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Some Considerations on the Asymmetry of the Sino-Japanese Economic Interdependen

Viewed 7031 times 2013-5-8 09:02 |System category:News

Duan Xia  Shen Yan

The proposition of whether or not economic interdependence can lead to safety has long been a hot topic for scholars both at home and abroad. A large amount of research recognizes the positivity of relationships, and that interdependence gradually deepens cooperation between relevant countries and helps to foster more common interests between them. Industries, sectors and interest groups allied to external economic interests’ stress that countries can only take peaceful means towards resolving contradictions and conflicts under interdependent conditions. However, looking at both history and reality, many cruel facts doggedly convey the fact that economic interdependence does not automatically bring about peaceful situations, and mutual interdependence may not achieve a win-win situation for both sides, that the result is dependent upon structural features and judgments by actors in the interdependent relationship, as well as the big strategies promoting development and change. Recently, with escalation of the Diaoyu Islands event, the Chinese domestic public has been appealing to resist Japan through economic warfare. It seems that once China escalates its economic warfare against Japan, the collapse of the Japanese economy would be just around the corner. Some Japanese people are also advocating use of trade wars and economic weapons to resist China. How should Sino-Japanese economic interdependence be regarded? This interdependence substantially increases costs in the use of economic and military means towards resolving contradictions and conflicts, but is it bound to cause mutual damage for both? If not, which one of the two sides will lose less? How do both sides take the initiative? This article attempts to find answers from the asymmetry of Sino-Japanese economic interdependence.

The Asymmetry of Sino-Japanese Economic Interdependence

Since the establishment of diplomatic relations between China and Japan in 1972, Sino-Japanese economic and trade cooperation has developed at a pace. Looking at a statistical analysis of China’s trade with Japan from 1972 to 2011, the volume of bilateral economic trade has grown to US$342.89 billion in 2011 from an initial US$1.04 billion. The value of imports and exports has grown in comparably impressive terms. Since 2004, Japan has become China’s second largest trading partner, for many years second only to the U.S.. In 2007, China overtook the U.S. to become Japan’s most important trading partner. National trade report data from China’s Ministry of Commerce shows that Japan’s total exports to China were US$162 billion in 2011, accounting for 19.7% of its total exports and that Japan’s imports from China were US$184 billion, accounting for 21.5% of its total imports. China has become Japan’s largest trading partner and the largest export destination and largest source of imports. Japan and China have become each other’s major import and export market and interdependent economic partner.

In recent years, the main reason for expanding Sino-Japanese bilateral trade and deepening economic interdependence has been that the bilateral economic and trade structure has significant differences and areas of complementation. Because of this, Sino-Japanese economic interdependence has structural differences. These structural differences are not only the basis of their economic interdependence but they also help to judge sensitivity and vulnerability in the economic interdependence, to weight up whether this interdependence has symmetry, and to find the other’s economic “Achilles’ heel.”

In 2011, Japan’s export commodities to China were predominantly mechanical and electrical products, base metals and products, and transportation equipments, with a growth rate of 10.3%, 5.3%, and 3.6% respectively, and accounting for 44.7%, 11.2% and 9.8% of its total exports to China. China’s demands for Japan’s electromechanical products are significant and growing rapidly. Such products include precise machinery, semiconductors, electronic components, integrated circuits and auto parts, steel, and so on. This suggests that although China is making great progress in its economy, it continues to find it hard to rid itself of its heavy dependence on Japan for key parts, quality of raw materials and machinery equipment, etc. The more rapidly the Chinese economy grows, the more rapidly its export trade grows with developed countries. With further decline in the proportion of rough manufactured goods in its export commodities and a continued rise in the proportion of decent manufactured goods, the Chinese economy will have a stronger external dependence. A Japanese media column has pointed out that Japan’s export commodities to China are mainly finished or semi-finished products, and that more than half of export goods (about 52%) are “capital goods” as opposed to “consumer goods,” assisting in the production of other products and providing a service. In 2011, about 70% of Japan’s export commodities to China were those machinery and parts that directly affected normal operations in China’s manufacturing industry. Some of these were core components that were even irreplaceable. Most of the production of China’s export goods to Europe and the U.S. could not have been achieved without those intermediate products and parts imported from Japan. It is based on this judgment that Japan is filled with noise about using core technology and economic warfare to resist China.

