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Why China, Japan and South Korea must learn to get along

South Korean President Park Geun-Hye (C) poses with Japanese Prime Minister Shinzo Abe (L) and Chinese Premier Li Keqiang (R) at the presidential Blue House on November 1, 2015 in Seoul, South Korea.
South Korean Presidential Blue House via Getty Images
South Korean President Park Geun-Hye (C) poses with Japanese Prime Minister Shinzo Abe (L) and Chinese Premier Li Keqiang (R) at the presidential Blue House on November 1, 2015 in Seoul, South Korea.

Each time I revisit this topic, I am thinking, perhaps naively, that China, Japan and South Korea, a quarter of the world economy, will soon improve their relations to rev up the rest of the region and beyond. To me, that always looked like an axiomatic proposition that should easily transcend old enmities.

But delegations upon business delegations, millions of tourists and students, and South Korea's popular TV shows, music hits, barbecue delights and beauty products still seem incapable of relieving tensions bedeviling these three economic powerhouses.

Japan's business with China and South Korea is plummeting at the time when Tokyo seems at a loss for magic potions to leave behind its decades-long economic stagnation.

And that's part of my perplexity, because the Prime Minister Shinzo Abe sounded like the man who knew exactly what he had to do to move on when he took power at the end of 2012. He said then that "China was essential for the growth of the Japanese economy," and that relations with China had to be improved.

Falling exports and weak investments

But the mutual acrimony only got worse. Last Tuesday (August 2), for example, Japan's defense white paper devoted 30 pages to highlight "China's military threat." Predictably, China indignantly rejected the accusation, claiming that this was just a convenient excuse to justify changes to Japan's pacifist constitution and to remilitarize the country.

All the business pleadings have come to naught. Japanese exports to China fell at an annual rate of 9 percent in the first half of this year, tracing out a sharply declining trend of Japanese sales to China since Mr. Abe's emphatic pledge three-and-a-half years ago.

Japanese direct investments to China are also falling. They declined 20 percent over the last three years, and the numbers for the first quarter of this year are showing no sign of any significant improvement in the months ahead.

China apparently can live with that, but Japan is finding it hard to get substitutes for its flailing export and investment business with the big neighbor. And that is a considerable difficulty at a time when Japan's economy showed virtually no growth in the first quarter and overseas sales – accounting for nearly one-fifth of GDP – declined 2.5 percent.

Weakening exports are a big setback for Japan's traditional business cycle recovery, because, typically, a sustained increase in overseas sales is necessary to set in train business investments, rising employment, personal incomes and household spending. That scenario is now impossible with declining exports and a weak (2 percent) growth of business capital outlays over the last two years.

Japan's business with South Korea is much worse than with China. Exports and direct investments are down 12.9 percent and 82.5 percent, respectively, in the first half of this year. Japan can probably shrug this off, but it is sad to see such a deterioration of economic ties.

South Korea can also live with that, but here is a punch that Seoul may find hard to take: Inter-Korean security threats could undermine the flourishing business with China.

Indeed, Beijing is strongly opposed to South Korea's decision to install a missile shield against military challenges from North Korea. China says that is unacceptable because such defense equipment poses problems for its own security.

Trilateral dialog

And the upshot is this: South Korean media are reporting about economic and other measures the Chinese are apparently taking to force Seoul to think again.

That is a tough call. China takes 25 percent of South Korean exports, and China's vast and growing markets are crucially important to Korean industries, ranging from automobiles to telecommunications equipment, tourism, cosmetics and entertainment. China also has a large presence in South Korea's insurance, high-tech, medical instruments, beauty products, and holds nearly one-fifth of the Korean public debt.

Clearly, a solution must be found to protect the economic relations among these three countries. Otherwise, the damage could extend to business transactions well beyond their trilateral framework.

For example, these three East Asian economies could take most of the business in the huge Central Asian and European markets as One Belt One Road projects are integrated with those conducted by the Eurasian Economic Union and with investment programs financed by the EU. This is not just the question of building highways, high-speed rail lines and port facilities; there is also an entire range of energy, hospitality, health, education and entertainment services that will be needed to complete these large transcontinental projects.

China's President Xi Jinping (R) shakes hands with South Korea's President Park Geun-hye during a meeting in Beijing, November 10, 2014.
Kim Kyung-Hoon | Reuters
China's President Xi Jinping (R) shakes hands with South Korea's President Park Geun-hye during a meeting in Beijing, November 10, 2014.

The Chinese are the key players in most of these deals, but the Japanese and the Koreans are also keen to participate. All that, however, would be very difficult unless these Northeast Asian neighbors find a way to better and more confident relations.

An early test of how much of that is possible will come during the forthcoming Eastern Economic Forum (EEF) in Vladivostok, Russia on September 2-3 and during the G20 summit in Hangzhou, China on September 4-5.

The EEF meeting is devoted to trade and investments in Northeast Asia and in Russia's Far East. According to Korean media, President Park Geun-hye is invited as a guest of honor and is expected to deliver a keynote speech on September 3 on East Asian economic and political issues. Japan's Prime Minister Shinzo Abe is also expected to attend, with a large business delegation. That will perhaps be an opportunity for Japanese and Korean leaders to meet and discuss their key bilateral issues and security problems in Northeast Asia.

Their dialog could then continue during the G20 summit in Hangzhou to try and narrow their differences with Chinese leaders.

Investment thoughts

It is difficult to be optimistic about the feuding Northeast Asian neighbors when Beijing bristles with dire warnings about South Korean missile defenses and runs reinforced air and maritime patrols in the South China Sea.

In spite of that, I believe that the millions of Chinese, Japanese and South Koreans visiting each other's countries for business, studies and tourism will show the way to their leaders to peace, prosperity and harmony. After all, an older generation of Sino-Japanese leaders did just that in the early 1970s, when they decided to try friendship and cooperation instead of lingering on wartime destructions and atrocities. They believed in the wisdom of new generations to settle the unfortunate colonial legacies and mistakes committed by being on the wrong side of history.

The new generations cannot betray that sacred trust.

Prime Minister Abe is fully aware of that responsibility. He is often criticized for his alleged belligerence, but his critics forget that he has always warned that Sino-Japanese differences should never be allowed to lead to renewed hostilities.

So far, I have seen no reason to doubt his word.

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