Japan, China and Korea: Territory versus Trade

Following on the ideas of China Bystander here, I wanted to take a look at how the territorial dispute is influencing regional cooperation in North-east Asia.

The Senkaku dispute is slowing getting out of control again, on 3 January several Japanese (local) politicians landed on a disputed island provoking official protest by Beijing. A few days later, the Japanese government saw fit to expand the powers of the Coast Guard to detain suspicious boats in the area, providing better (domestic) legal cover for a future arrest of Capt. Zhan. Again, to further bolster their position, the Government of Japan saw fit to name several small islets in disputed territory, with very boring names.

In response the Chinese side have expanded the area of their aerial maritime surveillance to include the disputed areas, with the Shanghai Maritime Safety Administration stating that the twin-engine Harbin Y-12 can fly over the area.

I have already heard from the Japanese side that the Senkaku/Diaoyutai dispute had caused negotiations on a bilateral FTA and at the CMIM to be shelved as China refused to deal with Japan).

But on the other hand I had a sense that even if these events were being 'exploited' in bargaining positions at the official level, most Japanese people did not care. I guessed (hoped) this may be true also for the everyday Korean and Chinese too.

Fortunately some good polling has been done on this subject. A recent poll by Asahi in China, Korea and Japan found that most people still wanted a trilateral FTA to go ahead. The numbers were Japanese 52%, Korean 55% and Chinese 82% supporting a trilateral FTA. Intriguing given the posturing at the official level.

I hope that we can make a distinction between short term public outrage over a disputed territories and the very real but quite aggregate interest in just getting along in Northeast Asia.

East Asian Free Trade Area is looking more likely!

This year has seen significant progress in negotiations, the outcome of which were only revealed at the ASEAN Plus Three summit in November. Early indications that an agreement might finally be reached occurred in August at the 14^th ASEAN Economic Ministers Plus Three (AEM+3) Meeting in Indonesia. The final communication of which welcomed “the joint proposal by China and Japan, ‘Initiative on Speeding up the Establishment of an East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership in East Asia (CEPEA)’.

Until this joint proposal by China and Japan on the future of an East Asian Trade Area, the whole process had been held hostage to the Sino-Japanese strategic rivalry. This deadlock was eventually broken by the worsening global economic situation and, relatedly, the United States bid to boost its flagging growth through exports which drove a return to Asia via the Trans Pacific Partnership. For China, the TPP is seen as particularly threatening as its intellectual property and investment protection requirements will pose a formidable barrier to joining – even if China were actually to be invited (which it is not). This new reality seems to have been enough to shift China’s priorities towards reaching an agreement in East Asia, even if that meant moving towards Japan’s position on issues of coverage and membership.

The outcome of this shift in strategic perceptions was the joint proposal by China and Japan calling for the East Asian Free Trade Area to cover goods, services and investment, i.e. an agreement which brings in Japan’s WTO-plus interests. Since the outset of negotiations on the EAFTA, Japan has been focussed on the investment related issues (and rather less interested in tariff liberalization). Since Japan has few tariffs left to cut, and those that remain are in the politically sensitive agricultural area, any EAFTA which focussed solely on tariff measures would not be of much interest to Japan politically. Specifically with regards to China, Japan has been unwilling to enter an agreement which does not address its concerns about its firms ability to confidently invest in the growing Chinese market — indeed, it is partly for this reason that the bilateral China-Japan FTA remains frozen. However, outside the bilateral negotiations and in the context of the EAFTA, China is willing to discuss Japan’s wider set of economic interests. This year Japan and China have jointly sponsored setting up three working groups to deal with trade in goods, services and investment respectively which will begin work in April of 2012, with the start of negotiations on the final text scheduled to begin in November of next year.

More importantly, the joint agreement virtually concludes the long standing disagreement over membership. China had been adamant about the EAFTA being limited to the ASEAN Plus Three process only, however it appears that the final agreement will include a wider membership than that. The East Asia Summit grouping of Australia, New Zealand and India is clearly the next logical step.

It is likely that Australia, New Zealand and India ­­— each of whom have their own ASEAN + 1 Free Trade Agreement in place ­­­— would be brought into the new trade area via the so-called “ASEAN + +” institutional mechanism. While the set up of this mechanism is not yet finalized, it is clear that it will aim to “roll up” the series of ASEAN + 1 agreements. The framework is being negotiated at the ASEAN Plus Working Groups, which are considering rules of origin, tariff nomenclature, customs procedures, and economic cooperation. These will feed into the working groups on trade, services and investment to provide the single template agreement.

Yet there remain some major hurdles. Firstly, the terminology has not been settled, with both the EAFTA and CEPEA still being bantered around. This suggests that the Chinese bargaining position has not been dropped, and there may still be some tussles over the membership. Secondly, while the Japanese and Chinese leaders have directed the bureaucrats to start negotiations, political leadership will be required to sign the agreement into force. However, the Heads of Government only enter the process next year, and in the mean time another flare up in Sino-Japanese relations could put everything back into deep freeze.

