China, Japan Island Dispute Sparks Trade Concerns in Seoul

17 October 2012

The simmering diplomatic row between Beijing and Tokyo over a group of contested islands has prompted questions over what the high-profile dispute could mean for proposed trade talks between Asia's two largest economies and South Korea, as well as for regional trade overall, Seoul officials said this past week.

Following the announcement in May of their plan to open formal trade negotiations, Seoul, Tokyo, and Beijing agreed to begin the talks by the end of this year (See Bridges Weekly, 16 May 2012). However, that deadline has been lately called into question, with many left wondering whether two of the three parties will even make it as far as the negotiating table.

The tensions between China and Japan stem from a territorial dispute over a series of islands in the East China Sea, an area to which both countries have laid claim. Apart from their symbolic significance to both parties, the islands - known as the Diaoyu in China and Senkaku in Japan - and their surrounding waters are also said to be rich in natural gas deposits.

The feud, which has intensified rapidly over the past month, reached new heights last Wednesday when top Chinese finance officials pulled out of attending last week's International Monetary Fund and World Bank Group's Annual Meetings, which were being hosted by Tokyo. Though reports have since emerged of secret meetings between country diplomats trying to quell the dispute, when and how the disagreement will be resolved remains unclear, as well as what the broader trade implications could be.

Higher-level discussions regarding the proposed trilateral FTA are scheduled to begin in Cambodia next month. With that date in mind, Seoul is therefore asking its partners to put aside their disagreements if they begin to threaten the future of the trade talks.

"We look forward to, and hope that, during the East Asia Summit meeting [in November], there could be an announcement to kick-start the negotiations," South Korean minister of strategy and finance Bahk Jae-Wan said, urging that territorial and economic issues be dealt with separately.

Despite their disagreements, Chinese and Japanese officials have made clear that the proposed free trade agreement could have major benefits for both economies.  Regardless of his insistence that his country will not cede sovereignty of the disputed territory, Japanese Prime Minister Yoshihiko Noda has acknowledged the value of eliminating trade barriers with Asia's most powerful economy.

"China is simply a huge market ... that's all there is to it," Noda said. In the last decade alone, trade between the two nations has tripled, reaching more than US$340 billion. Similarly, Chen Yulu - an adviser to China's central bank - has conceded that terminating the process would amount to a "big loss for Asia."

In the event that the three-way trade pact is finalised, South Korea stands to increase its GDP by a possible 3.1 percent. China's and Japan's could each rise 2.9 percent and 0.5 percent respectively, according to Chinese state-run news agency Xinhua.

Tokyo-Beijing fallout could have regional trade implications, officials warn

While the fallout has actually produced short term benefits for South Korean automobile manufacturers, who have seen an increase in their exports to China, South Korean Trade Minister Bark Tae Ho has cautioned that his country will not benefit in the long run should the row continue.

"[The disagreement] will hurt trilateral economic cooperation because invisibly we are all connected," he told the Wall Street Journal last week. With each of the three countries having a major trade relationship with the other, these ties could suffer if the row remains unresolved, Bark warned.

Some trade analysts have suggested that the imbalance in Sino-Japanese trade relations would leave Tokyo worse off should the dispute continue to escalate. According to Chinese customs data, in 2011 China was the largest market for Japanese exports, while Japan was China's fourth largest.

Some observers note that these predicted effects are beginning to surface. Japanese car exports to China have suffered since the dispute began and, according to JPMorgan Chase projections, could decrease by up to 70 percent in the final quarter of this year.

ICTSD reporting: "China-Japan Tensions Concern South Korea," WALL STREET JOURNAL, 11 October 2012; "China official says spat with Japan derails free trade talks," REUTERS, 27 September 2012; "China and Japan Say They Held Talks About Island Dispute That Has Frayed Relations," NEW YORK TIMES, 12 October 2012; "China-Japan Islands Dispute Clouds $340 Billion Trade Ties," BLOOMBERG, 18 September 2012; "INTERVIEW: South Korean Fin Min Still Hopeful for Trade Pact with Japan and China Despite Tensions," WALL STREET JOURNAL, 13 October 2012; "China consumers spurn Japan cars amid islands row," ASSOCIATED PRESS, 9 October 2012.

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