Will the US’s economic containment draw Japan and China closer? - SOAS China Institute

//Will the US’s economic containment draw Japan and China closer?

Will the US’s economic containment draw Japan and China closer?

Kajiyama Hiroshi, Minister of Economy, Trade and Industry of Japan (August 2021). – Photo credit: Dean Calma / IAEA (CC BY 2.0)

By Jane Du | 16 December 2021

Unlike Europe, East Asia does not have a tradition of contemporary diplomacy-based international relations. Although countries in the region share a degree of philosophical identity, their values and perceptions of national interests differ greatly. Relations within the region mostly consist of loosely connected bilateral arrangements. This was particularly obvious during the Cold War, when countries in East Asia responded passively as sub-systems of the US-Soviet bipolar international order. After the end of World War Two (WW2), the US assumed most of Britain’s role in the Asia Pacific and developed its influence in the region.

 

A reasonable generalisation is that Japan and China’s global engagement has been oriented more towards the Asian region than has been the case for the US. In terms of economic size and influence, the US remains the pivotal player, albeit a player that is less dependent on the region. This pattern of economic engagement has given the US a strong presence and has enabled it to play a dominant role in the region, with relatively independent decision-making.

 

The US relies heavily on Japan’s cooperation in dealing with regional economic and security issues. In the 1960s, Japan’s economy grew significantly to become a leading power in the capitalist camp; the country became not only a key economic power in the Asia-Pacific, but also the US’s most important partner in the region.

 

China’s economic rise is a new geopolitical phenomenon. After the 1980s, Deng Xiaoping’s opening-up policy expanded China’s economic relations with the outside world and the country’s economy became more closely linked with those of the US and Japan. As China extended its economic cooperation, its political influence grew. This reflected not only its fast-growing GDP, but also its deliberate efforts to regain a dominant role in the region. This in turn meant that relations between the US and Japan were forced to take account of the “China factor”.

 

In the current context of intensified economic confrontation between China and the US, there is considerable speculation about the likely future trajectory of Japan-China cooperation. From an economic perspective, current conditions may push Japan and China towards closer cooperation, but two features of Japan’s national accounts are suggestive about the extent of increased cooperation.

 

Current Account: Trade Balance

 

Despite its soundness in terms of economic magnitude and technological underpinnings, Japan’s trade mode differs fundamentally from that of the US. In terms of trade balance, the US ran a small deficit with China from the late 1980s until the early 1990s. Since then, initially in the wake of the signing of the North American Free Trade Agreement (NAFTA) in the mid-1990s, the gap has steadily widened. The US goods trade deficit expanded even faster after China’s accession to the World Trade Organisation (WTO) in December 2001, particularly when the Chinese government encouraged exports with subsidies. These factors meant a rising flow of Chinese products to the US, giving rise to the concentration of a bilateral trade deficit in the manufacturing sector and dragging down the US’s manufacturing employment rate. This development has prompted the US to prioritise the lowering of its deficit with China in its current economic policies.

 

Unlike the US, Japan’s overall goods trade balance was running at a surplus, occasionally with a small deficit, throughout the 1980s–2000s; a relatively bigger deficit opened up in the 2010s and has continued until recently. A large proportion of Japan’s goods trade deficit comes from imports of energy goods from resource-origin countries (e.g. the United Arab Emirates and Saudi Arabia) and of manufactured goods from emerging Asian markets (e.g. Malaysia and Indonesia). Under its economic recovery policy, trade has served as a driving force in Japan’s recent economic expansion cycle.

 

Compared with its overall trade balance, Japan’s trade deficit with China has remained stable and small. This is attributable to Japan’s per-project investments being relatively small-scale and related to processing trade. Although Japan is among the top importers of Chinese products, the high share of processing trade means that Japan’s domestic consumption market has never opened up freely to China. The Japan-China trade balance is therefore not expected to grow significantly even if the bilateral trade volume increases.

A view of Yokohama's Chinatown. – Photo credit: Toshihiro Gamo (Flickr)

Capital Account: Cumulative Investment Stock

 

Compared with trade balance under the current account, the capital account is more reflective of the two countries’ cooperation and Japan’s long-term economic penetration.

 

Japan’s successful industrialisation has made its investment in Asia mostly productivity-oriented. Among all recipients, China ranks among most important in terms of its magnitude. However, Japan’s investment in and from the US is much larger than that of China or any other country in the Asia Pacific. Before the Pandemic in 2020, Japan’s OFDI flow to the US constituted 39 per cent of its total OFDI, 15 per cent more than its OFDI to Asia as a whole. Meanwhile, the cumulative investment of Japan and the US in each other’s economies is more substantial. By the end of 2019 the US had received one-third of Japan’s total OFDI stock, while China had less than one-tenth. While competitiveness trends should logically deter OFDI flow to major manufacturing industries in both Japan and the US, much of this OFDI flow and stock was the combined outcome of macroeconomic forces generated and sustained by Japanese-American bilateral economic cooperation in the post-war era.

 

Few would deny that the US and Japan’s lack of consensus vis-à-vis China is largely a reflection of the latter’s economic policies, institutions and practices, which differ from theirs in many ways. As the first industrialised country in Asia, a large part of Japan’s FDI has undoubtedly been motivated by the politics of trade – in particular, the desire on the part of Japan’s manufacturing industry to diffuse any trade tension and avoid prevailing trade restrictions. Thus, like its trade mode, Japan’s manufacturing-based investment mode requires that it seeks a more stable investment environment that Japanese investors can expect long-term return on their investments.

 

Summary

 

While political concerns are usually thought to be paramount, there also exists an important Asia-centric economic reality – namely, the Sinicisation of Asian economic relations. This refers to the process whereby in the past two decades China has become the most significant engine of Asian growth through its efforts to build up a China-led Asian community. China’s “peaceful rise” has thereby created a triangular balance of power in East Asia. While Japan-China close economic cooperation has become one option within this matrix, the potential is however limited, given Japan’s concerns about China’s ambitions for regional domination.

 

Internationally, Japan’s post-1980s investment in China benefitted from China’s low profile on the international stage and the high-speed growth that followed from its economic reforms. After decades of economic boom, the balance of economic scales between Japan and China altered when China’s GDP surpassed that of Japan in the early 2000s. China’s rising economic capacity and fierce competition with Japan in the Asian product and capital markets make it less likely that Japan will open its domestic market freely to Chinese goods, while long-term bilateral diplomatic instability and uncertainties do not allow Japan to take the risk of greater economic dependency on China.

 

Domestically, in contrast to its strong uptrend in the 1980s-1990s, Japan’s current economic capacity has been weakened. The particularities of its investment and trade modes are reasons for Japan’s inability to accept large-scale trade deficits. Unless it changes its investment and trade modes or can generate accelerated economic growth, the economic importance of Japan for China today is far less than that of the US. Short-term political and diplomatic issues notwithstanding, the long-term trilateral relationship has to be viewed in terms of relevant deep-rooted relations and bilateral economic foundations.

 

 

This commentary is based on a recently published article by the author.

Dr Jane Du is a Research Associate at the SOAS China Institute.

The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.

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