The Coming Economic Shift?

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The dispute between Japan and China over the Senkaku / Diaoyu islands continues to simmer. Even as International Monetary Fund (IMF) chief Christine Lagarde warned about the dangers to the global economy should the dispute escalate, the fallout from the squabble continues to build momentum.  There was always going to be a risk of economic consequences for both sides, as Japanese companies operating in China were forced to shut down operations and had property damaged during the recent flair-up in tensions. Since the protests in China have stopped, a string of reports have emerged that show the consequences are going to be very real. 

The number of passengers on flights between Japan and China have plummeted, and at least one ferry route between the nations has cancelled its services due to a lack of custom.  On September 19, one day after protests peaked in the China, the chairman of Japan’s Foreign Trade Council stated that China had “slowed down” its clearance of imports from Japan. On the September 27, a senior Philippine trade official announced that the country, which has its own territorial disagreements with Beijing, was in talks with fifteen Japanese firms looking to relocate manufacturing operations out of China. This week it has also emerged that one of Toyota Motors’ key tyre suppliers would be scaling back its expansion in China, stating that it could supply the Chinese market just as easily from Malaysia. On Thursday, Mazda in China announced a 35% fall in sales in September.

News emerged this week that several Chinese financial institutions, including China’s four largest banks – the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China – had withdrawn their participation in the IMF and World Bank summits to be held in Tokyo next week.  For the Bank of China, which ranks amongst the designated “global systemically important financial institutions” (G-SIFIs), limiting participation in the IMF and World Bank meetings is especially worrisome.  It also emerged that three of the big four banks had withdrawn from the Swift International Banking Operations Seminar (SIBOS) to be held in Osaka later this month – not a famous gathering, but one held to be very important by finance industry insiders.  

Not all of these disruptions can be slated home to the islands dispute; there are more long-term structural changes underway too. First and foremost is the expected completion of the China-ASEAN Free Trade Agreement (CAFTA) by the end of 2015. This will mean that goods shipped from the ASEAN bloc into China will face estimated average tariffs of just 0.1%. It thus makes good sense for Japanese firms to shift some of their investment to these less politically risky economies. For goods produced near Hanoi in Vietnam, for example, shipping to Chinese customers in Guangdong may be cheaper than producing in the north and central China and shipping them all the way south.

Another factor pushing Japanese investment out of China are rising wages and input costs. Japanese firms are not alone in beginning to shift production to areas with cheaper labor: Indonesia, Vietnam, Thailand and the Philippines have all benefited. To take the latter as an example, Japan’s second largest ship-builder Tsuneishi Holdings opened a shipyard in the Philippines this year; inward investment by Japan already grew by more than 30% in 2011. ASEAN states now receive nearly half of Japanese investment in Asia.

Many ASEAN states are growing as domestic markets in their own right, especially Indonesia with its large population – so the expected completion of CAFTA within a few years is the perfect solution to Japan’s problem, not only perpetual unpopularity in China, but also of rising production costs there.

Yet there are limits to how far and how fast this process can go. China is not just a manufacturing center, but increasingly a key market for sales. Japanese firms cannot afford to give up on such a market (as long as consumer boycotts do not do it for them). In addition, China has developed top-class infrastructure for logistics and shipping, letting firms that operate there plug into their regional and global supply chains. Whilst some ASEAN states are trying to close the gap, they remain a step behind their larger northern neighbor, for now.

Comments
8
Dan
October 10, 2012 at 03:40

Chan,
Just remember that Japan is the third largest market for Chinese exports only after the US& EU markets. If the Japanese firms moving out of China then other foreign multinationals will follow suit  & also  FDIs & all the technology know-how currently extremely necessary for China. China will immediately feel the pain especially when its economy is coming down! So don't ask for the worst, comrade!

James the American
October 9, 2012 at 03:54

An advice to Japan: just sell those islands/rocks back to the United States.  Everyone was in peace when Americans were possessing those islands before 1971 anyway.   Once the US is in possess of those islands/rocks again, all your problem will be gone.  China will no longer be after you but after the US.  Let China and the US to figure out the problems, and you can benefit the most from the side.

John Chan
October 9, 2012 at 02:17

Japanese should move their factories out of China to wherever it sees fit. Its regressive monopolistic business practise has been causing undue burden on Chinese local entrepreneurs. The exodus of the Japanese businesses will open up space for Chinese entrepreneurs to grow.
 
Moving to SE Asia nations will be good for Japanese businesses, because they can continue its colonial economy policy in those nations without fear, they also do not have to worry their IP rights being violated.
 
Japanese businesses should move out of China in mass.

James the Australian
October 8, 2012 at 12:36

Japan do not have a moral ground to ask the Russian to return the Kuriles seized by the Soviet at the close of WWII, simply because they refuse to acknowledge that they seized the Dioyutai by force from the Chinese.
Why should the Russian return the Kuriles when Japan will not return the Dioyutai?
The Japanese are being absurd to begin with. If they want the Kuriles back which is a lot, lot more valuable, they show how the Russian how to behave by returning the Dioyutai to China.
And zi do not expect my comment to be publish as the Diplomat is a highly censored place where only pro American comments are allowed…….

John Chan
October 8, 2012 at 01:39

Japanese should move their factories out of China to wherever it sees fit. Its regressive monopolistic business practise has been causing undue burden on Chinese local entrepreneurs. The exodus of the Japanese businesses will open up space for Chinese entrepreneurs to grow.
 
Moving to SE Asia nations will be good for Japanese businesses, because they can hold those nations by the balls, and continue its colonial economy policy in those nations without fear, they also do not have to worry their IP rights being violated.
 
Japanese businesses should move out of China in mass.

Leonard R.
October 7, 2012 at 09:31

So, does Japan just sign over the Senkakus then? Maybe make them a gift to the CPC?
What then? Will that buy Japan more time in the Chinese market?  Will it buy them peace?
What does history show?
 

Overhyped Indonesia
October 7, 2012 at 04:27

Indonesia will never become a fully industrialised or developed country like the G8 or Australia or New Zealand.  It is a fallacy to do so.  I need not write out a thesis here.  Just wait and watch and see it stall 15 years from now.  it is highly unlikely to  escape the middle income trap country;  Not unless its economy and inustry is totally dominated by foreign investments from the U.S. and Japan.  At which point it becomes nothing more than a foreign colony and becomes a U.S> vassals like what you see in so many banan republics of the U.S. around the world.

JohnX
October 5, 2012 at 23:56

J. Parker wrote: "Yet there are limits to how far and how fast this process can go. China is not just a manufacturing center, but increasingly a key market for sales.".
 
Thats a good point, but if the Chinese are getting that dificult to deal with then its not in Japans interest to deal with them.
 
Yes, they have a huge population, but so does the rest of the world and lets be honest here.
 
How many Chinese will buy Japanese cars if the Chinese extremists will destroy thier vehicles and harass them on the street?
 
I feel maybe the Chinese have bit the hand that feeds them and as such the companies will look else where.
 
Though I have a company and if any Japanese company wants to put thier trade through mine, so as to do business without the hatred in China than I and many of my nations citizens would be more than willing.
 
China was sold to many as a willing consumer but if the Chinese are going to be racist than why not do business with others.
 
The actions of the Japanese in the 40s does not justify Chinese aggression in the 21st Century.

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