When Globalization Falls Short

However the Senkaku islands crisis is resolved, the questions that it has posed on globalisation will be debated. The fact that the relatively minor incident of the arrest of a Chinese fishing boat captain by Japanese authorities could so quickly escalate to threaten economic ties between the world's number two and three economies cannot but raise questions about the benefits of globalisation. It has become an article of faith among economists that growing interdependence serves as a guarantor of peace. China is, after all, Japan's biggest trade partner and Japanese investment in China is second only to its commitments in North America. The mutual economic damage that would result from an escalation of tensions was clear to see and, yet, neither seemed prepared to back down. So what happened?


Although claimed by China, the barren and uninhabited Senkaku/Diaoyu islands have been administered by Japan since the end of World War II. China's supreme leader Deng Xiaoping had said the issue should be left for future generations to resolve. However, with China surpassing Japan as the world's number two economy, Beijing may be considering the time ripe to make good on its claim. In the past, Chinese nationalists and fishermen who have travelled there have been quietly returned home by the Japanese Coast Guard. But in early September barely weeks after China overtook Japan as the world's second-largest economy a Chinese fishing fleet not only showed up in numbers in the waters off Senkaku, but one trawler reportedly rammed two Japanese coast guard vessels. The detention of the boat's captain sparked a stand-off that ended 17 days later with his unconditional release. The Chinese demands for an apology and compensation and Japan's counterclaims for damage to its patrol boats have served to keep tensions alive.


The unusual aspect of the stand-off was the ratcheting up of rhetoric and the unprecedented array of economic and political tools Beijing employed to pressure Tokyo. As the Japanese proceeded with legal action against the captain, China took strong steps. It halted tourists from visiting Japan (Chinese tourists brought about $2 billion in revenue to Japan last year), cancelled high-level meetings (including one to discuss cooperation in oil and gas exploration under the East China Sea) and blocked shipments of rare earth elements critically important for key Japanese industries. Shortly after China's prime minister issued warnings about unspecified "coercive measures", Japan suddenly relented and returned the captain to a hero's welcome in China, where he proudly proclaimed his intention to return to fish in the "Chinese waters" off Diaoyu.


Tensions may take time to subside and so will the questions raised by the episode. If globalisation has indeed created deep interdependence, then how does one explain China raising the ante to a dangerous level with seeming unconcern about the fallout on Japanese trade and investment? Can China ignore the impacts of decreasing Japanese FDI and reduced imports of Chinese goods? Japanese businesses were clearly rattled and pleaded for a peaceful resolution. The informal ban on the export of rare earth material to Japan in the past week alarmed manufacturers from hybrid automobile maker Toyota to electronic and other green technology companies relying on rare earth (92 per cent of its supply coming from China) to manufacture a whole host of export products. Preoccupied with its effort to restart its economic growth engine, Japan can ill afford to suffer setbacks such as those brought on by a confrontation with China.


The question is, why do global integration and interdependence not lead China to feel similar constraint? How can it ratchet up the dispute without worry about the consequences for its economy? The answer seems to lie in the asymmetric interdependence. China, flush with its $2.5 trillion reserves and still growing at 8 per cent, can risk taking a few knocks more than Japan's ageing and debt-laden economy. At a time of political transition, Chinese leaders' need to appear strong in defending the country's territorial claims. They also need to mind the rising anti-Japanese sentiment of China's internet-savvy youth.


Historians recall that shortly before the outbreak of World War I, British author Norman Angell famously wrote about the "economic impossibility" of conflict among trade partners. Though the world is infinitely more interdependent today, the Senkaku episode shows the unpredictability of nationalism and political calculations.