Can Uninhabited Islands Cost Over $345 Billion in Trade?

China and Japan continue to be in the spotlight as the tensions over uninhabited islands in East China Sea continues to escalate. Economic cooperation between the world’s second and third largest economies greatly benefit each other, however there are rising fears that the two countries will slip into an armed conflict.
The Japanese government’s action of purchasing the islands from a Japanese family last month sparked anti-Japanese protest across China’s major cities, including Beijing, Shanghai, Guangzhou, Shenzhen and Hong Kong. Demonstrators went on rampage, damaging anything Japanese from cars to Japanese department stores. A number of Japanese manufacturers have halted productions in China until further notice. With the increasing anti-Japanese in China, demonstrators demand a boycott on Japanese goods, impacting Japanese companies at least in the short term.

Courtesy of Times Magazine

It is not yet clear to Japanese companies the extent to which this will affect domestic sales and production or how long the demonstration is going to last. But what is clear is that trade between the two countries has declined by 1.4% compared to 2011 and trade will further decline in the coming months due to concerns of investment safety. Fitch Ratings has already stated that the Japanese auto and technology industries will come under pressure of downgrade if the tensions carry on. Japanese auto makers are especially exposed to this risk as China absorbs about a quarter of global Honda sales and a fifth of Toyota’s.

Investment safety is key here, as trade between the two countries is valued up to $345 billion. A breakdown in trade would be devastating to their economies as both have their own economic problems excluding those of the west. The investment safety does not only affect Japan but also the multinational corporations who have direct foreign investment in China, leading MNC to rethink their strategy and the investment position it has in China. I believe Japanese companies are already reconsidering their future in China and in the coming months there will be a decline in FDI invested into China and if the tensions increase it could mean MNC could move operations elsewhere in Asia.

We can see that no one will benefit from the breakdown of trading relations between the world’s second and third largest economies but the root of the problem is that both countries are stuck in history’s trap and this cannot be solved economically. What the Western press have left out is this: the demonstrations over the disputed islands are not the symptom of a sudden outburst of anti-Japanese sentiment. To the contrary, there are deep-rooted feelings of resentment between the two countries, which have recently been veiled by economic prosperity. The problem is deeply entrenched in education systems, textbooks and history, and grudges between two nations still linger. However, it seems that both governments are anxious to prevent a trade war, let alone an armed conflict because trade is the one positive thing both these nations share, and serves as a uniting force. It is hard to predict the outcome of the situation as of now and increasing American influence in the Asia Pacific is not helping matters.