The main commodities that Japan imported from China in 2011 were mechanical and electrical products, textiles, raw materials and chemical products. These amounted to, US$74.75 billion, 30.65 billion and 11.96 billion respectively, with an increase of 15.2%, 20.4% and 54% over the previous year. They accounted for 40.6%, 16.7% and 6.5% of Japan’s total imports from China. China’s exports of labor-intensive products still have a large advantage in the Japanese market, and its textile and raw materials and light industrial products take a more than 50% share in the Japanese import market, which helps to greatly reduce daily living costs for everyday people in Japan. With the escalation of China’s industrial structure and the increase in the competitiveness of exports of machinery and electronic products, Japanese-invested enterprises in China also share in China’s huge export bonus. Along with the increase of foreign direct investment in China over recent years, foreign-funded enterprises in China now occupy 50% of its import and export trade. A large proportion of Sino-Japanese trade is competed for by Japanese-invested enterprises in China. The situation has led gradually to the domination by Japanese-invested enterprises of Sino-Japanese trade, and to Japanese high-tech products monopolizing the Chinese market. A survey released by the Japan Bank for International Cooperation at the end of 2011 shows that, affected by Japan’s domestic economic downturn and the continued appreciation of the Japanese Yen, Japanese manufacturing enterprises are gradually raising the proportion of overseas production, with particular emphasis on the Chinese and Indian markets. The proportion of Japanese overseas production stands at 33%. This figure is estimated to rise to 38% in 2014, as part of which the proportion of overseas production for electromechanical and electronic industry enterprises is expected to rise to 53%. Japan’s intention to boost its domestic market by expanding overseas production is thus revealed.It can be seen from Japan’s import and export data comparison with China from January to September 2012, as released by the Japan External Trade Organization (JETRO), that Japan’s exports in 2012 declined every month as compared with 2011 figures, but that the trade volume of imports from China is rising steadily. This explains why the Sino-Japanese relationship is politically cold and economically hot in the long term, and even supports an important point of view that Japan’s economic recovery and development is dependent on China’s huge market, and also dependent to a large degree on China’s export trade. 40 years of Sino-Japanese economic and trade exchanges have generated these enterprises and markets, and these will become a significant constraining factor that must be considered when limiting Japan’s efforts to take economic or military action against China because of regional conflicts such as the Diaoyu Islands event.

Japan’s High Economic Dependence on China and Its Strategic Adjustments

For 40 years since the establishment of Sino-Japanese diplomatic ties, economic and trade exchanges between the two countries have changed significantly because of economic developments on both sides. With the rapid development of China and its growing influence in the global system, the volume of Sino-Japanese trade has begun to decline gradually, falling behind that of China’s trading volume with the U.S., the European Union and ASEAN. In contrast, because of its long-term economic stagnation, Japan’s foreign trade has begun to focus on China, and “special demands from China” have become an important factor in enhancing Japan’s economic recovery. The Japanese economy recovered in 2003 after 10 years of stagnation, with an actual growth rate of 2.6% that could not have been achieved without expansion in external demands, particularly the contribution of trade with China. According to data published by the Japanese Economic Industry, Japan’s export increases to China accounted for 39% and 68% of Japan’s total foreign export increases in 2002 and 2003 respectively. Thus it is clear that Japan’s economic recovery has a clear positive correlation with its export increases to China, which is why the “Application of China theory” and “China’s special needs theory” have been popular in Japan in recent years.

In terms of the products that China exports to Japan, these are principally primary products. The living costs of Japanese consumers would increase without cheap Chinese goods. In particular, the global economic downturn and the situation of wage reduction would be likely to cause social public dissatisfaction and increase domestic stability and social management costs. Japan’s “Daily News” has analyzed the association between the Japanese economic boom, China’s exports to Japan and Japan’s exports to China in the form of a graph. It argues that taking the influence of the anti-Japanese goods movement with the Diaoyu Islands event as a symbol of the deterioration of Sino-Japanese relations, Japan’s real GDP was reduced by 0.9% in the third quarter of 2012 as against the second quarter. Sales figures for Japanese-made cars dropped by 40.7% in October, 35% in September, and by 10% in 2012 over 2011. With the impact of the European debt crisis, China reduced its exports to the EU, its largest trading partner, and this also wreaked havoc on Japan. By September 2012, Japan’s exports to China were less than those in 2011 over consecutive 4 months. Weak exports decelerated Japan’s domestic production, resulting in the vicious circle of reduction of bonus and overtime pay and consumption deterioration.

