It is hard to believe that an argument over cheap mush-rooms would be allowed to escalate into a full-scale trade war. But that seems an increasingly likely result of the ongoing row over the export of Chinese vegetables to Japan, which has sparked high-level acrimony and tit-for-tat tariff hikes.
The argument began in April when Japanese authorities, alarmed over the threat to its grossly inefficient agricultural sector, slapped tariffs on three Chinese imports: shitake mushrooms, leeks and a type of grass reed used in the manufacture of tatami mats. In June, the Chinese responded with 100 percent punitive tariffs of their own on rather more high-profile Japanese products – cars, mobile phones and air conditioners. According to Japanese data, the tariffs apply to about USS 1 Wm-worth of Chinese imports and some US$540m of Japanese products.
Since then, the relationship seems if anything to have worsened, with Japan threatening new sanctions to protect other vulnerable domestic industries, including bicycles, chopsticks and towels. Matters have not been helped by last month's decision of the Japanese prime minister Junichiro Koizumi to visit a shrine for war dead. The visit led to public demonstrations in Beijing and Shanghai.
But while the war of words escalates, the real reason for the trade conflict ?indeed the nature of the conflict itself ?has remained hidden. Unsurprisingly, the reality is that the tension between the two countries has little to. do with vegetables and everything to do with the changing nature of their respective economies, which are becoming increasingly interdependent.
In the first half of 2001, trade between China and Japan grew 12.7 percent year-on-year to US$43.65bn, according to the Japan External Trade Organisation (Jetro). According to Chinese customs figures, the growth rate was an even more impressive 14.5 percent. Imports from China (primarily machinery/equipment and clothing) grew 11.3 percent to US$28.1bn. Meanwhile, Japanese exports rose 15.3 percent to US$15.5bn, the main growth component being IT related products such as semiconductors and electronic components. China is now Japan's second biggest export market behind the US, up from fourth position a year ago. This year, bilateral trade is expected by Jetro to exceed US$100bn, up from US$85.7bn in 2000.
Demand for cheaper goods
This sudden and largely unforeseen explosion in Sino-Japanese trade has two major causes. First, from the Japanese perspective, important economic and social changes have raised demand for Chinese imports. With its economy once again moving towards recession, Japanese consumers have greater incentive to protect their living standard by buying cheaper imported products. This has been facilitated by economic reforms that provide Japanese trading companies greater opportunity to import foreign-made consumer goods.
The resultant changes in consumption patterns have been dramatic. The average Japanese household now spends two percent of its income less on clothing and another two percent less on food than it did a decade ago, according to Morgan Stanley.
Beyond this, Japan has a long-standing need to restructure its economy, which has become increasingly capital intensive and inefficient. As a result, Japanese companies are now seeking to outsource production of an ever-growing range of high-technology products just as Chinese manufacturers are proving themselves capable of meeting the higher quality-control standards required by these industries.
The irony of this situation is that China's relationship with Japan today is much the same as Japan's relationship with the US some 20 years ago. In the 1970s, it was the US economy that was using protectionist measures to fend off a wave of cheap Japanese consumer imports and the Japanese that were crying foul.
The difference today, however, is that the trade is two-way. This brings us to the second reason why greater integration of the two economies is inevitable. In a recent report issued by investment bank Morgan Stanley, economist Andy Xie outlined how, under the traditional model of Asian economic development followed by Japan, South Korea and Taiwan, growth was solely export-driven. These places all built wealth by selling products abroad, and did not rely on internal consumer demand to fuel economic growth until domestic income levels had attained critical mass. As Xie writes, "The source of incremental demand was largely foreign, and the source of incremental capital was largely domestic."
Although the Chinese market used to follow the same model, things have changed in recent years. China has now come to rely increasingly on domestic consumption to fuel economic growth and on foreign capital to pay for it. In other words, says Xie, "the development model in China has turned upside down."
What this means is that China badly needs foreign investment and foreign capital goods, such as components for automobiles and consumer electronics, to fund and implement its economic expansion. Although these requirements will be met from a variety of places, Japan is ideally placed to make a crucial contribution.
As a result, China and Japan have no choice but to co-operate. Their economic requirements are both complementary and compelling. China needs investment and jobs, both of which come via Japanese capital. Japan, in its turn, needs cheaper consumer products and more efficient factories, which it gets by moving them to China.
The current trade spat, therefore, is better seen as a reflection of a backward looking view of their economic relationship rather than a recognition of current realties. Japan in particular is clinging to the outdated notion that it can maintain an export-driven economy that props up redundant industrial sectors by invoking protectionist legislation. The fact, for example, that tariffs have been imposed by the Japanese on agricultural products is a reflection of the disproportionate influence Japan's farmers have traditionally wielded over national politics.
In the end, however, such attitudes will have to change. Tokyo may be able to eke some advantage from this confrontation by currying favour worldwide for an upwards revaluation of the yuan. Indeed, it is already making moves in this direction. Nonetheless, the momentum towards structural reform is irresistible.
Like the US before it, Japan will have to abandon propping up uncompetitive industries such as agriculture and focus instead on staying a step ahead in other areas, such as technology and finance, in which it retains a natural advantage. This is why the dispute is unlikely to be allowed to spin out of control; there is much more at stake than the price of mushrooms on Japanese dinner tables.