When The Economic Elephants Of East Asia Fight

If war is to be waged between China and Japan on the economic front, it is China that starts from the stronger position. Japan is far more dependent on China for its growth than China is on Japan. China is Japanese companies’ largest export market. Japan is Chinese companies’ fourth largest. China’s exports to Japan last year, by its own count, were worth $148.3 billion whereas Japan’s exports to China were worth $194.6 billion. That tots up to some $340 billion-worth of trade at risk as a result of the territorial dispute in the East China Sea.

Foreign direct investment by Japanese companies has been growing apace, up 19% to $4.7 billion in the first seven months of this year, compared to the same period of 2011. That is one reason that there are so many Japanese factories, stores and other businesses for protesting Chinese to ransack. With violent anti-Japanese protests taking place in 50 cities, Japanese businesses from Qingdao to Chengdu have been vandalized–with plenty of marquee brand names’ local operations to go after, including those of Honda, Nissan, Toyota, Yamaha, Panasonic, Canon and Ito-Yokado.

They, and hundreds more of those that have not been attacked, or not yet, have shuttered up shop, waiting for this gale of nationalist fury to blow itself out, as previous such storms of anti-Japanese sentiment have done. Sept. 18th is the anniversary of the infamous Mukden Incident in 1931 which triggered the Japanese occupation of Manchuria. It may prove the most volatile day yet for this particular outburst. Beijing won’t want matters to get too far out of hand on the streets beyond that, but domestic Chinese politics in the run up to the leadership transition may constrain the voices of reason.

While the initial economic cost may be limited, the unintended long-term casualty of all this could be growth throughout the region, especially if Tokyo or Beijing take formal action such as imposing sanctions. The two countries economies have become so entwined, and their supply lines reach so far into East and Southeast Asia, that, as the east African proverb has it, when elephants fight, it is the grass that suffers.

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