 percent in 2002 from 2001.

Marine and agricultural products as well as cheap apparel are also flooding the Japanese market.

This surge follows high investment by Japanese firms that are attracted by low labour charges in China – between 20 to 30 percent lower than Japan – and the fast-growing consumer market in a country whose Gross Domestic Product grew by 8 percent last year, compared to Japan’s less than 1 percent.

As Ishiyama says, the Japanese cannot complete with China’s low production costs, so Japanese manufacturers are going to China to produce goods instead.

As of 2001, Japan invested 32.3 billion dollars in China, not counting Hong Kong and Macau making it the second largest investor in China after the United States.

Companies like Toshiba Corp, a leading Japanese electronic manufacturer, for example, has released new plans to double investment to China to 2 billion dollars over the next five years for projects including the world’s largest notebook computer plant.

Drawn into joint ventures aimed at capturing the lucrative local market, several large Japanese companies are have moved into new collaborations.

Nissan Motor Co will start joint operations with Dong Feng Automobile Co, one of three major Chinese automakers, by investing 976 million dollars this year. Nissan hopes to boost its share of the Chinese market for passenger cars to more than 10 percent in 2006.

But growing economic ties also brings with it potential for friction. The first signs of serious economic provocation came this year when Japan voiced strong concerns over its domestic deflation being linked to cheap Chinese goods.

In January, Finance Minister Masajiro Shiokawa said China should abandon the peg of its currency, the yuan, to the dollar. Officials say cheap Chinese goods are tantamount to exporting deflation to other countries and calling for a re-evaluation of the ”too low” value of the yuan.

The yuan has traded in a range of about a third of a percent – around 8.28 yuan – to one dollar for the past eight years. China, however, has brushed aside the call for an appreciation of its currency.

Japan’s ‘Nikkei’, the leading financial daily, likens Japan’s record trade deficit with China to the regular bouts of friction between Tokyo the United States. Japan’s large trade surplus with the United States – around 7 billion dollars in 2002 – is a thorn in its ties with its closest ally.

As room for friction increase with trade ties, China and Japan have already begun to invoke tariff safeguards on goods like steel imports under the standards of the World Trade Organisation standards, which China joined last year.

Some Japanese politicians also are calling for cuts in Tokyo’s aid to China, which for fiscal year 2002 already fell 25 percent from the previous year. They say aid should be reduced, citing Chinas’s economic might and rise in military spending.

Another sore point is the rise in bankruptcies among small and medium sized companies in Japan, which are being linked to the increase in cheap Chinese imports.

The Chinese economic onslaught is likely to shape Japan’s foreign policy and nudge Tokyo to scramble for more free trade agreements with the Association of South-east Asian Nations (ASEAN) and East Asia.

A free trade accord, the Japan-Singapore Economic Partnership Agreement, took effect from November 2002.

Analysts say that East Asia and ASEAN are also seeking a balancing factor from Tokyo against China’s looming shadow. ”Japan must increase its efforts to restructure its industry and its agricultural sector to play the role of balancer,” says Koijima.