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An Economic Analysis of Sino-Japanese Relations

Popularity 1Viewed 1900 times 2015-3-5 16:41 |System category:Others| economic analysis, sino-Japanese

Liu Junhong

(Liu Junhong is Research Professor of the Institute of Japanese Studies, CICIR.)

The strong inter-dependence of the economies of China and Japan is the platform on which their relations can be improved. However, along with globalization, China’s economy has become more integrated with the global economy, which has meant that economically speaking it is now less dependent on Japan. Meanwhile, Japan’s economy has grown more dependent on China’s. It is clear, then, that the economic relationship has moved through some structural changes.

 

China-Japan trade has shaped the two countries’economic ties. After the Second World War, trade was asymmetrical and followed a three-step development path. From the 1950s to 1972, it was all“under the table”, that is before the normalization of Sino-Japanese ties. Trade was of a very limited scale and scope. Its influence on economic ties was relatively small. The second stage ran from 1972 to 1979, and was characterized by Japanese exports of finished goods to China and Chinese exports of primary goods to Japan. Again the trade structure was simple, and Chinese exports were very basic. From 1979 to the late 1990s marks the third stage, when trade rose rapidly. In 1979, Japan launched its Official Development Assistance (ODA) to China. Later, China and Japan signed and revised an Investment Protection Agreement, providing governmental guarantees for Japanese direct investment in China, which marked the beginning of investment-oriented trade. During this period, Japanese companies exported manufacturing equipment, raw materials and spare parts to China. Products were assembled in China and then exported around the world, including to Japan. By the end of the mid 1990s, China and Japan had agreed on China’s accession to the General Agreement on Tariffs and Trade (GATT), after which their trade began to grow strongly. China’s export manufacturing industry was in its initial stages and heavily dependent on Japan for capital, technology, machinery, spare parts and management skills. It was particularly reliant on Japan in the high-tech sector. During this period we can say that trade was asymmetrical and dominated by Japanese companies.

 

China’s accession to the WTO came in 2001, after which China’s economy strongly integrated with the global economy. China opened its markets to the world, but at the time global markets were dominated by the U.S. and Europe. Money from around the world poured into China. Trade exploded and the economy rocketed. China-Japan trade transformed into one that could be described as being“intra-industry”. During this period, Japan’s economy was languishing. Japanese companies lost their competitive edge because of strong competition from the U.S. IT industry, the depreciation of the Japanese Yen, and the appearance of the emerging countries. And so Japan had to transfer its failing industries overseas, and China became the main destination. Japan was forced to do this because after China became part of the WTO, it became an important part of the global market. Japanese companies had to watch U.S., European and South Korean companies muscling in. Also, China’s local industries were growing rapidly and a strong industrial structure based around core sectors was forming. A trapezoid-shaped set of industrial bases sprang up on the mainland, the points formed by the Pearl River Delta, the Yangtze River Delta, and Zhongguancun, a suburb of Beijing. Competition within China bore all the characteristics and attributes of global competition. And so Japanese investment in China fundamentally changed. Although they continued to assemble products on the mainland, Japanese companies also began to carry out a localization strategy, namely purchasing the raw materials in China itself, manufacturing in China and also selling the products in China. This drove localization of research and development, production, logistical support, information and financing networks. In turn this brought Japanese and Chinese companies closer together, and made Japan more dependent on China. Japanese companies were exporting machinery, raw materials and spare parts to China, assembling products on the mainland, and then bringing the finished products back to Japan, forming a kind of“trade within the company”between the parent company in Japan and the subsidiary in China, fundamentally altering trading patterns between the two countries. For example, at the end of 2001, machinery, parts, and materials made up 90% of Japan’s exports to China, with just 10% of exports made up of finished products. After China joined U.S. and European markets, China became Japan’s main base for producing goods for exporting to the West, and China became a transfer station for Japanese exports to the world. It became an integral part of Japan’s global industrial chain. This formed the basic skeleton of China-Japan economic relations, and their inter-dependence forms the foundation for good relations between the two.

 

We cannot ignore the fact that for more than ten years following China’s accession to the WTO, foreign direct investment from a multitude of sources flowed into China, helping drive the growth of the country’s industrial sector. At the heart of China’s economy was the manufacturing industry and from that the country developed its homegrown sectors. China was no longer Japan’s workshop, nor even the world’s factory; it began to make its own products. Along with globalization and regionalization, China’s industrial structure has become an integral part of the region’s industrial structure, which has linked Chinese industries with those of the rest of the world. China, Japan, South Korea, China’s Taiwan, China’s Hong Kong and the countries of ASEAN have made an East Asia industrial grouping and this has begun to spread its roots to India, Central Asia and the Middle East. The number of containers dispatched from Chinese ports has become one of the leading indicators now to measure the health of the global economy. China has become the global center for personnel, capital, goods and information. Global investors are now paying close attention to China’s economic indicators, the Chinese Yuan exchange rate and political trends in China. The entire globe is growing increasingly dependent on the Chinese economy and the Chinese market. This has pushed China-Japan economic ties into an asymmetrical structure.

