Costs Rise in Island Row

Experts see long-lasting economic effects in a territory dispute between China and Japan.
An analysis by Michael Lelyveld
2012-10-22
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A riot policeman directs protesters in Chengdu as they march carrying an anti-Japanese banner and a Mao portrait, Sept. 16, 2012.
AFP

China's rift with Japan over territorial claims may have lingering and long-lasting economic costs for both countries, even if anger subsides soon, experts say.

An RFA review of trade and investment data suggests damage to both sides from the dispute over the islands that China calls Diaoyu, known in Japan as Senkaku.

The immediate effect has been seen most clearly in a steep 40.8-percent drop in Japanese vehicle sales last month on the Chinese market. Overall sales declined just 1.8 percent from a year earlier, the China Association of Automobile Manufacturers said.

The trouble for carmakers was demonstrated most dramatically on Sept. 15, when anti-Japan protestors attacked the driver of a Toyota in the central city of Xi'an and destroyed his car. The driver suffered a smashed skull that left him unconscious, the official Xinhua news agency said.

While the police have cracked down on such violence, trade figures for this year suggest a broad impact at a time when both economies are struggling to maintain growth.

Japanese exports to China through August were down 7.6 percent, considerably more than the 2.5 percent decline to all Asian countries, while total exports have grown 1.7 percent, according to the Japan External Trade Organization (JETRO).

The trend continued in September as exports to China fell 14.1 percent from a year earlier, Reuters reported, citing Japan's Finance Ministry.

China's total trade with Japan dipped 1.8 percent through September to U.S. $248.6 billion, accelerating from an eight-month drop of 1.4 percent, China's General Administration of Customs said.

'Untimely' dispute

Gary Jefferson, a Brandeis University professor of international trade and finance, said the island dispute has been "very untimely" for the economies on both sides, and perhaps throughout Asia.

"You might imagine that other countries might want to take advantage of this, but you may also find other countries believing that this may be just a string of these kind of skirmishes that could have unforeseen fallout for them as well," Jefferson said in an interview.

In an October update to its World Economic Outlook, the International Monetary Fund (IMF) lowered its growth projections for both China and Japan by 0.2 percent.

A comparison of data from 2011 shows that China accounts for 20 percent of Japan's trade, while Japan represents about 9 percent of China's total. Recent declines follow a record high in bilateral trade last year.

Japan's investment of U.S. $12.6 billion in China was 10.9 percent of its foreign direct investment worldwide, while Chinese investment in Japan was a negligible U.S. $109 million. Japan has invested some U.S. $72 billion in China over the past decade, according to JETRO reports.

But it is unclear whether the comparative stakes can predict which economy will suffer more, or which country will blink first in the island dispute.

"Looking at it in the broader context, it would seem to me that the Chinese have a stronger incentive to show that they have the patience to prevail," said Jefferson, noting that Beijing faces similar border struggles with other countries in the South China Sea.

Discerning the 'hurt'

But reading the relative costs from the data may be difficult, since damage to Japan's joint ventures can also harm Chinese interests, economic growth and employment.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, said the economic effects are likely to weigh on both sides.

"Both are going to be hurt by this dispute, and the hurt will probably far exceed the economic value of the islands to either country," Hufbauer said.

While the drop in Japanese car sales has grabbed headlines, the impact on China is likely to be more subtle, since Japan is a source of consumer goods that compete with other supplies.

"The way it's going to hurt China is that prices won't be as low, and in some cases there will just be outright shortages of some items that are not made in such abundance elsewhere in the world," said Hufbauer.

China may be willing to pay that price to assert its claims, and if so, it may play the stronger hand.

But the economic costs to China are "not negligible," Hufbauer argued.

"The longer it has this standoff with Japan, the more other countries in Asia will become more leery of Chinese intentions, and how that will spill out in the economy remains to be seen," he said.

Car costs

While tentative diplomatic efforts have tried to contain the damage, the impact on auto sales suggests there will be lasting effects.

The conflict over the islands has flared up with increasing frequency since 2003, but it has been brought under control just as often, allowing trade and investment to flourish.

But since a car is a durable good that lasts for years, Chinese buyers may avoid the risk of being seen in a new Japanese model for some time, even if the controversy dies down again.

"That's why the Chinese-Japanese flare-up has such long- term consequences compared to anything that, say, China might do in the South China Sea," Hufbauer said.

Gary Jefferson said that lost sales may prove costly in the long term because buyers will switch to other models.

"It's not just a matter of Chinese consumers possibly delaying their purchase of a Japanese automobile," he said. "They have lots of choices, so they may make their purchase of a car immediately but choose something other than a Japanese brand."

The combined market share of Japanese car brands in China has already slipped from a high of 31.4 percent in 2008 to 22.6 percent at the end of August, the official English-language China Daily said, citing British-based LMC Automotive.

Toyota's joint ventures in China have reportedly offered to compensate owners for uninsured damage during anti-Japan protests. Other Japanese automakers are said to be considering similar moves.