A China representative with a Japanese company, a longtime friend of mine, told me of his unpleasant experience on Dec. 26, the day Japanese Prime Minister Shinzo Abe visited the Yasukuni Shrine.
Representing a Japanese mechatronics company in Nanjing — the then Chinese capital where cold-blooded Japanese soldiers slaughtered hundreds of thousands of Chinese troops and civilians in an event known as the Nanjing Massacre, or the Rape of Nanking, in 1937 — my friend, a Chinese, went to a business meeting to negotiate a deal. Sitting at the other side of the table were his Chinese clients, all from state-owned enterprises.
The atmosphere of the talks, which took place in a high-end hotel in Nanjing hours after Abe’s visit to the shrine, was “extremely hostile”, my friend said.
Tough words were traded, with both sides showing not even the slightest willingness to compromise on the terms of the contracts, he said. The meeting finally lapsed into an unfriendly ending, with the Chinese companies asking my friend to make sure that two of his colleagues, both Japanese nationals, do not participate in the next round of negotiation, if any.
The negotiations were clearly not like normal business talks, said my friend. “It’s like officials from Chinese and Japanese foreign ministries are confronting with each other.”
My friend’s case is just a tip of iceberg that mirrors worsening economic relationship between China and Japan, the world’s second- and third-largest economies.
According to newly released figures, China-Japan trade dipped 5.1 percent year-on-year in 2013 to stand at US$312.55 billion. China seems to sit in a slightly comfortable position with its exports to Japan sliding only 0.9 percent, while Japanese shipments to China dropped 8.7 percent.
The declining trade between the two countries is clearly not just a result of a global economic slowdown, because China’s trade with South Korea, whose trade structure with China is very similar with that of Japan, continued to rise in 2013. China-South Korea trade was up 7 percent to US$274.25 billion last year, with South Korean’s exports seeing a rise of 8.5 percent.
Apparently, Japan’s loss becomes South Korea’s gain. Chinese enterprises’ demand for goods such as car components and electronics products was still robust, but orders shifted from Japan to South Korea more in the past year.
The reason behind the decline in China-Japan trade is a political one. Since Japan decided to “nationalize” part of the disputed Diaoyu Islands in September 2012, ties between the two nations quickly ran to a low. The recent shrine visit by Abe, the first by a sitting Japanese prime minister in six years, dragged the ties to an ice point, with Beijing declaring that Abe will not be welcomed by the Chinese people, a rare tough stance adopted in addressing bilateral relations.
The situation was different from the time of Junichiro Koizumi, the Japanese prime minister between 2001 and 2006. Koizumi visited the Yasukuni Shrine every year during his term, but Sino-Japanese trade during those years was one of the best in all times in terms of both size and growth. The changing situation shows up a few points.
First, the economic interdependence between China and Japan has declined in the past few years, with China slowly moving up the value ladder. China used to import Japanese components, assemble them into finished products and export the final products. But this trade form, called processing trade in China, is reducing against the backdrop of China’s efforts to boost services trade.
Japanese products used to be a good combination of price and quality compared with those from US and Europe. But with Chinese companies able to afford more expensive products and South Korean products able to offer a replacement to Japanese products, China’s sourcing channels for machines, electronic goods and car components have increased. In this sense, the economic interdependence between China and Japan is not as high as it was in the initial years of this century.
Second, Japanese businesses are moving their production from China because of sharp increases in production and labor costs. Almost a quarter of Japanese manufacturers are re-thinking their China investment plans, according to a Reuters Corporate Survey carried out in November 2012. The trend is intensified by the latest political twist. Since Japanese companies in China account for a large part of trade between China and Japan, exit of Japanese from China companies has hurt trade.
Third, China is waging an economic war against Japan. With growing confidence about its own might, Beijing aims to rein in Japan with economic means, believing that Abe will have to soften his tone once the Japanese economy turns worse. According to sources, China has launched anti-trust investigations against some Japanese car parts suppliers, showing that it holds the idea that Japan will lose more in any economic war between the two nations.