SinoJapanese Economic Issues Interdependence on a Deeper Level

Sino-Japanese Economic Issues: Interdependence on a Deeper Level Fred Taylor

Hypothesis Liberal International Relations Theory says: Economic Interdependence Security Cooperation My Research Question: Will Interdependencies Lead to Diplomatic Cooperation? Step 1: Economic Interdependence Increase Cost of Conflict Increased Empathy Step 2: Increased Empathy Diplomatic Cooperation Security Cooperation

Outline • Economic Trends – Bilateral Trade – FDI • South and SEA Rivalry – Financial Integration • Foreign Exchange • Energy and Ecological Interdependence • Prospects in 2027 • Conclusions (So What? ) Wen-Abe Summit: 11 -13 April 2007 – Linkages to Security and Diplomatic Policy

Sino-Japanese Trade Statistics • China by the numbers – – – • Japan by the numbers GDP: $2. 512 Trillion Trade Total: 1. 75 Trillion %GDP Total: 69% %GDP w/ Japan: 8% %GDP w/ U. S. : 10% • U. S. Stats show larger % – Flows w/ Japan: -$24 B – Flows w/ U. S. : $232. 6 B • Import: Raw Materials • Export: Manufactured Goods – – GDP: $4. 365 Trillion Trade Total: $1. 02 Trillion %GDP Total: 23% %GDP w/ China: 4. 7% • With Hong Kong included – %GDP w/ U. S. : 4. 1% – Flows w/ China: $26 B – Flows w/ U. S. : $88. 4 B • Import: Food, Airplanes • Export: Cars, Car Parts Bottom line: China is highly dependent on world trade Japan also net-importer food, fuel

Direction of Trade China Top 5 Imports Exports EU 90. 3 Hong Kong Japan Top 5 Imports Exports 182. 0 Total ($ B) 272. 3 U. S. 58. 9 123. 3 Total ($ B) 182. 2 107. 4 155. 4 262. 8 China 73. 6 99. 8 173. 4 U. S. 59. 2 203. 5 262. 7 Korea 22. 5 42. 9 65. 4 Japan 115. 8 91. 8 207. 6 ROC 16. 6 40. 0 56. 6 ASEAN 89. 5 71. 3 160. 8 Thai land 14. 3 20. 6 34. 9 China Monthly Statistics: 2006 Japan Statistic Bureau (MOF): 2005 Take Away: Increased trade also increases trade friction

Foreign Direct Investment (FDI) • China’s FDI Total: $53 B • FDI from Japan: $28. 2 B • Investment Frictions – Foreign Invested Enterprises account for %58 of exports • “Economic Colonialism” – Japanese “hollowing out” • Suzuki Motorcycles – Emotion trumps Economics • Mori Building in Shanghai • Maglev vs. Bullet Train • Sino-Japanese Competition for SEA Influence • Chinese Foreign Exchange Investment Bank – Build Domestic Economy, Less Dependent on FDI

Financial Integration (w/ U. S. Market) • Foreign Exchange reserves – China: $1. 30 Trillion – Japan: $. 895 Trillion • Economist Intelligence Unit CRS Report RL 32165 (’ 06) • Integration After 1997 Asian Financial Crisis – Asian Monetary Fund (AMF) – Chiang Mai Initiative • “Dollar Zone” Bottom line: U. S. economic integration doesn’t directly correspond to Sino-Japanese integration

Energy Interdependence • Nuclear Capacity – Japan: 55 plants – China: 4 plants • Energy Efficiency – Japan: 37% – China: 9% • Japan’s Options – – – Nuclear Energy Conservation Renewable Energy East China Sea Siberia-Pacific Pipeline • China’s Options – – – Coal Hydro electric Central Asian Pipeline East China Sea Siberia-Pacific Pipeline

Ecological Interdependence Asian dust brings hazy skies to western U. S. USA Today 04/18/2001 AP/NASA/Goddard Space Flight Center Pollution over China Blows out to Sea October 22, 2004

Official Developmental Assistance • Japan ODA to China: $30 B • Japan voted to stop low-interest loans in 2008 • Grant-Aid will continue beyond 2008 International Nuclear Safety Center, March, 1999

Sino-Japanese Relations in 2027 • Goldman Sachs BRIC Report 2050 – Models based on: labor, capital stock, and TFP – Continued growth based on: • • Macro-Economic Stability Openness to Trade and Investment Efficient Institutions Enhanced Education Levels • Japan’s Challenges – Graying and Shrinking Population – Debt (150% of GDP), Economic Reforms Needed • China’s Challenges – Environment, Corruption, Social Safety Net MP: China’s prospects for growth better than Japan’s

So What? • Conclusion: Economic and Ecological Interdependence Will Remain Strong for the Next Two Decades, but So What? – Economic Linkages to Security are Weak • Regime survival and “lost child” more important than $$ – Economic Linkages to Politics are Arbitrary • Can sometimes “buy” good will, sometimes not • Not a guarantee for “peace” in the region, but rather an incentive to maintain economic stability – If China perceives she is winning the “great game, ” then she will likely preserve future good relations with Japan and the U. S.

Conclusion Liberal International Relations Theory says: Economic Interdependence Security Cooperation My Research Question: Will Interdependencies Lead to Diplomatic Cooperation? Complex Interdependencies May Positively Affect Diplomatic Cooperation Sometimes Step 1: Economic Interdependence Increase Cost of Conflict Increased Empathy Step 2: Increased Empathy Diplomatic Cooperation Security Cooperation

Questions? Wen-Abe Summit: 11 -13 April 2007