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PUBLISHED : Thursday, 27 September, 2012, 12:00am
UPDATED : Thursday, 27 September, 2012, 9:26am

Economic war with Japan won't serve China's interests

Hu Shuli says calls for a boycott of Japanese products don't stand up to analysis, and diplomacy remains the best way to resolve Diaoyus dispute

In recent years, whenever China's relations with another country took a turn for the worse, calls for a boycott of that country's products would ring out. So it has been with the Diaoyu Islands dispute.

Dozens of Chinese cities saw protests this month against the Japanese government's "purchase" of the islands. As bilateral ties deteriorated, many academics joined ordinary Chinese in urging Beijing to inflict economic pain on Tokyo, putting the bilateral trade relationship under strain.

Ordinary Chinese are free to voice their support for a boycott, of course, as long as they keep to the law. But a consideration of our national interests demands that we separate politics from economics, and cautions us against playing the "economic card" lightly. The demand of the minority of boycott proponents who resorted to violence to make their point should simply be ignored.

Over the past 40 years of diplomatic relations, China and Japan have repeatedly clashed over their differences on history and territorial issues. Yet this has generally not affected bilateral trade, which has steadily grown.

Last year, trade with Japan accounted for 8.5 per cent of China's total foreign trade, while Japanese investments in China grew by 50 per cent, with exports to China up 10 per cent. This year alone, at a time when foreign investments in China are shrinking, Japanese investments grew by 16 per cent. For Japan, China is its top destination for exports and its No 1 source of imports.

Any major disruption to bilateral trade would hurt both countries. Yet some scholars argue otherwise. They say Japan is more reliant on the Chinese economy than vice versa, hence if China were to "pull the economic trigger", it would cripple the Japanese economy and even cause it to suffer another "lost decade" or two.

This is more guesswork than fact-based analysis. Let's not even consider what a sluggish Japanese economy will do to the global economy. We can be certain at least that a Japanese downturn would affect the Chinese economy in unpredictable ways, and it may well trigger a downturn here.

Besides, to keep growing, China must continue to open its economy. Before they consider "pulling" any "economic trigger", the authorities would do well to think through the adverse consequences of such action.

Japan is at the high end of the global industrial chain, while China is its low-end manufacturing base. Every year, China imports large quantities of parts and components for the assembly of products that are then exported worldwide. These Japanese-made components include some hi-tech, high-valued-added products that aren't easily replaced. Just recall how the tsunami and nuclear accident in Japan last year set back the electronics and car industries not only in China, but also in Europe and the US.

Many Chinese work in Japanese-owned companies or those that rely on Japanese goods for their business. A boycott of Japanese products would not only result in a block on the useful transfer of technology that comes with the import of such products, it would also cause massive job losses. This would be disastrous in a shaky Chinese economy.

Instead, China must improve its business environment and strengthen the rule of law. Attacking Japanese enterprises and forcing them out of business is against the law.

A functioning market depends on the equal treatment of all. Allowing radical pressure groups to harm Japanese interests would send an unwelcome message to all foreign business and investors. This will raise the costs of doing business in China, and lead to capital flight that could seriously hurt some fledgling industries and regions. In the end, such action wouldn't help China take back the Diaoyus; it would only succeed in letting some people vent their anger.

Another consideration is the free-trade area under discussion between China, Japan and South Korea which, when operational, could rival the EU trading bloc in size. Not only that, the three countries have separately concluded free trade agreements with the 10-member Association of Southeast Asian Nations. This means the potential emergence of a 13-country free trade zone.

Negotiations between the three East Asian countries were to begin in Seoul at the end of this month, after a decade of preparation. If they work together to co-ordinate their policies, minimise friction and complement one another's competitive advantage, they could create a booming trade area that can compensate for the gloom in Europe and the US; if they focus instead on turf-building, not only will regional development be the worse for it, so will their domestic growth.

Since the escalation over the Diaoyus, we can only hope that the talks will proceed.

The Diaoyu row is distressing to the Chinese. Economic sanctions remain a strategic tool of the Chinese government, but they must be wielded wisely. On this issue, China's goals are clear and Beijing has taken effective measures so far. Diplomacy remains the best choice of action; military pressure has its use, and an economic war is in no way inevitable.

The separation of politics and economics is likely to remain a feature of Sino-Japanese ties. Economic co-operation may not engender strategic trust, but an economic war will certainly send overall relations plunging to a new low. China can resolve this dispute without resorting to economic sanctions. Time is on its side.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com

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