Looking at the latest trade and trans-border direct investments in Northeast Asia, one may be surprised to read serious concerns expressed last week by Chinese, Japanese and South Korean leaders about their trilateral relations on the sidelines of the G-20 summit in Hamburg, Germany.
Japan, in particular, is re-emerging as an export powerhouse, drawing large benefits from its Chinese and Korean business operations. In the first five months of this year, Japanese exports to China soared 17.3 percent from the year earlier, a huge improvement from a 6.5 percent decline of Japanese sales to China for 2016 as a whole.
This fast and significant turnaround in Japan's export business with its largest trade partner was not caused by changes in any economic fundamentals driving the bilateral trade flows. There is every reason to believe that some extra-economic developments have changed the trade "mood music."
The change is even more meaningful if you look at Japanese direct investments in China. The data for the first quarter of this year show that those investments were running at an annual rate which is 6.5 percent above last year's spending on Japan's production capacities in China.
These are not just the usual "animal spirits." What you see here is a well calculated and deliberate response to China's widely publicized "win-win cooperation policies."
Has Japan found China's "sweet spot?"
Chinese exports to Japan have also been marking strong annual increases between 7.5 percent and 10.4 percent during the March-May interval — a vigorous pickup after a 12.4 percent decline in 2016.
Unrelenting pleadings by Japanese business circles for better, friendlier and more productive Sino-Japanese relations over the last four years are apparently bearing fruit. The Chinese have also decided to play along because they can get from Japan the technologies they need to create what they call an "innovation-driven" economy in order to boost productivity and business profits. That, China believes, will help to avoid the dreaded "middle-income trap" of developing economies.
Remarkably, the Japanese have also succeeded in turning the trade tide with South Korea. After a 6 percent decline in 2016, Japanese exports to South Korea were growing at a strong, 21.5 percent annual rate during the January-May period of this year. Over the same interval, the Korean sales to Japan have rebounded with an annual gain of 16 percent — after a 16.1 percent drop for all of 2016.
South Korea's export trade with China is booming, too, despite complaints that Beijing was cutting off business and "punishing" the Koreans for allowing the installation on their soil of an American missile shield that appeared threatening to China (and Russia).
China is still Seoul's most important trade partner by far. Beijing takes 25 percent of South Korean exports, compared with 12 percent for the U.S. In the first five months of this year, sales to China rose 14 percent — a sharp pickup from a 9.3 percent decline in the course of 2016.
Now, this booming Northeast Asian trade comes at a time when (a) China is asking Tokyo and Seoul to get on their best behavior and respect Beijing's core interests and (b) Japan and South Korea are failing to resolve their long-standing disputes during a summit meeting in Germany.
A tough trilateral context
China's official news sources report that President Xi Jinping told Japanese Prime Minister Shinzo Abe during their bilateral meeting at the G-20 in Hamburg that "there is no room for compromise on Taiwan," in response to the visit of a Japanese official to the island that Japan governed from 1895 to 1945.
Xi also urged Japan to learn from history, echoing a civil society group in Japan marking 80 years since the Marco Polo Bridge (aka Lugou Bridge) incident, taken as the beginning of the Japanese full-scale invasion of China on July 7, 1937. There was also Xi's warning for Japan "not to get involved in the dispute over the South China Sea."
South Korea, for its part, heard Xi's concerns during the meeting with President Moon Jae-in before the beginning of the G-20 summit in Germany. China, according to Xi, would like to bring the bilateral ties to "the track of healthy development," and it is inviting Seoul "to attend to China's major concerns and handle relevant issues properly …"
This is a shorthand for what Beijing considers provocations with large-scale U.S.-Korean military exercises (mock-ups of a North Korea invasion), and an American missile shield southeast of Seoul that China believes can threaten its security.
To complete the picture, the Japanese and South Koreans held a summit meeting last Friday to build "future-oriented" bilateral relations. They, however, could not agree on how to handle the problem of Korean women forced to work in Japanese wartime brothels. "Comfort women" is one of the most sensitive bilateral issues, in addition to contested territorial claims and a Korean dismay about Japan's allegedly incorrect presentations of the two countries' historical relations.
This is a very difficult trilateral context in which these countries are supposed to work on the peaceful resolution of the military confrontation on the Korean Peninsula.
The key to "solving" enduring enmities in Northeast Asia is an acceptable modus vivendi between the U.S. and China. That would open the way to less adversarial Sino-Japanese political relations, and to a process of establishing an appropriate inter-Korean dialogue.
At the moment, these are very long odds. The peaceful resolution of the Korean stand-off, and of the contested territorial claims in the South and East China Seas, sounds like easily acceptable objectives. But the problem is how to reach these settlements in a situation where core interests of the parties involved, some of them nuclear-armed, are diametrically opposed.
China, supported by Russia, is urging patience. Both countries believe time is working for them, because there are no acceptable military solutions to any of these problems. In the end, they think, China's economic might will bring a denouement on its own terms.
Washington now understands that decades of hubris (in the classical Greek sense), errors and unforgivable neglect have led to this position. That feeling was summed up by President Donald Trump last Saturday when he said that, on the Korean issue, "there will be success in the end one way or the other," sounding more like a sage than a high-charging "Make America Great Again" action man.
China now has the upper hand on a strategic issue that will define East Asia's economic and political outlook for the foreseeable future. From a purely technical economic viewpoint that is fine. The region's prodigious economic potential will continue to produce high growth.
But the rest of the world should make sure that the growth is not generated at its expense by traditional export-driven development strategies. East Asia's $600 billion to $700 billion in annual trade surpluses should not be tolerated. The area's huge excess savings should be used to stimulate domestic demand and increase purchases from overseas trade partners.
That's where Washington can — and emphatically should — play a key role.
Commentary by Michael Ivanovitch.
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