China Should Be Treading Lightly In The Diaoyu Dispute

China PSC

Photo: Vincent Yu/AP Images

The territorial dispute between Japan and China that erupted into a diplomatic firestorm in August is already beginning to do long term damage to both parties.The small islands, known as Diaoyu in China and Senkaku in Japan, have become a bone of contention for Beijing and Tokyo, and the row may have more wide-reaching consequences.

Aside from the obvious risks that come with multiple navies conducting operations within the same waters, the Chinese government could be threatening vital economic interests at a time when their economy needs all the help it can get.

Although incursive Chinese action would likely elicit an American response, US officials seem as yet contented to remain neutral.

As the US State Department is usually quite forthcoming with its opinions on Pacific regional security, this uncharacteristic silence could be indicative of underlying intentions. In light of current circumstances, an American play for Japan’s participation in a multilateral free trade agreement seems most likely.

Free trade agreement talks between China, Korea, and Japan were scheduled to begin this month, but are unlikely to take place this year, as tensions run high. The proposed agreement would be the first step in completing the Regional Comprehensive Economic Partnership (RCEP), a free trade bloc comprised of the 10 ASEAN nations as well as China, South Korea, Japan, Australia, New Zealand and India.

The RCEP would account for around 28 per cent of global GDP, making it a rival for the United States and the European Union. Many experts have concluded that the agreement is a gambit on China’s part to compete with the Trans-Pacific Strategic Economic Partnership (TPP), championed by the United States. Japan is currently examining both agreements, but chilly relations with Beijing could derail plans to liberalize trade with China.

Until recently, Japanese participation in a trilateral free trade agreement with China and South Korea appeared far more likely than TPP membership. A powerful Japanese agricultural lobby has been quick to protest against TPP on the grounds that the removal of trade barriers on produce – there’s a 778 per cent tariff on imported rice – would be a catastrophic blow to farmers.

Japanese consumers are already beginning to forsake their loyalty to domestic produce, however, so the case against TPP is growing weaker. This territorial dispute may be the catalyst that gets Japanese policymakers to break the political impasse and make good on promises to join TPP negotiations. That could be precisely the reason that America is in no hurry to settle it.

Though American policymakers have not stated, in so many words, that they are ignoring the territorial dispute in hopes of wooing Japanese trade representatives to the table, it must have crossed their minds. Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell said last month that the United States is looking to Japan to help reshape the Asian-Pacific region’s economy.

Renowned policy expert Joseph Nye also extolled the virtues of the Trans-Pacific Partnership and emphasised the critical role Japan would play in the agreement. In a report co-written with former US Deputy Secretary of State Richard Armitage, Mr. Nye cited TPP as a means for Japan to maintain its status as a “tier-one nation.”

President Obama’s successful reelection bid has made predicting US positions considerably easier. The president will undoubtedly continue to endorse American participation in TPP as ardently as he did during his first term. During a debate with Republican challenger Mitt Romney, he exposed the more salient issues behind the strategy, stating that America would be organising strategic trade relationships so that “China starts feeling more pressure about meeting basic international standards.”

In his congratulatory message to President Obama following the election, Japanese Prime Minister Yoshihiko Noda said that his government would push for stronger ties with Washington, including a renewed commitment to joining TPP talks as soon as possible.

It’s not as though competition between RCEP and TPP is a zero-sum game for Japanese participation – Japan could easily join both, and APEC has expressed interest in merging the two blocs to create a much larger free trade zone. All the same, Japan’s RCEP membership could be on hold until the territorial dispute with China is resolved, while the Trans-Pacific Partnership faces no diplomatic obstacles.

TPP has been touted by President Obama as a means of bolstering America’s existing ties in the Pacific, and as a counter to China’s economic dominance of the region. Indeed, China’s enthusiastic pursuit of the RCEP and generous concessions to other negotiating countries have been interpreted as reactionary; Beijing is looking to assert itself as the region’s preeminent power by establishing its own free trade bloc.

As a major importer of Chinese goods and a significant source of foreign direct investment in China, Japan is a trading partner that cannot be ignored. Most prominent Japanese businesses operating in China have experienced devastating drops in sales figures, prompting many of them to shutter factories and close stores temporarily.

In some cases, vandalism and threat of violence has prevented Japanese citizens and even Chinese employees of Japanese firms from working. While some pundits have insisted that the allure of the rapidly growing Chinese market outweighs the unease vis-à-vis Sino-Japanese relations, they could be underestimating the price that Japanese businesses are willing to put on safety.

The Chinese government has some serious thinking to do about the Diaoyu/Senkaku dispute. A summary evaluation of the situation suggests that China is mortgaging future economic prosperity and regional leadership to spite an old adversary.

Chinese leadership in Asia won’t come from demonstrations of dominance; it will take time, commitment and diplomatic prudence. Rather than allowing this longstanding row to damage economic relations, the Chinese government should set a stronger example that political issues are exclusive of economic matters, and that Japanese corporations and employees that have shown goodwill toward China should never fear for their safety because of diplomatic tensions.

Whoever may be validated in the eventual conclusion of this territorial dispute, it would be a shame for both nations to lose out on valuable opportunities in the meantime. This is a chance for China to demonstrate that it can handle such delicate matters with the diplomatic grace of the superpower it has become.

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