The Japan-China Conflict: Old Mistrust, New Dependence

In an excerpt from his book The Bull Hunter, Dan Denning discusses the origins of the Japan-China Conflict, and also goes into the possible causes of the current problem.

Old Mistrust, New Dependence

BELOW IS A SHORT excerpt from my forthcoming book, The Bull Hunter (to be released in about a month). The excerpt is about the roots of the Japan/China conflict, through the example of a couple of inadvertent visits I made to the Yasukuni Shrine — the war memorial that happens to honor, among others, the Japanese war dead who prosecuted the rape of Nanking…and who are nominally the subject of the current Japan/China diplomatic wrangling.

But is this current dust-up really about the past? As I see it, there are three possibilities:

1. Energy: Japan and China have escalated tensions over drilling in the East China Sea. Last week, Japan began allocating rights for gas exploration in a disputed area of the East China Sea to private firms. China certainly needs the oil and energy. But it may also be worried that in a conflict with Japan (or Taiwan), its energy supply could easily be choked off, as this quote from The Washington Times suggests:

“Eighty percent of China’s oil currently passes through the Strait of Malacca, and the report states that China believes the sea area is ‘controlled by the U.S. Navy.’

“Chinese President Hu Jintao recently stated that China faces a ‘Malacca Dilemma’ — the vulnerability of its oil supply lines from the Middle East and Africa to disruption.

“Oil-tanker traffic through the strait, which is closest to Indonesia, is projected to grow from 10 million barrels a day in 2002 to 20 million barrels a day in 2020, the report said.

“Chinese specialists interviewed for the report said the United States has the military capability to cut off Chinese oil imports and could ‘severely cripple’ China by blocking its energy supplies.”

2. Internal Dissent: The Nazis were national socialists. Economically, the state controlled the economy as much as it did in nominally communist countries. Leave it to the experts to split hairs over the difference, but one can see the Chinese become increasingly nationalistic and belligerent in order to redirect internal anger to a foreign enemy. Nationalism runs high in China to begin with (as it does in France, Russia, Germany, and the United States). Over 80% of the country is from the same Han ethnic group. The central government in Beijing, faced with growing protests over pollution, corruption, and ineptitude (not to mention shortages), may find the easiest thing is to blame an old and untrusted enemy.

3. Economic Posturing: The World Trade Organization reported last week that China overtook Japan as the world’s third-largest exporter. China saw a 35% jump in demand for its electronic goods. Thursday’s Financial Times reports, “China is now the biggest merchandise trader in Asia and the third-largest in the world for exports and imports, making it a key driver of the world’s growth.”

The Japan-China Conflict: “Sinking Globalization”

I’d say THE key driver — except the U.S. consumer, who seems to be keeling over, finally. My friend John Mauldin quoted Niall Ferguson in the April issue of Foreign Affairs. It’s worth taking a look at. In “Sinking Globalization,” Ferguson says:

“From around 1870 until World War I, the world economy thrived in ways that look familiar today. The mobility of commodities, capital, and labor reached record levels; the sea lanes and telegraphs across the Atlantic had never been busier, as capital and migrants traveled west and raw materials and manufactures traveled east. In relation to output, exports of both merchandise and capital reached volumes not seen again until the 1980s. Total immigration from Europe between 1880 and 1910 was in excess of 25 million. People spoke euphorically of ‘the annihilation of distance.’

“The last age of globalization resembled the current one in numerous ways. It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest of the world, and the development of its massive internal market had become the principal source of business innovation. China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly…
“The end of globalization after 1914 was not unforeseeable. There was no shortage of voices prophesying Armageddon into prewar decades. Many popular writers earned a living by predicting a cataclysmic European war…Yet most investors were completely caught off guard when the crisis came. Not until the last week of July 1914 was there a desperate dash for liquidity; it happened so suddenly and on such a large scale that the world’s major stock markets, New York’s included, closed down for the rest of the year.”


Ferguson adds one more critical observation that points out why all of these events are so dangerous to investors:

“This deficit [America’s] is the biggest difference between globalization past and globalization present. A hundred years ago, the global hegemon — the United Kingdom — was a net exporter of capital, channeling a high proportion of its savings overseas to finance the construction of infrastructure, such as railways and ports in the Americas, Asia, Australia, and Africa. Today, its successor as Anglosphere empire plays the diametrically opposite role — as the world’s debtor rather than the world’s creditor, absorbing around three quarters of the rest of the world’s surplus savings.”

The Japan/China feud and the China/Taiwan feud are just two of several geopolitical situations that could turn a garden-variety global slowdown into a rhyming but more intense version of the collapse in global trade that took place in 1914. As Ferguson cheerfully notes:

“We all know — or should know — that a crisis over Taiwan would send huge shockwaves through the international system; it could even lead to a great power war. We all know that revolutionary regime change in Saudi Arabia would shake the world even more than the 1917 Bolshevik coup in Russia. We all know that the detonation of a nuclear device in London would dwarf the assassination of Archduke Ferdinand as an act of terrorism.”

