Risks of economic interdependence

By Eric Chiou 邱奕宏  / 

Mon, Oct 22, 2012 - Page 8

Fifty years ago, on Oct. 16, 1962, the 13-day Cuban missile crisis started, which may well be the closest the world has ever come to the outbreak of nuclear war.

During the Cold War, the political leaders of the US and the Soviet Union sought a predominance of nuclear capability by seeking to outnumber their opponent’s nuclear weapon stocks, in order to pose a credible deterrent capability. Since there was no significant bilateral economic ties between the US and the Soviet Union at that time, any direct military confrontation between the two superpowers was very likely to escalate into total war.

Despite there being no intention to start a war on either side, misperception and miscalculation of the enemy’s objectives and moves could have led to overreaction and undesirable consequences. However, thanks to then-US president John F. Kennedy’s prudence and deliberation, the Cuban missile crisis was peacefully defused and did not result in catastrophy.

Fifty years later, the tension between China and Japan caused by a territorial dispute over the Diaoyutai Islands (釣魚台列嶼) — known as the Senkaku Islands in Japan — has rapidly increased. Although the dispute is not equivalent to the Cuban missile crisis in terms of its political significance and scale, the unwillingness of political leaders to wage war is comparable in both cases.

However, instead of the fear of triggering a nuclear war seen in the Cuban missile crisis, what deters China from resorting to military means is the possible involvement of the US, due to its military alliance with Japan.

The last thing China wants is direct confrontation with US forces at this critical juncture of its leadership transition. On the other hand, the US-Japan alliance implicitly constrains Japanese forces from taking any action that may provoke China. As a result, the dominating presence of US troops in East Asia is the key to regional stability and what restrains nations from using force to solve disagreements.

Given that initiating military conflict is too costly and the outcome uncertain, both China and Japan have tended to adopt low-level conflict strategies, such as conducting maneuvers and dispatching surveillance vessels and warships to the disputed waters, in order to show off their respective military muscle.

Accordingly, in the past week the Japanese navy have staged a large-scale military parade and, subsequently, seven Chinese military vessels sailed toward the Diaoyutais on Tuesday. Both sides tried to send similar warnings to the other to not underestimate its strength or resolve.

In spite of rising military tension, the odds of this dispute turning into a real military clash are rather remote, owing to various geopolitical constraints and domestic factors.

Most importantly, leaders on both sides have no intention of risking starting a war.

Since military force cannot be utilized, China must resort to oher means to pressure Japan, and its economic ties with Japan have turned out to be an important asset it can exploit. Despite Sino-Japanese trade has tripling over the past decade and reaching US$340 billion last year, the structure of economic interdependence between the two is asymmetrical in many respects.

This asymmetrical economic interdependence creates room for the less dependent nation in this relationship to take advantage of the other. In Robert Keohane and Joseph Nye’s classic book, Power and Interdependence, they point out: “asymmetrical interdependence can be a source of power, we are thinking of power as control over resources, or the potential to affect outcomes.”

Furthermore, the vulnerability dimension of asymmetrical interdependence is crucial in empowering one nation to affect another, since that vulnerability means that the nation will suffer from costs imposed by the other’s policies even after it has made its own corresponding policy adjustments.

In regard to Sino-Japanese economic relations, Japan seems to be more vulnerable than China if economic ties were to be cut. Even though Japan is China’s second-biggest trading partner, accounting for 9 percent, or US$345 billion, of its total trade, China is Japan’s largest trading partner, representing 21 percent of Japan’s exports and imports last year, which is double the size of Japan’s second-largest trading partner.

Thus, Japan needs China as a primary overseas market far more than the other way round. Additionally, Japanese investments in China have climbed to US$6.3 billion in the past year, ranking Japan No. 3 after Hong Kong and Taiwan, suggesting that Japanese companies have become increasingly dependent on China as a major production center.

All these statistics indicate that this economic interdependence seems to play in favor of China rather than Japan. If economic warfare breaks out, Japan may suffer more than China does, since the former is the one more dependent on China and more vulnerable to its policies.