The Interim financial report from listing corporations in the Tokyo Stock Exchange in September 2012 confirms the judgment:Nearly 30% of Japanese enterprises lowered their annual performance predictions, many large motor manufacturing companies said that they would be encountering huge losses in 2012, and electric machine manufacturers producing famous Japanese brand products saw rapid failings.One research report conducted by Morgan Stanley emphasizes that the dispute over sovereignty of the Diaoyu Islands caused a decline in Japan’s exports to China in the fourth quarter, and that the number of Chinese visitors to China also collapsed. Compared with average figures for the first quarters of 2011 and 2012, the number of Chinese visitors to Japan in the fourth quarter of 2012 was expected to fall by 70%, and Japan’s tourism income would be reduced accordingly by 67 billion Yen (one Yen = 0.08 Renminbi), accounting for 38% of Japan’s total export value expected in the quarter. As of October 4, approximately 19,500 reserved seats on JAL flights to and from China between September and November were canceled. A total of approximately 43,000 booked seats on all Nippon airways flights to and from China as of October 1 were canceled. The deterioration in Japan-Chinese economic relations obviously affects Japanese corporate earnings for family appliances, automotives, tourism, shipping, etc.. Many Japanese economists worry that Japan will face an economic recession.

Although China and Japan have higher interdependence on each other and their adjacent regions, both import from the other products that account for approximately the same proportion of their total imports. Japan depends more than China does on mutual exports, and as well as on imports and exports with adjacent regions. Firstly, Japan’s exports to China have the larger share, accounting for approximately 13.7% of its total exports in 2009, while China’s exports to Japan accounted for only 8.1% of its total exports. In 2011, Japan’s imports and exports to China stood at 21.5% (imports) and 19.7% (exports) of its total import/export amounts. Secondly, both import and export scales and proportions in adjacent Asian countries without the Western Asian region are equivalent. However, due to historical complexities, these countries are basically disgusted with Japan’s territorial claims. China’s efforts to create a united front may affect those countries, and China can even provide some alternative export products for these countries in order to meet their needs so as to expand its influence on them. Thirdly, there are different external energy dependence strengths between China and Japan. Over recent years, China’s energy import scale has been expanding. Imported energy in national energy consumption rose by 5.8% in 2008 from 2.9% in 2000. But China’s dependence on imported energy is much lower than people’s imaginations. By contrast, Japan is the world’s third-largest energy consumer, and its domestic energy consumption is predominantly dependent on imports. The proportion of energy imports in recent years has been maintained at around 80%, and imported energy derives primarily from the Middle East, Russia, China and other countries. Oil line security issues led by regional conflicts will not impact structurally on China, but will lead to considerable economic and social security implications for Japan.

In addition, with the impact of the new round of the knowledge economy revolution, Japanese companies undergoing transformation are concerned about Japan’s “sandwich situation.” Some high-level R&D personnel consider that while Japan possesses world-beating technology in high-tech fields such as DVD and liquid crystal, companies in South Korea, mainland China and Taiwan would be able to pick these up quickly if the need arose to imitate and catch up with Japanese companies, using their business models of low price and novel design. Meanwhile, Japanese enterprises still fall some way behind the U.S. manufactures such as Apple corp. and Intel in terms of product design and innovation. If Japanese companies are unable to change their ideas, it may become very difficult for them to sustain their high growth rates of the past.If this situation continues, the technical advantage of Japan’s exports to China would no longer be unique, and once this can be replaced, the situation of Sino-Japanese interdependent asymmetry will be more favourable to China.

With the escalation of the Diaoyu Islands dispute, China is taking economic countermeasures to interrupt rare earth exports and to strengthen clearance limits, thereby letting the Japanese public become aware of the serious consequences of Japan’s economic overdependence on China. Due to Japan’s concerns about the deep potential hazards for its national security brought about by its economic dependence on other countries, Japan has begun to take its industry transformation and global layout operations outside of China. The Japanese political and industrial sectors are shifting their industrial focuses away from China to South-east Asia, West Asia and other areas, little by little. According to reports from media including the Nikkei Chinese Network, Japan is slowly its acquisitions in China significantly, and Japanese-invested enterprises in China are setting the pace in compressing capacity and adjusting open plans. According to statistics from Japan’s M&A Advisory Corp., RECOF, from July to September 2012 there were five merger and acquisition (M&A) cases for Japanese companies to Chinese companies, amounting to 5.6 billion Yen. This was a reduction of 75% compared with figures from April to June. Some Japanese convenience stores and chain stores have postponed their plans of store openings in China. With higher and higher investment costs in China, some Japanese companies have shifted their investment goals to Thailand, Burma, Vietnam, the Philippines, India, Brazil, and other countries. On November 10, 2012, Japan held the Ministerial Policy Dialogue Meeting with the five Central Asian countries of Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan and Turkmenistan. Japan covets these countries’ rich rare earth, oil and uranium and other natural resources, and has been hoping to strengthen cooperation with them, breeding a regional organization similar to ASEAN, in order to change the current industrial structure and space layout that is characterized by high dependence on China and its adjacent regions. Professor Hattori Kenji from the Strategic Management Research Department, Japan Centre College, predicted that “by the end of 2013, the possibility of Japanese companies turning to other countries is relatively low, but in 2014 there will be a big operation switch in which Japanese companies will enter into South-east Asia with a population of 0.5 billion, India with a population of 1.2 billion, Brazil and Russia, etc. under the premise of maintaining business in China.”

