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China and Japan Cannot Afford an Economic War

10-09 14:05 Caijing
Both China and Japan should rein in hysterical nationalism and return to negotiations to prevent the worst-case scenario and achieve long-term cooperation.

By staff reporters Wang Yanchun, Yuan Xue, Song Wei, Shen Cichen, Hu Weijia, Jin Yan, and Wang Ningning

A grand celebration of the 40th anniversary of the normalization of Sino-Japan diplomatic relations originally scheduled to be held at the Great Hall of the People on Sept. 27 was cancelled, despite six months of preparations leading up to the event. Neither China nor Japan held any celebrations or commemorations that day.

In contrast, September of 2002, which marked the 30th anniversary of the normalization of Sino-Japan diplomatic relations, witnessed various celebrations and commemorations in both China and Japan.

People committed to Sino-Japan exchanges are deeply concerned about the current state of Sino-Japan relations. They are disappointed to see that the dispute over the sovereignty of the Diaoyu islands, which has escalated since June 2012, has cooled down Sino-Japan political, diplomatic, economic and cultural relations, and brought about uncertainties and risks.

Those who are familiar with the development of Sino-Japan relations over the past 40 years know that occasional disputes or conflicts between China and Japan over political, diplomatic and historical issues generally have not affected the continued development of bilateral trade and economic cooperation. Since the 1990s, the phrase "warm economic ties, cold political relations" has often been used to describe Sino-Japan relations. However, the recent Diaoyu islands dispute has chilled once warm economic ties, shaking the cornerstone of Sino-Japan relations.

Since September, the sales of Japanese goods in China declined substantially, while the number of Chinese tourists traveling to Japan has dropped rapidly. The chilled bilateral trade and economic relationship will inevitably hurt both countries; the question is how much does each country stand to lose, and how much longer will the impasse last? Signs of subtle changes in Sino-Japan economic and trade relations have emerged since last year, and the renewed Diaoyu islands dispute has added an additional layer of risk to the already fragile situation.

Industry insiders point out that with the rise of its economic strength, China has gained three advantages: a) the country holds more than US$ 3 trillion in foreign exchange reserves; b) China's outbound investment continues to increase; and c) the domestic market continues to expand. China can exert its economic influence by making use of these three factors.

Still, some industry insiders contend that imposing economic sanctions on or waging an economic war against Japan could be detrimental to the Chinese economy in that they may drive down foreign investment and consumption in some sectors, therefore adding new risks to the already slowing Chinese economy.

China has long experienced a deficit in Sino-Japanese trade. If China places trade sanctions on Japan by reducing exports of mid- and low-end products, Japan will remain largely unaffected as the Association of Southeast Asian Nations (ASEAN) countries and other competitors can easily replace China. In the field of advanced manufacturing, Japan acts as the main supplier of key intermediate inputs and production equipment in the world, especially in the automobile and electronics industries. It is not easy to find alternatives for most products China imports from Japan; and for some products, no alternatives exist.

The bilateral economic and trade relationship between China and Japan has become highly interdependent over the past 40 years. The prospects of economic integration in Asia hinge on China, Japan, and South Korea working together to create a regional end market. However, many people have overlooked the negative impact the Diaoyu islands dispute might have on the Sino-Japan economic and trade relationship and the uncertainties it might bring to the political and economic landscape of East Asia and even the Asia-Pacific region.

Steering the relationship between Asia's largest and second largest economies out of the current predicament is a test for the citizens and policymakers of both countries. Both China and Japan should rein in hysterical nationalism and return to negotiations to prevent the worst-case scenario and achieve long-term cooperation.

Full article in Chinese: http://magazine.caijing.com.cn/2012-10-07/112168966.html

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