Relations between China and Japan are on the rocks these days, literally. The long-running dispute between the two nations over a splattering of small islands in the East China Sea — known as the Senkaku in Japan and Diaoyu in China — has escalated in recent weeks, raising fears that the heightened tensions could lead to a real shooting war. Beijing late last month attempted to impose an “air-defense zone” over the area, causing jets from both countries, as well as the U.S. and South Korea, to buzz about the region. U.S. Vice President Joseph Biden will visit Tokyo, Seoul and Beijing this week, hoping to defuse the situation. When it comes to these islands, passions are clearly clouding pragmatism.
(MORE: China’s Restriction on Airspace Over Disputed Islets Could Lead to War)
On the less emotional matter of economics, China and Japan are putting at risk much more than the few clumps of dirt are probably worth. As tensions rise, the economic relationship between the world’s second and third largest economies has come under strain as well. Though the island group may offer some material benefits — fishing rights, perhaps — the economic ties between China and Japan are so critical to both sides that undermining them would cost each nation much, much more.
For two countries that so distrust each other, they sure do a lot of business together. Total trade between China and Japan was almost $334 billion in 2012. For Japan, struggling to emerge from two decades of economic malaise, exports to burgeoning China are a key source of growth. Companies from Sony to Toyota desperately need Chinese consumers to buy their cars and TVs to offset a sluggish home market and compete with rivals like GM and Samsung. But the relationship is hardly a one-way street. China imports more from Japan than any other country, and many of those goods are indispensable to China’s economic advance — high-tech components to fuel its export machine and capital equipment for its expanding industries. Japan also possesses special expertise in technologies that China badly needs for its future development, such as energy efficiency and other eco-friendly know-how that could help China contend with the environmental damage brought about by rapid industrialization.
Yet the tensions are inflicting an economic toll. Trade between the two has been on the decline since 2012. In the first half of 2013, total trade dropped by 10.8% to $147 billion. The decline is partly due to slower growth in China, but rising anti-Japanese sentiment caused by the island row hasn’t helped. In 2012, sales of Japanese-branded cars plummeted amid large anti-Japan protests. China is taking a hit as well. Japanese firms are beginning to shift their money away from China and toward its emerging-market competitors, where they don’t face nearly as much ire. According to statistics from the Japan External Trade Organization, Japanese direct investment into China plunged by nearly 37% in the first nine months of 2013, to only $6.5 billion, while investment in Southeast Asia’s four major economies — Indonesia, Malaysia, Thailand and the Philippines — surged by over 120% to almost $7.9 billion.
Japan is not the only nation caught between political priorities and economic necessity in its dealing with a rising China. The U.S. and China too jockey for geopolitical influence, and increasingly eye each other as rivals for global primacy, even as their economies become ever more fused together. The challenge facing China’s President Xi Jinping and Japanese Prime Minister Shinzo Abe is how to set aside their territorial sparring and create a more favorable environment for the trade and investment both sides need for their economic futures.
Hopefully they’ll realize that the sorry rocks can’t substitute for exports and jobs.