China, Japan, and South Korea

Overview: Economic Relations between China, Japan, and South Korea

Thanks to the reforms of China’s trade policy since the late 1970s, the economy has rapidly developed to become the world’s second largest and the world’s largest with respect to purchasing power parity (Purdie, 2019). Similarly, Japan’s stable economic growth in recent years has undercut analysts’ expectations of contractions for the world’s third largest economy, while economic expansion in South Korea has been fuelled by sustained development. Although the three nations each have implemented free trade agreements (FTAs) with major trading blocs such as the USA and the EU, they are yet to finalise prolonged negotiations on a China-Japan-South Korea FTA between themselves. The three nations embarked on the journey towards economic harmonisation with a joint study issued in 2011 and the first round of negotiations commenced in 2013.

Notwithstandingjapan, China, and South Korea’s GDP accounting for almost 20 percent of the global GDP, 18 percent of the world exports and 16 percent of imports, prospects still exist to enhance economic integrations between the three nations (MOFA, 2011). As evidence of the potential economic integration which could be achieved, while intra-regional trade between the trio increased from 12.3 percent in 1990 to 21.7 percent by 2008, this was still far lower than the intra-regional trade levels in regions such as the EU which stood at 60 percent. The complimentary economic composition of the three nations has been a driving force of arguments supporting the establishment of the free trade area between the three countries and China’s accession to the WTO had made it more amendable to such agreements.

By April 2019, the trio had entered their 15th round of negotiations on the establishment of the FTA. In the six years since the commencement of the trilateral negotiations, the three nations still face deep-seated issues to be resolved which stem from foreign policy positions in the case of territorial disputes, previous wars, and similar pillars of economic growth. While trilateral negotiations remain unresolved, bilateral discussions amongst themselves have been more progressive. The remainder of the chapter addresses these bilateral China-Japan and China—South Korea relations respectively and discusses their impacts on the air transport environment between each of the two nations.

China–Japan Relations

China and Japan normalised their diplomatic ties in 1972. Both being powerful and affluent in Asia, the two are undergoing domestic transformations that have had major regional and global economic consequences. As of 2003, the two economies already constituted 47.9 percent of the value of merchandise trade in Asia and 12.5 percent globally (Pekkane and Tsai, 2005). Bilateral trade rose from S18.2 billion in 1990 to S236.6 billion in 2007 or 17.7 percent of total Japanese external trade, with Sino-Japanese trade exceeding that of the American-Japanese, making China the largest trade partner of Japan ever since then (Xing, 2008). As recently as 2017, Sino-Japanese trade had grown even further to $297 billion (representing 19 percent) ofjapan’s exports.

The economic relationship between China and Japan presents one of the most significant geopolitical relationships in Asia and on a broader global scale. Since the first Sino-Japanese 1890s war, the two have continued to seek to dominate geopolitical leadership in the region (Stuart, 2014). While trade between the two nations represents the third largest bilateral trade partnership globally, China and Japan face tenuous historical and political relations. Notwithstanding, the structure of the two production-led economies has created a symbiosis which has allowed China to benefit from Japan’s competence in industrial technology whereas Japan was able to use China as a source of economic growth in the 1990s to propel its economic recovery through an external-led growth and development strategy (Armstrong, 2012). Japan’s economic resurgence was so strongly supported by the growth in the Chinese economy that the International Monetary Fund (IMF) attributed almost all of the increase in Japanese trade in Asia during this period to exports to China (Chung, 2014). The growth in China and its consequential growth in consumer demand thus spurred Japan’s economy. In the period between 2000 and 2004, Japanese exports grew by 8.5 trillion yen, 4.7 trillion of which were exports to China, equating to 55 percent of Japanese exports. While Japan’s largest trading partner has been China, Japan only represented China’s fourth largest trading partner. According to the World Bank, in 2017 Japan’s total trade deficit with China totalled $28 billion US dollars with Japanese exports to China summing $137 billion compared with $165 billion in imports (Figure 6.1).

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FIGURE 6.1 China—Japan trade balance. Source: worldbank.org.

Major exports from Japan to China include electric-mechanical products, transportation goods, metals, and chemicals. In 2017, machinery and electrical products accounted for $54 billion of the $132 billion in Japanese exports to China. Similarly, exports by China to Japan also principally included electric—mechanical products, transportation goods, metals, and chemicals. Of the $165 billion in exports to Japan, S75 billion related to electric-mechanical products. Trade in goods between the two nations is reflective of the expanding economies. In 1992, clothing and textiles were the largest exports from China to Japan accounting for almost a third of the trade value (Chan and Kuo, 2005). As a consequence of Chinese economic growth, Japanese investors exploited business opportunities and took advantage of lower labour costs in China to produce goods often exporting them back to Japan. The prevalence ofjapanese investment in China therefore helped to extend China’s trade surplus with Japan.

As in any bilateral trading system, however, economic trade between nations is also closely tied to political relations. China’s overarching perspective has been that Japan has been heightening its foreign policy stance in relation to disputes between the two, particularly over territorial claims. However, as Stuart (2014) has asserted, China relies on enforcing its governmental sense of legitimacy and stability to sustain its economic prosperity and propel its global dominance and overtake the USA as the world’s superpower. As Japan is an integral trading partner, the pursuit of this goal stands to be undermined by continued tensions between these two nations.

In the modern global economy, China however holds the economic power relative to its neighbouring Japan. This is in contradiction to the earlier trade dynamics in the region where Japan represented the fastest growing economy in the region in the 1950s and 1960s. However, the economic reforms in China provided sustained economic growth, and since Japan’s economic recession in the 1980s, China has maintained its advantage.