Economic Relations

In the post-war period, Japan emerged as the unquestioned giant of Asia and is the
worlds number two economic power after the United States while Chinese growth
gradually soared. The two countries found themselves bonded together because they are
complementary and also in competition for resources.

Sino-Japanese relations have been labeled as cold in politics and economics. China and
Japan has started to delink economics from politics because first, Japan is a market
economy and China is in the transition of transforming itself into a market economy.
Therefore, Individual consumers and firms will start following their own economic
interests. Second, the two economies are highly complementary. Japan is rich in capital
and technology, which are highly demanded by the rapidly growing Chinese economy.
Chinas sustained high growth has provided a new growth source for the Japanese
economy and opportunities for Japanese multinational enterprises. The economic
cooperation created a win-win scenario, which generated economic benefits to both sides.

The factors driving economic integration of China and Japan includes: (1) Chinas
spectacular economic growth which stimulates demand for Japanese exports and
promotes Chinas exports to Japan; (2) Trade liberalization within Japan-China and
Chinas accession to the World Trade Organization (WTO); (3) The massive Japanese
direct investment in China which integrates the Chinese industries in Japans global
production chains further enhancing significantly intra-industry trade between the two
economies and reverse imports; (4) the complementarity nature of the two economies and
(5) the geographic proximity between the two countries

The division of the post-war world into competing superpower blocks locked China and
Japan into opposing camps. For over twenty years, the countries strived some form of
reconciliation within the cold war framework. This turned to an earlier strategy of an
unofficial relation in an effort to build trust and establish a formal relationship. Economic
was the primary instrument of the endeavor. It was difficult for the Japanese government
to directly engage in trade relations with the Chinese mainland because of the United
States policies of demilitarization and democratization in Japan. Economic relations
were in private agreements. In the 1950s, both China and Japan moved the agreements
into an official relationship but it was run afoul of the Cold War order. The bilateral trade
in 1959 experienced a dramatic 78.5% drop; political relations fell to a post-war flow
because of the event in 1957 in Kishis administration. After what happened, years later,
China and Japan resumed the policy of unofficial economic relations. The Sino-Soviet
split in 1960 opened the way to renewed relations with Japan because China desperately
needed to import complete industrial plants, machinery, steel and chemical fertilizers.
Chinese Premier Zhou Enlai introduced this as the friendship trade a system by which
Sino-Japanese trade relations would be limited to particular Japanese companies that the
Chinese designated as friendly. The number of friendly companies grew quickly from
11 in 1960 to 190 by 1962.
By September 1962, there was an inability of friendly companies to meet Chinas
growing imports led to another form of trading relations called memorandum trade
which covered 1963-1967 and projected an annual turnover of US$100 million. Through
this, bilateral trade continued to grow.
In the mid 1960s, several events worked against the continued improvement of the
relationship such as: Japans new Prime Minister Sato Eisaku was strongly anti-China, In
China, the Great Proletarian Cultural Revolution came into full swing and domestic
political movements overshadowed interest in foreign relations. The Cultural Revolution
in 1966 deteriorated the Sino-Japanese trade.
In September 29,1972, China and Japan formally established diplomatic relations which
opened the way for a new paradigm in Sino-Japanese relations. Bilateral relations were
designed to support both Chinas economic modernization and improve Japans
economic resignation. Normalization had an electric effect on economic relations
between China and Japan. The Japan-China economic association was formed in
November 1972 in Tokyo with partial government funding and extensive private sector
support. The association worked to support increased private level economic interaction
and in turn, Japanese government removed all restrictions on Ex-Im Bank credit
financing. Chinese and Japanese governments signed agreements on trade, reducing tariff
barriers, civil aviation, maritime transport and fisheries. Trade relations were further
intensified in both countries when China opened and the oil shocks of 1970s
The death of Mao in 1976 and purge of the Gang of Four allowed Chinese party
Chairman Hua Guofeng to reinstate the Four modernizations program by Zhou Enlai
for China to catch up with the industrialized world. In here, China acquired Japanese
technology while Japans steel industry supported this initiative in order to increase steel
exports in China.
Later on February 16, 1978. Liu Xiwen Chinas vice minister of Foreign Trade and
Inayama the vice president of Japans business association signed a Long Term Trade
Agreement (LTTA) that covers 1978-1985. The agreement is built on the growing
complementary between the two economies also addressed the difficulties it encountered.
After the cold war era, Japan sought to carve out a new political role for itself that is at
least somewhat commensurate with its powerful economic status. As Japan builds itself
as an economic power and a relationship with China, Japan started to play the role of big
brother

Trade fiction began in the early years of the Open door relationship when Chinese
domestic economic restructuring led to the unilateral cancellation of a series of contracts
in 1979-1981. This caused dismay in the Japanese business community. In the mid
1980s when China started to decentralize its foreign trade system and the demand for
Japanese imports raised, a trade imbalance occurred in Japans favor, which raised an
appeal in China that Japan was again on the road to economic imperialism which the
Chinese feared. The low levels of Japanese FDI became a sore point for China in this
period leading to accusations that Japan was using the mainland for economic colony and
that they were unwilling to invest in Chinas development itself, or to transfer valuable
technology to the PRC. The Japanese took these accusations seriously so they strived to
attain a trade balance while the Investment Protection Act of 1988 was specifically
designed to facilitate larger Japanese investment on the mainland.

On the side of the Japanese, Chinas increase in export of labor-intensive products in the
early 1990s led the government to consider invoking the Multinational Fiber Agreement
to place quantitative restrictions on Chinese textile imports. China responded to these
voluntarily restricting exports. It is evident that the growing Japanese investment in the
PRC revealed differences in Japanese and Chinese business practices /business etiquettes,
value of contracts, patterns of decision-making and life styles. Beijing and Tokyo have
clashed on a number of issues such as intellectual property rights but these disagreements
have seriously threatened economic interaction or the political relationship.

The success of Sino-Japanese economic cooperation together with Chinas growth in its
economy has raised concerns regarding economic competition. While Chinese economy
grows, Japanese economy became stagnant thus leading to a concern about the
emergence of a Greater Chinese Economic Empire which challenges Japans regional
role.
The sorest point between the Sino-Japanese relations is the question of history-Japans
war in China. Japans even-keel policy falls down thus China is dissatisfied with its
partners reluctance. Japan then feels weary and has come to suspect that China is forcing
the issue in an effort to secure greater economic concessions. China also complains of
Japans halfhearted apologies and at the same time, Japans active economic engagement
in China goes beyond current economic and political imperative. Japan feels like it has a
moral obligation to assist in Chinas new economy as a compensation for the pain that
Japan inflicted on China during the war. The result is Chinas numerous demands for
further apologies. Both countries have let the issue ride without forcing resolution.
The future of Sino-Japanese relations in the twenty-first century can be answered or
predicted by history: First, we saw that economic interaction is effective in promoting
stable political relations. It is the foundation of any political relationship and the two
countries served to maintain the relationship. Second, The role of the US is still critical to
the stability of Sino-Japanese relations. Japan still adheres to the US-Japan Security
Treaty and this means that if there will be hostilities between US and China, Japan will
have no choice but to support The US. Third, Japan is increasingly ready to take a world
leadership role commensurate with its powerful economic status. As long as Chinese and
Japanese economy becomes more intertwined, they are increasingly likely to reach out to
each other beyond economic aspect to an aspect that can affect regional security affairs.