A thorny region

Against the increasing marginalization of Japan and Taiwan by way of their less-than-stellar economic performance, the rise of China has created a new world order in Northeast Asia, if not the entire continent altogether.

Beijing's relations with the other players in the region span the intricately linked spheres of economics, military strategy and politics of which at the moment, the only bright spot is economics. US-based foreign affairs specialists Dick Nanto and Emma Chanlett-Avery, writing in a US congressional research paper in April, put it like this: "At the human level the temperatures are mixed, at the economic level hot, at the diplomatic level cold for Taiwan to warm for South Korea, and at the military level, temperatures of interaction are cold."

Economic ties
The Chinese mainland has significant economic relations with its Northeast Asian neighbors, with Japan, Korea and Taiwan contributing about 9%, 10% and 12% respectively to China's 2004 foreign direct investment (FDI), or almost one-third of the total.

Sino-Japanese economic interdependence has deepened in recent years, as the flow of Japanese capital, goods and people into China breaks records year after year. In 2004, China took in US$5.5 billion in Japanese FDI, and with bilateral trade between the two reaching US$210 billion last year, Japan is now China's second-largest trade partner, having only recently been displaced by the US in 2003. Until then, Japan had been China's no. 1 partner for 11 years running. China, meanwhile, is now Japan's largest trade partner, a title it grabbed in 2004 from the US, which had been Japan's dominant trade partner from the end of World War II.

China hunger for Japan's high tech know-how, capital equipment and raw materials such as chemicals and metals has been credited for boosting the Japanese economy, with about 25-30% of Japan's recent growth being accounted for by exports to China. In turn, Japan, like the rest of the world, has developed a growing penchant for cheap Chinese farm products, toys, shoes, textiles and other cheap goods.

Across the strait
In Taiwan, the story bears a similarity to Japan's in that the island leans on the Mainland to advance its economy, leading UBS economist Jonathan Anderson to refer to the Mainland as Taiwan's "only bright spot." Yet Taiwan's economic progress has to a large degree been stalled by the absence of direct mainland links; if opened, sectors such as agriculture and tourism could flourish.

And just as the Mainland's cheap labor has "hollowed out" Taiwan's manufacturing base, Korea's is poised to meet with the same fate. Duncan Wooldridge of UBS told the China Economic Review that "in the end, the [South Koreans] are going to address restructuring their economy." Like Japan, South Korea is feeding China its topnotch equipment and machinery, in addition to its flagship exports – ships, steel, cars and electronics. Trade between China and South Korea totaled US$90 billion last year, and entrepreneurs and executives from both sides have crossed borders in search of cheap labor, in Korea's case, and in China's, business acquisitions.

The two nations have become chummier in recent days, as South Korea granted China market economy status (MES) in November when Hu Jintao made his "first state visit to Seoul since taking office (MES would give China greater shelter from antidumping duties on its exports).

Their deep economic ties notwithstanding, South Koreans nevertheless cast a suspicious eye towards China: according to a Korean Broadcasting System poll late last year, nearly 80% of South Koreans said China was a rival, not a partner. But some experts suggest that the concerns of economic dependence or rivalry, depending on how one views them, are often exaggerated. "There's a very natural interdependency (amongst the countries), it's hard to say who depends on who," said Xiao Geng, associate professor at Hong Kong University's school of economics and finance. When speaking of economic threats or Chinese competition in the region, Geng finds it useful to look at the example of Hong Kong. "Before 1997 most people worried China was going to have a bad [economic] impact on Hong Kong, but after 1997 it is obvious Hong Kong depends on China economically."

Political showdown
Today, China is central to East Asia's flash-points, among them the Taiwan quagmire and territorial disputes with Japan over parts of the East China Sea, which represents billions of dollars worth of underwater energy reserves. As China has reportedly completed at least one new drilling platform in the disputed waters and may already be tapping into the natural gas and oil fields there, the rift between Tokyo and Beijing can only widen.

The feuds brewing on other fronts remain unresolved, among them the Japanese history textbooks that China and others say distort history to gloss over Japan's World War II aggression. China remains incensed over Japan's perceived lack of contrition for its wartime transgressions. Of course, Japanese Prime Minister Junichiro Koizumi's October visit to the Yasukuni shrine, which honors Japan's war dead including Class A war criminals, makes clear that the standoff could remain a long one.

On this issue, China and South Korea are aligned, as their "shared history in Japan's imperial aggression has created an emotional bond between them," said Yiyi Lu with the London-based international studies research center Chatham House. "On the whole, the relations are quite good between China and South Korea."

The high stakes involved in North Korea's nuclear weapons program have also brought South Korea and China closer, Lu said. Like South Korea, China supplies aid to North Korea, including food and an estimated 70-80% of the country's fuel supplies. The aid is not without political motivation, which China has used in trying to convince Pyongyang to abandon its nuclear weapons program. Talks have been progressing fitfully for years. Most recently, Chinese president Hu Jintao visited North Korea and convinced Pyongyang to return to the negotiating table.

For China, northeast Asia is rife with problems, and while economic integration has proceeded strongly, diplomatic closeness has been slow to follow. As the old international order based on US oversight is modified by China's rise, the US is now trying to figure out how to readjust its stance to deal with the awakening giant.

Still, the scale of the economic stakes would seem to preclude any military gambits by China and possibly even further diplomatic meltdowns with Japan. In playing down the concerns about the anti-secession law that Beijing announced earlier this year to provide a legal basis for military action should Taiwan declare independence, Andy Xie, the influential economist at Morgan Stanley, stressed the theoretical nature of the move: "Taiwan-China relations will be peaceful for a long time to come."

As for whether the region could become a coherent bloc, Chatham's Lu's take is "there is considerable interest in developing an integrated regionalism in the area, but there are also obstacles." For sure, more political drama will emerge in this area, but equally certain is that China will be a key part of the cast.