 

If we take a closer look at export and import ratios, export as a proportion of GDP, and as a proportion of trade, we will be able to get a clearer picture of the Sino-Japanese economic relationship. Between 2001 and 2010, Japanese exports to China rose from 7.6% to 19.4% of its total exports. Japanese imports from China rose from 16.5% to 22% of its total imports over the same period, showing that Japan’s trade reliance on China grew steadily over that period. In 2010, Japanese exports to China made up 19.4% of its total exports. In that same year, Chinese exports to Japan made up 7.2% of its total exports. That year, Japanese imports from China made up 22% of all its imports, while Chinese imports from Japan made up 12.7% of its total imports, showing how much more dependent Japan was on China, than China was on Japan. In 2010, Japan China trade made up 5.4% of Japan’s GDP, while it made up 5.1% of China’s GDP. These figures show that the importance of their bilateral trade was about as equally important to each other.1 Japan’s strategic industries: chemicals, mechanics, electric appliances, and the car industry were particularly closely tied to China.

 

While Abenomics has proved very popular, it has not reversed Japan’s economic downturn. And although China is now grappling with adjusting its economic structure, it is still able to maintain growth rates of over 7%. The IMF recently said that Japan’s predicted growth rate for 2014 is 0.9%, 0.7 percentage points lower than the July forecast. The IMF put China’s predicted economic growth for 2014 at 7.4%.2 Japanese Prime Minister Shinzo Abe introduced Abenomics hoping to seek the country’s economic rejuvenation with bold financial policy, flexible fiscal policy and depreciation of the Japanese Yen. Two years’down the line, and Abe has not achieved any of his economic goals. For example, Abe pledged to push the consumer price index up 2% to get rid of inflation, but it rose only 1.1% in August 2014 after deducting value added tax. The inflation rate of the Central Bank’s assets swelled to nearly half of GDP.

 

More importantly, Abenomics cannot solve the fundamental problems with Japan’s economy. Japan lacks a sufficient labor force because birth rates have been low and the population is aging. The country lacks a strong domestic driving force for its economy. Abenomics is fettered by population economics.

 

Japan also lacks financial support. Japanese borrowing and government debt now amount to over 1,000 trillion Japanese Yen each, double the nominal GDP. Economic growth seesaws up and down, while fiscal expenditure is restricted by all kinds of politics. In particular, spending on social security for the aging population has expanded, accounting for more than 30% of the annual budget while the annual tax income is only half of the fiscal budget. The government is also shelling money out for amortization on national bond interests and other kinds of special accounting fees, widening the fiscal deficit. The only solution is to issue additional public debt. The government’s lack of fiscal support means its hands are tied. Abe’s political influence is weakened by his policy.

 

Japan is also hampered by the fact it has few industries at home; it moved most of them overseas after 2000. More Japanese goods are made overseas than are made on Japanese soil. After the 2008 financial crisis, it accelerated the expansion of Japanese companies overseas but this hurt R&D inside Japan. Japan’s competitiveness at home declined rapidly. Japan’s electronics industry was beaten by emerging giants such as Apple. Moving its industry overseas and faced with energy supply issues meant that Japanese exports stagnated while imports rose. Japan’s current account deficit for the first six months of 2014 reached 507.5 billion Japanese Yen. Japan’s economy is suffering from both deficits in its fiscal and current accounts.

 

Abe’s government is propped up by magnates, big banks and big industry; its political support is closely linked to the Tokyo Stock Exchange. The failure of Abenomics will directly bankrupt Abepolitics. Japan will hold its first unified local elections for assembly in early 2015 since the earthquake and Abe’s best chances are if he can kick start the economy.

 

However, both the U.S. and European economies have struggled since the global economic crisis, and they cannot help other developed countries drive their economies. Southeast Asia is politically unstable, which has shaken markets. The new Indian government has just taken power and is therefore unable to help Japan. Only China’s market has the capacity to help Abe in time. That is why it is urgent for Abe to seek help from China. The Chinese economy and the Japanese economy are inextricably intertwined. And economy cannot be separated from politics. And so if Abe really wants to save the Japanese economy, he must realize the importance of friendly ties with China. In the end, it is friendship that will ultimately help both nations.
 

(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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