Sino-Japanese Economic Issues: Interdependence on a Deeper Level

Fred Taylor

Hypothesis

Economic Interdependence Security Cooperation

Economic Interdependence Increase Cost of Conflict

Increased Empathy

Increased Empathy

Security Cooperation

Diplomatic Cooperation

Step 1:

Step 2:

Will Interdependencies Lead to Diplomatic Cooperation?

My Research Question:

Liberal International Relations Theory says:

Outline

• Economic Trends– Bilateral Trade– FDI

• South and SEA Rivalry

– Financial Integration• Foreign Exchange

• Energy and Ecological

Interdependence

• Prospects in 2027

• Conclusions (So What?)– Linkages to Security and Diplomatic Policy

Wen-Abe Summit: 11-13 April 2007

Sino-Japanese Trade Statistics

• China by the numbers– GDP: $2.512 Trillion– Trade Total: 1.75 Trillion– %GDP Total: 69%– %GDP w/ Japan: 8%– %GDP w/ U.S.: 10%

• U.S. Stats show larger %

– Flows w/ Japan: -$24B– Flows w/ U.S.: $232.6B

• Import: Raw Materials• Export: Manufactured Goods

• Japan by the numbers– GDP: $4.365 Trillion– Trade Total: $1.02 Trillion– %GDP Total: 23%– %GDP w/ China: 4.7%

• With Hong Kong included

– %GDP w/ U.S.: 4.1%– Flows w/ China: $26B– Flows w/ U.S.: $88.4B

• Import: Food, Airplanes• Export: Cars, Car Parts

Bottom line: China is highly dependent on world tradeJapan also net-importer for food, fuel

Direction of Trade

China

Top 5

Imports Exports Total

($ B)

EU 90.3 182.0 272.3

Hong Kong

107.4 155.4 262.8

U.S. 59.2 203.5 262.7

Japan 115.8 91.8 207.6

ASEAN 89.5 71.3 160.8

Japan Statistic Bureau (MOF): 2005

Japan

Top 5

Imports Exports Total

($ B)

U.S. 58.9 123.3 182.2

China 73.6 99.8 173.4

Korea 22.5 42.9 65.4

ROC 16.6 40.0 56.6

Thai land

14.3 20.6 34.9

China Monthly Statistics: 2006

Take Away: Increased trade also increases trade friction

Foreign Direct Investment (FDI)

• China’s FDI Total: $53B• FDI from Japan: $28.2B• Investment Frictions

– Foreign Invested Enterprises account for %58 of exports

• “Economic Colonialism”

– Japanese “hollowing out”• Suzuki Motorcycles

– Emotion trumps Economics• Mori Building in Shanghai• Maglev vs. Bullet Train

• Sino-Japanese Competition for SEA Influence• Chinese Foreign Exchange Investment Bank

– Build Domestic Economy, Less Dependent on FDI

Financial Integration (w/ U.S. Market)

• Foreign Exchange reserves– China: $1.30 Trillion– Japan: $.895 Trillion

• Integration After 1997 Asian Financial Crisis– Asian Monetary Fund (AMF)– Chiang Mai Initiative

• “Dollar Zone”

• Economist Intelligence Unit

CRS Report RL32165 (’06)

Bottom line: U.S. economic integration doesn’t directly correspond to Sino-Japaneseintegration

Energy Interdependence

• Nuclear Capacity– Japan: 55 plants– China: 4 plants

• Energy Efficiency– Japan: 37%– China: 9%

• Japan’s Options– Nuclear– Energy Conservation– Renewable Energy– East China Sea– Siberia-Pacific Pipeline

• China’s Options– Coal– Hydro electric– Central Asian Pipeline– East China Sea– Siberia-Pacific Pipeline

Ecological Interdependence

AP/NASA/Goddard Space Flight Center

Asian dust brings hazy skies to western U.S.USA Today 04/18/2001 

Pollution over China Blows out to Sea October 22, 2004

NASA/Goddard Space Flight Center

Official Developmental Assistance

• Japan ODA to China: $30B• Japan voted to stop low-interest loans in 2008• Grant-Aid will continue beyond 2008

International Nuclear Safety Center,

March, 1999

Sino-Japanese Relations in 2027

• Goldman Sachs BRIC Report 2050– Models based on: labor, capital stock, and TFP – Continued growth based on:

• Macro-Economic Stability• Openness to Trade and Investment• Efficient Institutions• Enhanced Education Levels

• Japan’s Challenges– Graying and Shrinking Population– Debt (150% of GDP), Economic Reforms Needed

• China’s Challenges– Environment, Corruption, Social Safety Net

MP: China’s prospects for growth better than Japan’s

So What?

• Conclusion: Economic and Ecological Interdependence Will Remain Strong for the Next Two Decades, but So What?– Economic Linkages to Security are Weak

• Regime survival and “lost child” more important than $$

– Economic Linkages to Politics are Arbitrary• Can sometimes “buy” good will, sometimes not

• Not a guarantee for “peace” in the region, but rather an incentive to maintain economic stability– If China perceives she is winning the “great game,”

then she will likely preserve future good relations with Japan and the U.S.

Conclusion

Economic Interdependence Security Cooperation

Economic Interdependence Increase Cost of Conflict

Increased Empathy

Increased Empathy

Security Cooperation

Diplomatic Cooperation

Step 1:

Step 2:

Will Interdependencies Lead to Diplomatic Cooperation?

My Research Question:

Liberal International Relations Theory says:

Complex Interdependencies May PositivelyAffect Diplomatic Cooperation SometimesComplex Interdependencies May PositivelyAffect Diplomatic Cooperation Sometimes

Questions?

Wen-Abe Summit: 11-13 April 2007