It is clear that Japan has a greater dependence on the Chinese market than China does on the Japanese market. According to the interdependence theory in international relations, whether a relationship of mutual influence and restriction between interdependent actors is symmetric or not depends on each actor’s external “sensitivity” and “vulnerability.” Robert Keohane and Joseph Nye consider that interdependence sensitivity refers to the extent of reaction in the policy framework, and that how rapidly a country changes leads to another country changing at a price and how much the country has to pay.They consider that vulnerability refers to the damage cost to each actor as imposed by external events (especially after policy changes), or over a period of time, and the costs incurred by each actor in order to make effective adjustments to cope with environmental changes. Considering the effects of the Diaoyu Islands incident on Japan’s economy, politics, social life and strategic adjustments, interdependence between China and Japan has obvious asymmetry, and Japan’s “sensitivity” and “vulnerability” in interdependent relations are greater than those of China. However, this asymmetry cannot automatically support the destruction of opponents and preservation of their own international security proposition. China must prevent Japanese industrial transfers and economic counters as soon as possible.

Assessments of China’s Interdependence on Japan’s Economy

Japanese products are not irreplaceable in China’s consumer areas. The Chinese boycott of Japanese goods after the purchase the Diaoyu Islands by the Japanese government provides evidence of this. Looking at things from a different angle, this indicates that China’s interdependence on Japan’s economy has substitutability.

From the perspective of the Sino-Japanese trade development process, as described above, while Sino-Japanese trade is expanding, it is also gradually declining in terms of the proportion of foreign trade between the two countries. According to statistics from Chinese Customs, Japan was China’s fourth largest trading partner in 2011. The top three were the E.U., the U.S., and ASEAN. The China-EU trade volume reached US$567.21 billion, with an increase of 18.3%; the Sino-US trade volume reached US$446.7 billion, with an increase of 15.9%. The Chinese Minister of Commerce, Chen Deming, believes that by 2020, if both China and the U.S. can maintain a relationship marked by long-term stable political trust, and if the U.S. can relax its limits on high-tech exports to China, then the total volume of bilateral trade is expected to exceed that of the U.S. and the EU, making China the U.S.’s largest trading partner. The China-ASEAN trade volume will amount to US$362.9 billion, and Sino-Japanese trade volume will amount to US$342.89 billion. The volume of China’s foreign trade exports to Japan fell from 15.7% in 2000 to 7.8% in 2011, while the total volume of China’s import and export trade to Japan fell from 16.4% in 2002 to 9.4% in 2011. Characterized by its big market and by huge domestic demand, China, with its strong substitutability in terms of its interdependence on Japan’s economy, will find that its interdependence on Japan’s trade will decline even further. There are different comparative advantages between the two countries. China has the advantage with labor-intensive and part capital-intensive products, but Japan is dominant in tech-intensive products, giving it the upper hand in the industrial chain. This industry pattern has not yet changed. In addition, since the 1990s, the Sino-Japanese trade balance has in general been to China’s deficit. With an increasing trade deficit, China’s trade balance gradually became unbalanced. According to Chinese statistics, during the 21 years between 1990 and 2011, there were 7 years during which China came out top, and 14 years of a negative balance. Since the beginning of 2002, China’s trade deficit has been expanding each year, and rose to US$46.29 billion in 2012. As for the reasons why, on the one hand, due to economic development needs, China rapidly increased imports of raw materials and parts from Japan for advanced equipment and industrial production. On the other, due to the appreciation of the Renminbi, Japanese-invested enterprises in China begin to sell products to other countries instead of reverse importing to Japan, leading to a decrease in the number of Chinese exports to Japan and an increase in the trade deficit. As such, independent scientific and technical research and development towards improving core technology and the purchase of core raw materials and components for reprocessing in manufacturing from third parties are key factors for China in gaining the initiative in economic relations with Japan.

