China and Japan have lodged protests with each other over the holding of naval exercises in the East China Sea as their dispute over tiny islands shows no sign of a resolution.
The heightening tensions have negatively affected economic relations between the region’s two most important countries, which are also the world’s second and third largest economies.
The dispute, which became a crisis when Japan purchased three of the islands from a private businessman in September 2012, resulted in a 3.3 percent drop in overall bilateral trade last year, to US$333.6 billion, according to Japanese figures.
The decline has continued this year.
In fact, six-month figures show that the drop in trade was such that by the first half of 2013, China was no longer Japan’s biggest export market but had dropped behind the United States for the first time in five years.
The China Daily has warned that Japan is likely to be replaced by South Korea as China’s second largest trading partner, after the United States, if present trends continue.
Meanwhile, Japanese investment in China fell in the same period by 31.2 percent, to US$4.9 billion, according to Jetro, the Japan External Trade Organization.
Southeast Asia is benefiting handsomely from the diversification of Japanese investment from China. Asean received US$10.3 billion in Japanese investment in the first six months of this year, a 55.4 percent increase and more than double the investment in China.
Tourism between the two countries has also been affected. The number of Japanese tourists in China fell by 25 percent in the first half of 2013, to 1.4 million. The number of Chinese who visited Japan declined to 530,000, a drop of 27 percent.
Some 14,000 Japanese companies have investments in China, totaling US$70 billion in 2012.Quite a few of them are so scared of the operating environment – featuring violent protests, burning of cars and trashing of Japanese-owned establishments – that they have decided to leave the country.
Chinese law, however, stipulates that closing down a company requires the approval of local authorities, who are concerned about the loss of tax revenue and jobs. In the end, the Japanese investor may have little choice but to abandon his investment in favor of his Chinese joint venture partner.
A Japanese businessman, Masaru Hirose, at a press conference in Taiwan, spoke about the troubles of his father’s company in Qingdao when it ran afoul of a Chinese partner. He said that “more than 100 Japanese corporations are currently prohibited from leaving China.”
“Japan has not completely turned its back on China but wants to reduce its dependence on China and diversify its economic interaction with the Asean regional grouping, which is inherent with good trade and business potential,” Yumiko Kawasaki, an economist who does research on Asian economies, told Bernama, the Malaysian national news agency.
India, too, is expected to benefit from Japan’s shift from China, where the atmosphere has been hostile for much of the last three years and worsened in September 2012.
A major problem is a severe lack of mutual trust. In fact, surveys show that more than 90 percent of the public in China view Japan in negative terms and these sentiments are reciprocated by more than 90 percent of the Japanese public.
This is in stark contrast with the situation in the early 1980s when, in the wake of the signing of a peace and friendship treaty, the majority of people in each country felt a sense of affinity for people in the other country.
This means that the current situation isn’t irreparable. When the territorial dispute is put on the shelf, the two peoples won’t view each other as enemies. But the two governments need to take steps to defuse the issue.
First, there needs to be recognition that the two countries need one another. The first thing to do is tone down the rhetoric.
On a substantive level, Japan should acknowledge that there was a tacit understanding to shelve the issue back in the 1970s rather than say China did so unilaterally.
China, on its part, should recognize that the Japanese government’s purchase of three islands from their private owner was done to prevent them from falling into the hands of Shintaro Ishihara, head of the Tokyo Metropolitan Government, who wanted to develop the islands and, frankly, provoke China. Furthermore, the purchase had no impact on sovereignty.
The two countries have to find a way to put the issue back on the shelf.
Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.
[email protected]; Twitter: @FrankChing1