China has ‘too much to lose’ to impose Japan sanctions

Chinese police vehicles are parked in front of a restaurant with its signboard covered with a banner saying “Diaoyu islands belong to China” near the Japanese Embassy in Beijing on Sunday, Sept. 23, 2012. While Chinese state media has warned Japan that it will suffer economically for nationalizing disputed islands, analysts say China has too much to lose to impose any serious sanctions. AP PHOTO/KYODO NEWS

TOKYO—While Chinese state media has warned Japan that it will suffer economically for nationalizing disputed islands, analysts say China has too much to lose to impose any serious sanctions.

The world’s second- and third-largest economies have been involved in a steadily degenerating spat over who owns an unpopulated – but possibly resource-rich – archipelago in the East China Sea.

Violent protests shook Chinese cities over several days until Tuesday, with Japanese shops and businesses the focus of angry mobs demonstrating over Tokyo’s purchase of the Senkakus from their private owners.

Japan controls the islands, but Beijing claims them as the Diaoyus.

Commentators said the demonstrations appeared to have at least tacit blessing from the authorities, an impression backed up by comments made by the state media.

The People’s Daily newspaper, a Communist Party mouthpiece, warned Beijing would not back down.

“Amidst a struggle that touches on territorial sovereignty, if Japan continues its provocations China will inevitably take on the fight,” the paper said. “Japan’s economy lacks immunity to Chinese economic measures.”

It did add that given the interdependency of the two countries, sanctions would be a “double-edged sword” for China.

But, in an apparent reference to Japan’s “lost decade” after the bursting of its stock and real estate bubbles, the paper asked: “Would Japan rather lose another 10 years and even be ready to fall back 20 years?”

As well as straight tariff barriers that any economy has at its disposal in a trade spat, China has form in just making life difficult for importers.

In May, when Manila and Beijing were involved in a stand-off over different disputed islands, Philippine fruit exporters complained their shipments were left rotting in Chinese ports, supposedly because pests had been discovered in some produce, prompting stricter and more cumbersome quarantine inspections.

On paper, China appears to have the upper hand – its economy has been on a rapid upward trajectory for years while Japan has been treading water since around 1990.

In 2010 the Middle Kingdom overtook its smaller neighbor to become the world’s second-largest economy; Japan is only its fourth-largest trading partner after the US, the EU and Asean.

With a vast population that is rapidly learning consumerism, China is Japan’s single biggest market.

But economists agree that with two way-trade worth $342.9 billion last year, according to Chinese figures, Beijing can ill afford the economic cost of a full-fledged scrap with Tokyo.

Jeremy Stevens, Beijing-based economist for South Africa’s Standard Bank Group, said given the high economic stakes, a rational outcome to the current face-off is likely as “both sides recognize that a rupture will hurt both.”

“Global supply chains are so interconnected, multifaceted and complex that it would be crazy not to appreciate that China and Japan are reliant on one another in bi-directional and mutually beneficial ways,” he said.

“As such, we expect clear eyes and minds to prevail.”

While the Made in China tag abounds on consumer goods the world over, the components that go into making the finished product are not all homegrown.

The mobile phones, televisions and video cameras that fill shipping containers leaving Chinese ports are frequently assembled from precision parts made by Japan’s finely honed hi-tech industries.

So retribution on Japanese firms could easily rebound on the Chinese companies that are dependent on know-how on the other side of the East China Sea, said Professor Ivan Tselichtchev of Niigata University of Management.

“Weakening Japan economically after all goes against the economic interests of China itself, and Chinese leaders are too pragmatic and too smart not to understand it,” he said.

Chinese threats are “mostly rhetoric and psychological pressure,” he said.

“There will be no big ‘economic retaliation’ from the Chinese side. It will exert pressure mostly in other areas.

“However, I will not be surprised if it takes some symbolic steps on the economic front to show its discontent, say, halts this or that particular investment project or blocks a particular export-import transaction.”

Which is exactly what Japanese firms said Friday was starting to happen.

Trading houses Itochu and Sojitz said customs inspections on Japanese goods were being ramped up at major Chinese ports, not enough to stop them, but enough to cost time and cause inconvenience.

During the last major diplomatic bust-up over the islands, China dammed exports of rare earths, minerals vital in the manufacture of the hi-tech products that are the mainstay of Japan’s economy.

But, say industry watchers, there has been no sign of similar action this time around.

Zhou Yongsheng, professor of international relations at China Foreign Affairs University in Beijing, said Chinese rhetoric might yet tip over into concrete action, in the form of a trade war, but it was unlikely.

“Trade sanctions are definitely a double-edged sword… particularly if the other side takes counter-measures,” he said. “Trade sanctions would be a lose-lose policy.”