Apparently, China is aware of its advantages in this asymmetrical relationship and has been willing to aptly exploit this “Achilles’ heel” by imposing pressure on Japan. The incident of a Chinese fishing boat captain being arrested by a Japanese Coast Guard vessel off the Diaoyutais in 2010 has demonstrated that China is capable of manipulating economic leverage to achieve its political goals. By imposing export bans on rare earth materials, over which it has a near-monopoly, China compelled Japan to back down and release the fisherman.

Hence, an editorial in China’s the People’s Daily last month warned that China was willing to defend its territorial integrity by launching an economic war against Japan, despite the enormous costs it would have to bear.

Regardless of this nationalist rhetoric, China has not taken any explicit economic actions to punish Japan, except for canceling its top officials’ participation in the IMF meeting held in Tokyo and other bilateral social and economic exchange activities.

Already affected by a slowdown in economic growth as well as the gloomy prospects of the global economy, Beijing certainly does not want to exacerbate the current dire economic climate by pouring oil onto the fire, since a sudden withdrawal of Japanese companies from China would cause undesirable consequences, such as rising unemployment and social unrest.

Nevertheless, the reluctance of Beijing to further use its economic leverage to punish Japan certainly does not stop Chinese people expressing anti-Japanese sentiment by boycotting Japanese goods and cars. In addition, many Japanese shops and factories were forced to shut down or suspend operations during the period of anti-Japanese protests in China last month. Japan’s tourism industry and airlines also suffered a heavy blow, with tens of thousands of flight cancelations from Chinese tourists.

One recent news article indicated that Toyota’s car sales in China last month were half of those in the same period last year. Other Japanese car manufacturers and consumerelectronics companies have also experienced a downward spiral in Chinese markets and have yet to see signs of a recovery.

These negative impacts on Japanese businesses in China have swiftly transformed into political pressure and resentments against Japanese Prime Minister Yoshihiko Noda’s administration. The chairman of Japan’s largest business lobby, Keidanren, has criticized the Japanese government for mishandling the dispute and devastating Sino-Japanese economic relations.

Bearing enormous domestic pressure, the Japanese government has somewhat softened its original stance by making various conciliatory gestures and continuing diplomatic negotiations with China.

However, manipulating the vulnerability of asymmetrical economic interdependence involves risks and may well backfire. China’s frenetic anti-Japanese riots and military assertiveness not only stir up grave concerns for the Japanese government, but also provide Japan’s right-wing politicians with a justified reason to reinforce Japan’s military preparedness, which may further deepen distrust and plant the seeds of future instability in the region.

The Diaoyutais dispute has highlighted the risks implicit in asymmetrical economic interdependence and the implications are multifaceted and consequential.

Japan’s vulnerability stems from its economic over-exposure to China. Both its capital and technologies are not irreplaceable and certainly do not possess monopolistic sway over China, whereas China’s market is vital to revitalize Japan’s sluggish economy.

The empirically verified tenet of the democratic peace theory, that two democracies do not go to war with each other, is built on three pillars: democratic institutions, economic interdependence and participation in international organizations.

In the case of Japan and China, the first pillar does not exist, since China remains authoritarian. The third pillar falls short of providing effective constraint, since both sides seek to spoil international institutions in favor of their respective interests. Similarly, the second pillar despite its robustness, has failed to be a significant deterrent as well. Instead of imposing constraints on both sides, it has been used as leverage in favor of a less dependent state and aggravating a sense of insecurity to the other.

As a result, the current peace between China and Japan is probably attributable more to geo-strategic balance of power than to the consequences of disrupting economic interdependence. Since the structure of asymmetrical economic interdependence between the two has endowed China with the upper hand, without the US deterrence, a military clash would not be incomprehensible.

If asymmetrical economic interdependence has no credible impact on pacifying conflict between two nations, what does it mean for Taiwan’s national security?

While some of Taiwan’s media outlets are busy gloating over Japan’s economic losses due to China’s reprisal tactics, Taiwanese may be better served by more cautiously contemplating the structure of cross-strait economic relations.

Eric Chiou is an associate research fellow at the Taiwan Institute of Economic Research.