Notwithstanding those issues, it is clear that the halting trend towards the realization of an EAFTA is progressing. While there will no doubt be more setbacks, an EAFTA now seems to be more a question of when than if.

A more polished version appears on the East Asia Forum here.

China: Control the gold

I was reading idly the Annual report on exchange arrangements and exchange restrictions and discovered an interesting little fact about the Chinese monetary system:

By law, all gold produced in China is sold to the PBOC, which in turn sells it on to those wishing to use the gold jewelry, industrial or other purposes. Since most currency in China (like elsewhere) is paper money, the original purpose of the law (to ensure supply of precious metal for coin) is forgotten and this must just be a nice way of taking a cut for the Bank.

It sort of makes sense too in that it forces Chinese mainlanders to settle in RMB. If inflation becomes a bigger problem for people, they will not be happy with that but the government at least keeps control (esp as the standing committee runs the PBOC). Contrast that with what is happening Vietnam as the Dong inflation is driving people to settle debts in gold and other metals.

No doubt there will be other random posts on China shortly...

How to waste an opportunity: Ira Kan

Kan Naoto managed to survive the no confidence moved against him, in fact he 'won' hansomely with vote of 152 for to 293 against.

Wow, Kan appears to be slowing but surely winning against the influence of Ozawa faction. This is the third major win. Maybe Japan will turn the corner yet!

Or not.

In order to defeat the no confidence motion, Kan had to promise to step down in the near term (undefined).

His win has set himself up as (yet another) lame duck PM in Japan. Great.

Japan is therefore still on course to play the master game of strategic irrelevance - and they are not going to like the cards dealt them.

Sino-Japanese relations: fleeting flirtation or long-term engagement?

This weekend (21-22 May) the leaders of China and Korea are hosted by Japan for the Fourth Trilateral Summit, the first such Summit since the triple disaster of March 11. As a part of this visit, Wen Jiabao and Lee Myung-bak will travel to Fukushima to demonstrate their nation’s continuing support of Japan’s reconstruction.

Indeed, both China and South Korea have already contributed significantly during Japan’s disaster response in the immediate aftermath of the crisis, providing emergency relief teams and the provision of material support. The large (and unprecedented) level of support that China offered, especially the prompt dispatch of a Chinese search and rescue team, has led some to posit that warming relationships between Japan, China and Korea may be the silver-lining to Japan’s national tragedy. Especially with regard to China, with whom Japan’s relationship slumped precariously after a fishing infraction turned into a territorial dispute in November of 2010, the quake represented for some a possible circuit-breaker.

Certainly there has been an improvement in the relationship at the societal level. China’s media commented very favourably about the Japanese people’s resilience and lawfulness under the extreme duress of the power, food and water shortages – not to mention failing communications and concerns about family members. The Chinese media wondered aloud if China could ever reach such levels of civility. That peers in Asia were viewing the Japanese societal response favourably was a story which was in turn picked up the Japanese media and became a source of national pride for the many Japanese doing it hard. At that moment the empathy and mutual respect between the Japanese and Chinese (and others around the world) was at its zenith.

Yet in the longer term it is very unlikely that the earthquake will mark a turning point in the Sino-Japanese relationship. This is because tensions in the Sino-Japanese relationship are due to more than societal distrust but the basic strategic interests and perceptions of the two powers.

In this context it worth remembering that in the aftermath of the triple disaster China’s full offer of a PLAN hospital ship and expanded rescue team were not accepted by Japan.

This refusal by Japan was due the fundamentally different strategic orientations of the two countries and a (reasonable) lack of trust of the Chinese military in Japanese policy circles, not to mention the political implications of inviting Chinese military personal into Japan to work next to the US forces under Operation Tomodachi. Japanese politicians too would have had some difficulty in explaining a major Chinese presence after recent and damaging disputes – especially over the export of rare earth (a subject that Kan has flagged for discussion during the Trilateral Summit). Japan already made clear its order of preference (and trust) during the crisis, and despite the positive appraisals of Chinese assistance in the media, the fact is that Japan accepted only limited Chinese assistance due to a fundamental differences and competing interests.

Even the initial societal level warming up of the relationship is starting to cool. The Chinese media is reporting negatively on the choice of Fukushima as feature of the Trilateral summit, while discussion is Japan about how to cope a regional order that China is increasing being able to influence and in which Japan will play a junior role is heating up. Opinion within Japan is divided. The influential journalist Yoichi Funabashi has been arguing that Japan must ‘cleave to’ China in the future, but he acknowledges that a reorientation towards China would require political courage – a commodity in desperately short supply.

There is therefore no reason to expect that Japan’s even weaker domestic political and economic situation after the crisis will help to improve the Sino-Japanese relationship in the long term. Rather, despite the current warming of ties at the societal level, the most likely course for this important relationship is unfortunately the reassertion of old and competitive patterns of interaction.

Joel Rathus is a recent PhD graduate from Adelaide University, an EAF scholar and a regular contributor to the East Asia Forum. His other posts can be found here.