From the perspective of investment, Japan has been an important source of foreign capital for China, and Japan’s direct investment in China plays a very important role in Sino-Japanese economic relations. Japan’s investment in China began in 1980 and has been increasing thereafter. Since the 21st century, Japan’s direct investment in China has been growing rapidly, and a new round of investment peaks have seen actual capital of US$6.33 billion increase by 55.1%. By the end of June 2012, the actual accumulative total amount of Japan’s direct investment in China was US$83.97 billion, ranking first place in China’s foreign fund sources, and occupying absolute advantage in manufacturing industry investment. Investment in the electrical equipment sector and the transport machinery field accounted for more than half of total investment. A high-class, comprehensive, diversified and technology-intensive investment situation is gradually developing. In recent years, with a mind to diversify investment risks, Japanese companies’ investment in South-east Asia, South Asia and other countries has been intensifying. Japan’s actual investment in China’s utilization of foreign investment has fallen gradually. In terms of Japan’s actual use of investment, this accounted for only 15% in 1990, and less than 10% after 1992, followed by figures of 7.3% in 2006 and 4.8% in 2007. However, China is still the best choice for Japanese enterprises in terms of overseas investment. Japan JETRO-published data shows that in the first half of 2012, Japan’s investment in China reached US$7.169 billion, with an increase of 37% from the same period in previous years, accounting for 12% of Japan’s total foreign investment. From January to September, in terms of the amount of actual foreign investment, Japan, at US$5.621 billion, still ranks in second place in China’s foreign investment sources, just behind Hong Kong (US$52.084 billion). However, it is worth noting that Japan’s industrial transfer policy will inevitably bring about a substantial increase in Japanese direct investment to other countries and regions, and China’s foreign capital from Japan will be significantly reduced. Intermediate goods account for a large proportion of goods in Sino-Japanese trade. If investment in manufacturing continues to decline, the bilateral trade volume might also see a decline. This would inevitably have a negative impact on the Chinese economy. With the deepening of China’s reform and its gains in economic strength, China’s foreign exchange shortages have been resolved, and the impacting factor in development is not the use of foreign capital, but structural adjustment, i.e. from increasing in number to improving in quality, and turning to key industries and area development.

To sum up, the Chinese economy is still subject to Japan in core technology areas and has an apparent “Achilles’ heel,” but this will not shake the foundations of China’s development overall or fundamentally. Over the years, the market action logic of Sino-Japanese companies has created a situation in which Japan’s economic recovery and development is largely dependent on the Chinese market. This has become a significant constraining factor, and must be taken into account when considering Japan’s policy towards China. Faced with a series of popular and governmental countermeasures in China since the upgrading of the dispute over the Diaoyu Islands, Japan is in a weak position to resist, which both develops and confirms the fact that the Japanese economy’s overreliance on China strengthens its sense of crisis when it comes to the national security risk engendered by its economy being subject to that of other countries. This has spurred action to adjust its industrial impact on the world outside of China.

Studies have shown that the accumulation of occasional isolated events have the potential to bring about significant change. China and Japan are major trading partners, and one economic situation or policy change will lead to the other side paying the appropriate price or changing accordingly. Both countries should give full consideration to the application of policies in order to achieve win-win and multi-win results, to expand common interests, and to avoid riling one another to the point of strategic counterattacks. China should make the effort to study Japan’s relatively “sensitive” and “fragile” anxiety in terms of Sino-Japanese interdependence, and actively respond to its industrial transfer, economic counters and strategic adjustments. Faced with the thorny issue of the Diaoyu Islands event, as well as other sticking points in Sino-Japanese relations, China makes its policy choices primarily on the basis that Sino-Japanese economic interdependence is not symmetrical. This is also capital for China in its overall strategic planning. It cannot be fail to be seen that in Sino-Japanese economic and trade interdependency, China’s lesser dependence on Japan than that of Japan on China does not mean that China is in a position to abuse its asymmetric advantages. Although China could benefit in the short term or in isolated incidents from these asymmetric advantages, in the long run, gains cannot make up for the losses.

(translated by Li Hongli)

(Opinions of the writer in this blog don't represent those of China Daily.)




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Contemporary International Relations(ISSN1003-3408), a policy-oriented research journal, was inspired by the need for the international communication in a period of rapid Chinese development.


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