09.03.2015 Author: Ekaterina Arapova

China and Japan in the Struggle for Regional Leadership

34234231111Early in January 2015 bilateral agreements on free trade between Japan and Australia entered into force, while China announced its intention to sign a similar agreement with Australia in the second quarter of 2015. It is expected that the agreement will enter into force before the end of 2015.

Negotiations on a free trade zone between China and Australia have been under way since 2006. China’s desire to speed up the process of signing an agreement can be regarded not only as an attempt to minimize the downside risks to the country’s export earnings as a result of its regional neighbours’ reorientation of trade flows in favour of new integration associations implemented without the participation of China, but also as an attempt to preserve its commercial leadership in the Asian region by expanding its network of bilateral contacts. It is the entry into force of the FTA between Australia and Japan that may become the stimulus that China has lacked in recent years, and which is able to significantly speed up the negotiation process.

The struggle between China and Japan for regional leadership and the role of the locomotive of economic growth and integration in East Asia has been raging since the early 2000s. Moreover, we must admit that the confrontation of these two powers gave quite a powerful impetus to the development of integration processes in the region. In the 2000s, the main object of rivalry was the ASEAN countries. For China, strengthening its position in the markets of ASEAN countries could provide a significant increase in growth, primarily due to the trade sector (ASEAN countries are a good market for Chinese products), as well as an expansion of investment.

Japan’s actions to expand cooperation could be called a “response” intended to serve as an alternative to China’s foreign economic policy. It was China that at the ASEAN +3 Summit in Singapore in November 2000 initiated the establishment of an ASEAN free trade zone, after which an agreement was signed on the establishment of a free trade area until 2010. As you know, this integration association became operational on January 1, 2010

Japan also has always been one of the main economic partners of ASEAN countries, and China’s proactive stance has caused concern in Tokyo about the possible weakening of its position in the region. In early 2002, almost immediately after the signing of the China-ASEAN agreement on the establishment of an FTA, Japanese Prime Minister Koizumi visited the five major ASEAN member states, promoting the concept that later became known as the “Koizumi Initiative”. The gist of it was to strengthen Japan’s trade and investment relationships with ASEAN countries, to gradually move in the direction of signing free trade agreements, as well as to create an East Asian Community subsequently with the participation of Australia and New Zealand.

At the same time, Japan entered into a bilateral free trade agreement in 2002 with Singapore, in 2006 with Malaysia, in 2007 with Thailand, and in 2008 with Indonesia, Brunei, and the Philippines. Further processes of economic convergence in the ASEAN-China and ASEAN-Japan directions were almost the same: ASEAN-China and ASEAN-Japan Summits were held, and two agreements on Comprehensive Economic Partnership/Collaboration were signed.

Since 2000, supremacy in the struggle for the leading position as the locomotive of integration processes in East Asia in turn passed to Japan, and then to China. In the pre-crisis period up until 2008 Japan was the main strategic partner of ASEAN in the trade and investment sectors. The crisis of 2008-2009 turned the tide: indicators of integration in foreign trade of ASEAN with China soared against the background of a decline in the corresponding figure for Japan.

To date, in terms of the number of bilateral free trade agreements concluded in the APR, Japan occupies a leading position, having 11 bilateral agreements with APEC partners (out of 20 possible). China has thus concluded only 5 such agreements. However, despite its active regional position, Japan long ago lost its status as a regional leader in the field of trade. As of 2013, China’s total exports exceeded Japan’s exports by nearly a factor of 3, and the trade balance is in surplus of around 260 billion dollars. This stands in stark contrast to Japan, which has in recent years seen a chronically negative trade balance.

Despite the continued favourable structure of foreign trade (imports are still dominated by raw materials and low-tech goods, and Japan exports mainly high-tech industrial products), to date, Japan’s main focus has been on the expansion of foreign investment. The country’s economy can be called investment-oriented, revenue from foreign investment far exceeds export earnings .

In an effort to strengthen its position as regional leader, China in recent years has stepped up efforts not only towards the conclusion of bilateral free trade agreements, but also the development of a network of bilateral currency swap agreements, including with APEC partners to strengthen their trade capacity and internationalize the RMB.

Firstly, bilateral currency swap agreements are a tool to promote mutual trade turnover between the two countries by reducing trade costs. Secondly, the system of currency swap agreements reduces the risks associated with currency fluctuations, helping to improve the stability of trade flows. Thirdly, Member States of the agreement may independently choose the currency for bilateral transactions, making them less dependent on the world’s reserve currencies, mainly the US dollar. Today it is no secret that China is pursuing an active policy of de-dollarization, while seeking to strengthen the position of the Yuan in the global financial system while also stimulating growth in mutual trade with regional partners.

At the same time, Japan, apparently, is not paying the development of the system of currency swap agreements the same level of attention as China. Recently, Japan and Republic of Korea have declared their unwillingness to extend the bilateral agreement, which expired in February. Experts attribute this to the fact that non-economic factors demonstrated the more apparent economic feasibility of the initiative, and the adoption of exclusively economic decisions is more influenced by politics.

While Japan and the Republic of Korea remember the lessons of history and present each other mutual claims, having painfully reacted to statements on the status of its citizens during the Second World War, China continues to pursue a policy of trade and monetary expansion, focusing mainly on the economic feasibility of existing initiatives. And it is achieving notable success in this regard.

Ekaterina Arapova, PhD of Economic Sciences, expert professor at the Moscow State Institute of International Relations, University of the Ministry of Foreign Affairs of Russia, exclusively for the online magazine “New Eastern Outlook”.

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