Business is booming between China, Japan and South Korea — the US should get in on it

  • The patient pursuit of better neighborly relations is boosting trilateral trade flows in Northeast Asia
  • Japan is the main beneficiary of the region's brisk business deals
  • The U.S. should make fewer threats and conduct more business to plug its leaking trade accounts
Chinese President Xi Jinping (R) meets with Japanese Prime Minister Shinzo Abe in Da Nang, Vietnam, Nov. 11, 2017.
Xinhua | Lan Hongguang | Getty Images
Chinese President Xi Jinping (R) meets with Japanese Prime Minister Shinzo Abe in Da Nang, Vietnam, Nov. 11, 2017.

China, Japan and South Korea account for a quarter of the world's output of goods and services. Their combined trade surplus is currently running at an annual rate of $400 billion. They can recycle that trade income to finance, with interest, most of America's external deficit of $460 billion.

The economic and political relationships in what Asians call their "golden economic triangle" have been caught up in recent years in revived tensions stemming from difficult history, contested territorial claims and acute security problems on the Korean Peninsula and in the South China Sea.

None of those issues has been solved, but trade and investments flows in the last few quarters strongly suggest that political and business ties could be warming up.

That is particularly the case between China and Japan. Those countries' leaders have been considerably strengthened by recent political events — a landslide election victory in Japan and a Communist Party congress in China. Partly as a result of that, the Beijing-Tokyo dialogue seems to have become more constructive, and on the way to better and more cooperative relations.

On a more practical plane, years of patient work by Japan's powerful business lobbies to protect and expand their market shares in China also appear to be paying off.

Japan takes it all

Indeed, after a 6.5 percent decline in Japanese sales to China last year, and a slow start at the beginning of this year, Tokyo's exports to China soared at a sizzling annual rate of 22 percent in the two quarters between April and September.

The same trend is observed with respect to Japanese direct investments in China. In the first nine months of this year, those investments marked an annual growth rate of 13 percent, a huge turnaround from a 15 percent decline for 2016 as a whole.

That strong revival of direct investment flows to China is particularly important. It indicates that Japanese businesses are now more confidently betting on the profitability of their future operations in the vast and rapidly growing Chinese markets.

Clearly, such daring acts of faith must be underpinned by (official?) assurances that Beijing and Tokyo have turned over a new leaf in search of more constructive bilateral ties. Japan now seems to be responding to China's "win-win cooperation" calls, and to Chinese invitations for active participation in "Belt and Road" projects linking Asia, Africa and Europe.

And a novelty is that Japan is not just selling to China; it is buying from its big Asian neighbor to such an extent that Tokyo's trade deficit with China is its largest on record so far this year. I wonder whether President Donald Trump has been briefed about that.

Yes, it is tempting to note that Japan's $23.5 billion trade deficit with China in the first nine months of this year is in stark contrast to Japan's $51 billion trade surplus with the U.S. over the same period. In spite of a sharp trade rhetoric from Washington, and Japan's promises to get a more balanced bilateral trade, America's red ink with Japan is now virtually unchanged compared with last year.

Meanwhile, South Korea's trade business with China also remains very strong. Political and economic problems caused by the deployment of the U.S. missile shield in South Korea, and differences about relations with North Korea, appear to have been smoothed out and put to the side for the time being.

US should do Asian megadeals

China is South Korea's most important trade partner and a destination for 25 percent of its exports (the U.S. is a distant second, taking 13 percent of Seoul's export sales). In the first 10 months of this year, South Korea's sales to China, and its trade surplus with China, are running at annual rates that are virtually identical to those observed in 2016.

High-level contacts are also under way, following China-South Korea summit meetings on the sidelines of the APEC conference in Vietnam earlier this month, to stabilize the Sino-Korean ties "in accordance with the size of the bilateral trade."

Another encouraging development is a strong revival of the Japanese-South Korean business relations. Japan's exports to Korean markets soared at an annual rate of 21 percent in the first nine months of this year, after a 5.7 percent decline for all of 2016. Over the same period, South Korean exports to Japan increased 17 percent — a remarkable recovery from a 16 percent decline during last year.

All that is wonderful news, even though this surging trade in Northeast Asia cannot be explained by purely economic factors. There is no evidence, for example, of strong and sudden increases in domestic demand (which drives external trade flows) in any of those three countries, or in an unexpected discovery of their economic complementarities.

Take the case of Japan. The growth of its domestic demand in the first three quarters of this year increased at an annual rate of only 0.8 percent. And, from Tokyo's perspective, the economies of South Korea and China are also increasingly seen as credible competitors in many product and service lines.

Therefore, the reasons for the booming trilateral business have to be sought in improving political ties. These often estranged neighbors have been unsuccessfully talking for years about liberalizing their mutual trade relations — only to be sidetracked by a constant resurgence of bitter war memories, colonial humiliations, unsettled maritime borders and absurd rivalries.

Threats of a more difficult access to European and American markets could be another reason why these Asian neighbors may have decided to internalize larger segments of their trade flows.

Most people will now spring for Trump's tough trade talk as the main factor driving the countries to closer economic and political relations. That would be a wrong conclusion, but that seems to be the mood of the times. So far, Trump is largely innocent on that count; he has not done much, if anything, to stop lopsided trade rules and practices that cost hundreds of billions of dollars to the American economy every year. Chinese, Japanese and South Korean products are widely available in the U.S. at very competitive prices — often cheaper than in their markets of origin.

But, as any simple traveler and comparison shopper can discover, that is not the case of American or European products in Asian markets. Most of those products are either unavailable, or, when they are, they are subject to exorbitant customs duties that double and triple the prices charged in their home markets in Europe and America.

Investment thoughts

The evidence since the beginning of the year is showing an exceptionally strong growth of trade flows among China, Japan and South Korea. China is at the center of this rapidly developing trend.

Japan's export-driven economy is the biggest beneficiary of the soaring Northeast Asian trade. Partly thanks to China, which takes one-fifth of Japanese overseas sales, net exports accounted for 50 percent of Tokyo's average annual growth of 1.5 percent in the first three quarters of this year.

And watch this: Japan is now intensely courting Russia (another Asian neighbor) for huge business deals in Moscow's Far East to unlock, according to the Foreign Minister Taro Kono, "unlimited possibilities." The schmooze revolves around Japan's hopes to get back the four islands (that Tokyo calls "northern territories") the Red Army took in the closing days of WWII. Tokyo most probably won't get any islands back, but it could be part of Russia's energy and infrastructure projects currently under way.

The U.S. should get in on the Northeast Asian trade bonanza by continuing to push its exports and direct investments. So far this year, the dynamics are good. Exports to South Korea and China are growing at annual rates of 17.6 percent and 15.2 percent, respectively. Japan, by comparison, is a laggard, with its imports from the U.S. growing at a relatively modest rate of 7.8 percent.

Trump might wish to take a closer look at all that. Instead of trade squabbles and military threats that South Koreans and Chinese don't want, Asian megadeals would help to rebalance America's trade accounts and to support the growth of jobs and incomes.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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