The Fight Between China and Japan

In a fight over the factors of production, China and Japan relations have continued to deteriorate as both countries attempt to lay claim on a set of supposedly natural gas-rich islands. Why is the issue worrisome? Aside from the fact that the world’s second and third largest countries, who just happen to be neighbors, cannot seem to get along, the results of their feud has lead to a halt in free trade talks.

This report from Reuters describes the hope that these protectionist measures will soon come to an end. Why has the relationship failed in the past few decades? One possible question is motivation—for these large trade-controlling countries, the opportunity cost of closing their borders is relatively low. A Chinese professor and national monetary policy advisor insisted, however, that “it will be a big loss for Asia if the process is terminated.” Why? More than either China or Japan, those East China Sea islands the two countries are fighting over will be hurt by closing borders. The country with the most at stake is probably South Korea, the third player involved in the free trade talks but one who is dominated by the significantly larger economies of its neighbors.

Perhaps its my ego-centric nationalism at work, but I found myself wondering about the US’s stance on such a predicament. Wouldn’t restricting free trade have harmful effects around the world considering the interdependency between China and the United States? Yet if China and Japan harm each others economies enough, it would eliminate competition for the US in returning to its hegemonic power of the 20^th century.

Yes, the breakdown of talks between China and Japan would hurt their economies and in doing so perhaps allow an opening for the US to return to dominance, but doing so would punish not just the economies of China and Japan but more significantly the smaller countries such as South Korea whose national economy depend on its larger allies.