It would also, needless to say, ruin my day here on the South Bank. Will national governments risk so much (trade and wealth) over so little (pride and stature)? In The Bull Hunter, I say no. I say they’d try to make a nonideological peace…that puts trade over ideology.

But it may turn out that in a world driven by the internal discontent caused by globalization (and the contest for scarce resources), going to war is a lot more politically popular than trade. After all, it’s happened before.

The Japan-China Conflict: The Yasukuni Shrine
So here it is, an excerpt from The Bull Hunter, by Dan Denning (John Wiley and Sons, May 2005):
 “For three days in early June 2004, I spent most of my time waiting at the Indian Embassy in Tokyo. I was waiting for a visa to visit India that I hadn’t been able to obtain after spending three days at the Indian Embassy in Washington, D.C. On each of those three days, I hopped in a cab at my Tokyo hotel and gave the driver a piece of paper with an address on it. The address was written in Japanese characters, but the English name was the Yasukuni Shrine. On each of those three days, each different cab driver paused while looking at the paper and gave me a sceptical look before setting off.

 “The Japanese are a studiously polite people. You can spend 10 minutes on the subway with your face in someone’s back and your armpit in someone else’s face, and nobody says a word. I should have known something was up with the shrine, but I didn’t think it mattered. I was being dropped off at the shrine only because it was close to the Indian Embassy and an easy landmark for cabbies. The Yasukuni Shrine is a symbol for all the troubles Asia faces in its future.

 “The shrine was erected in 1869 to honor Japanese war dead. Its Japanese name, Yasukuni Jinja, means “peaceful nation.” Over 2.4 million Japanese are remembered at the shrine. But it’s six of them in particular who illustrate the problems Japan and China must overcome in the next century.

 “After World War II, the International Military Tribunal for the Far East held trials for Japan’s 25 wartime leaders. Hideki Tojo and six others were convicted as Class A war criminals and hung till dead. Those six, and Tojo, are honored at the Yasukuni shrine.

 “This alone makes the shrine controversial to the victim’s of Japan’s aggression in World War II and its ambitions for a greater Near East. While it is not unusual for victorious nations to honor their war heroes, losing nations are generally not allowed to have heroes, or to honor them with shrines. It gets even more complicated when the leaders of modern Japan pay regular visits to the shrine to honor the war dead.

 “The Chinese have taken particular offense to the visits to Yasukuni by current Japanese Prime Minister Junichiro Koizumi. Koizumi maintains he is honoring the ancestors who made modern Japan possible and that the shrine predates World War II. The Chinese note that the shrine’s literature ignores Japan’s famous Rape of Nanking and that the visits are a way of subtly asserting Japan’s independence from China’s growing sphere of influence, to borrow a phrase from the Cold War.

The Japan-China Conflict: Going Back Thousands of Years

 “Japan and China have a simmering argument left over from World War II. But it really goes back thousands of years. In its current incarnation, it’s an argument over who will be more important to Asia’s future. All the signs point to China’s emergence. But both countries have a lot at stake. For years, the United States has been Japan’s largest bilateral trade partner. But in 2004, Japan-China trade crossed over the $213 billion mark, accounting for 20% of Japanese trade. U.S.-Japanese trade was $197 billion in 2004, or 19% of Japanese trade.

 “The Chinese passed Japan as the United States’ third-largest trading partner in 2004, as well. China and Japan are now more important to each other, respectively, than the United States is to either. They are bound together by a common geographic bond. They share many of the same markets. Japan has the capital and capital goods that China needs. China has the growing market to sell into that Japanese firms lack domestically. Perhaps, most important of all, they both need oil. Then again, so does the rest of the world. Who was it? And who’s going to get it?

 “Consumption of oil and natural gas by the developing nations of Asia is going to rise dramatically in the next 20 years. We’re seeing the beginning of it today. It’s already driven oil futures into record territory.

 “Yet the world’s oil and gas reserves are located in some of the world’s most politically volatile and dangerous areas — areas where the United States is not particularly popular today. I’m talking about Venezuela, Saudi Arabia, Russia, and Iran, to name a few. Japan, which imports over 90% of its oil, faces a tough choice. Will it side with the United States in the war on terror and jeopardize its access to energy and friendly relations with the nations that produce oil? Or will it take a different path?

 “The immediate path before Japan is the path of “realism,” where energy interests trump idealistic interests. If the world goes down this path, the world’s petro-political map will be redrawn along energy alliances. In fact, it’s already happening. China in particular has made a flurry of agreements to secure its energy interests with nations the United States considers front lines in the war on terror.

 “In this petro-political world, the Saudis, the Iranians, the Chinese, the Russians, and perhaps the Japanese decide that good business relations are more important than abstract and intrusive political ideals. The development of the world’s economic markets is driven by the self-interest of nations that may have very different political systems, but recognize that trading with each other is essential. They stay out of one another’s internal affairs and enjoy the fruits of cheap gasoline and steady trade.” 


Dan Denning
April 19, 2005