As the global focus of trade shifts to Asia, is it time for erstwhile rivals China, India, Japan and South Korea to turn over a new leaf? Eleanor Wragg reports.
Driven by the exporting powerhouses of China, India, Japan and South Korea, the 21st century of trade belongs to Asia. But a heady mix of economic interdependence and mutual distrust among these four nations sees them jostling for primacy. Growing pressures in the west, from Brexit to the Trump administration’s attacks on Nafta and withdrawal of the US from the Trans-Pacific Partnership (TPP) mean Asia’s economic giants must take up the mantle for free trade and globalisation in order to meet their goals of strengthening their economies and raising living standards for the almost 40% of the global population that lives within their borders.
Work is already underway: large-scale free trade agreements between the Association of Southeast Asian Nations (Asean) and China, Japan, South Korea and India are laying the foundations for greater regional economic integration, but for these Asian giants, balancing interests is far from plain sailing.
Thanks to China’s manufacturing might, India’s strength in services, South Korea’s strong industrial base and Japan’s monolithic conglomerates, these four nations have become a force to be reckoned with. China and India are now the world’s fastest-growing big economies. The Middle Kingdom is also the world’s second-largest economy, followed by Japan. Meanwhile, although South Korea’s economy may be smaller – currently ranked 11th – it is the world’s largest investor into R&D, spending 5% of GDP on research as it works to innovate its way to economic growth. It also ranks highest among its rivals for export weight in its economy, with exports in goods and services accounting for over 42% of GDP.
What’s more, the countries are increasingly tied together, economically speaking, as the May 2017 declaration by the finance ministers of China, Japan and Korea at the G20 summit made clear. “We will continue a high degree of communication and co-ordination among China, Japan and Korea to cope with possible financial instability in the context of increased uncertainty of the global economy and geopolitical tensions,” the communiqué said.
A tangled web of relationships
However, with increased co-operation comes increased competition: Japan’s proposal on the sidelines of the Asian Development Bank (ADB)’s annual gathering in Yokohama to set up bilateral swap arrangements to enable it to provide yen funds in times of financial stress to Southeast Asian nations was seen less as an altruistic move and more of a strategic one to counter China’s previously-made bilateral currency swap arrangements with about 30 countries.
Indeed, the web of relationships between and among China, India, Japan and South Korea could best be described as tangled. From China’s dim view of South Korean co-operation in the US Terminal High Altitude Area Defence (THAAD) missile defence project, to South Korea’s disquiet at China’s leverage over the North Korean regime, to a recent standoff between Indian and Chinese troops at the disputed border region of Doklam, to numerous acrimonious territorial disputes over the South China Sea, East China Sea and the Liancourt Rocks in the Sea of Japan, the countries have a far-from- neighbourly relationship.
This rivalry has come into increasing focus in recent years, as beating each other in their home markets becomes a source of national pride. Systematic investment has seen Korea’s Samsung and LG crush Japan’s Sony’s supremacy in the TV and smartphone industries. Meanwhile, all three companies have slashed prices by as much as 40% in the Indian market in order to edge out India’s Micromax and keep Chinese firms Huawei, Xiaomi and LeEco at bay. There’s a lot at stake: the OECD estimates that by 2030, Asia will account for almost two-thirds of global middle-class consumption, and any company able to boost market share stands to reap the rewards.
Trade and investment battles reach far into the Asian continent. “We see competition between China and Japan, especially in Southeast Asia; they are vying to export their goods, technology and lending to Southeast Asian countries,” says Mark Wong, managing director of credit, political and security risks for Asia at insurance firm JLT. “The two main countries that have attracted a lot of interest from both the Chinese and the Japanese of late are Vietnam and Indonesia, where in megaprojects, you see one consortium being Chinese, and the other being Japanese.”
China’s One Belt, One Road project, coupled with its fast-growing presence in infrastructure finance, has rattled Japanese policymakers, who are concerned that
the Chinese-backed Asian Infrastructure Investment Bank (AIIB) may overshadow the Japan-backed ADB. “The economic rivalry between China and Japan largely plays out through bilateral relationships each country has with key partners, such as China’s Belt and Road Initiative,” says Rajiv Biswas, Asia Pacific chief economist at IHS Markit.
It’s not just the immediate region which is subject to tussles for dominance. An Asian scramble for Africa is well underway, as the fast-growing economies seek commodities, food and energy resources to support their development. From being roughly neck-and-neck in terms of trade with Africa at the turn of the millennium, China has now raced ahead of India, dominating the continent’s infrastructure investments – and getting favourable access to raw materials to fuel its domestic growth in return.
Not to be outdone, Japan, which through the Japan International Co-operation Agency (JICA) has poured overseas development assistance into countries including the Democratic Republic of Congo since as far back as the 1970s, has signed a number of deals with the Kenyan government to expand and improve the port of Mombasa and surrounding logistics links. But, to Japan’s likely annoyance, just down the coast in Tanzania, China is now developing Bagamoyo Port, which will present direct competition to Mombasa, with the capacity to handle 20 million containers a year, dwarfing the current capacity of any other port in Sub-Saharan Africa.
Given their oftentimes uneasy diplomatic relationship, it is unsurprising that these trading behemoths tend to use exports and investment as political weapons.
“Japanese exports to China were hit in 2012 by a political dispute over competing sovereign territorial claims over several islets in the East China Sea, which resulted in a period of anti-Japanese riots in China and a significant Chinese consumer backlash against Japanese goods such as cars and food products,” says Biswas.
He adds that South Korea’s economy is also highly vulnerable to bilateral Chinese political and economic relations as China is South Korea’s biggest customer, buying around 25% of its exports and accounting
for almost half of its inbound tourist visits. “China’s economic measures in response to South Korea’s installation of US THAAD missiles to counter the North Korean missile threat have had an impact on the South Korean economy in H1 2017, notably due to a significant drop in Chinese tourism visitors.”
On the plus side, “India’s bilateral trade relations with Japan and South Korea are set to expand in line with India’s fast-growing economy”, says Biswas. He points
to recent joint naval exercises between Japan and India, but cautions that the security relationship is at an early stage. “It is unclear how the bilateral security relationship will develop. Both Japan and South Korea are primarily focused on their defence and security ties with the US, which is their key military ally.”
The India-China relationship is arguably the most strained – Indian Air Force chief Arup Raha recently called China “the single major security challenge to India’s growing interest in the Asia Pacific region”, accusing it of trying to thwart the rise of his country and forcing India into a perpetual balancing act against China among its neighbours. This has been reflected in trade figures.
“The difficult political relationship over many decades between China and India saw Indian exports to China account for only around 3.6% of total Indian exports in the 2016-17 fiscal year,” says Max Zenglein, research associate at the Mercator Institute for China Studies (Merics).
The best-laid plans
Inspired by Germany’s Industrie 4.0 initiative, Beijing’s Made in China 2025 roadmap, unveiled in 2015, seeks to “upgrade China from a manufacturer of quantity to one of quality”, according to a statement by Chinese Premier Li Keqiang, and will involve a far-reaching upgrade of Chinese industry so that it can occupy the highest parts of global production chains. The plan pinpoints a dizzying array of market sectors in which China hopes to become an international leader, from integrated circuits to robotics, aircraft engines and intelligent vehicles, and objectives include lifting the domestically produced content of components used in China to 70%, up from less than 30% currently. Whether by coincidence or design, many of these sectors are those in which Japanese and Korean firms currently enjoy dominance.
“Japan and Korea are particularly exposed to the Made in China 2025 strategy. It specifically targets the backbone of manufacturing in those countries,” says Zenglein. He adds that the strategy threatens to favour Chinese suppliers within China at the expense of foreign suppliers. “Globally it may also lead to the build-up of new industrial overcapacities, for example in the area of robots.”
However, analysts at Japanese bank Mizuho are more pragmatic about the threat. In a paper put together by Yongyu Shao, an economist in its China business promotion division, the bank said that “China is expected to face numerous difficulties and challenges in implementing Made in China 2025. The biggest of these are the lack of awareness of the need for innovation and a shortage of technicians, including systems development engineers, which have long plagued China’s manufacturing industry. In consequence, China has been unable to establish its own technology infrastructure, which is hampering both technology transfer and the diffusion and penetration process and weakening the nation’s international competitiveness.”
The bank goes as far as to forecast that the plan could even lead to greater economic co-operation, with new business opportunities and growth in investment co- operation in the manufacturing and manufacturing service sectors of Asia.
China is not the only country with a big plan. Prime Minister Narendra Modi’s Make in India initiative, launched in September 2014 as part of a wider set of nation-building initiatives, has been devised to transform India into a global design and manufacturing hub. With one of the plan’s objectives to boost the ability of Indian manufacturers to compete against their Asian rivals, earlier this year China’s official media warned India of countermeasures if the Modi government gives in to appeals from Indian firms to increase supplementary levies against mobile handsets from Chinese companies.
Indeed, some of the biggest winners of Make in India are Chinese: the launch of the plan resulted in a ramping- up of Chinese investment into the country, reaching a total of US$1.54bn in the period up to December 2016, as companies took advantages of new policies to set up factories. Among these inflows is handset manufacturer Huawei Technologies, which recently spent US$170mn on an R&D centre in Bangalore.
To policymakers in each of the four countries, it is becoming increasingly clear that slotting together their complementary strengths is preferable to attempting to go it alone, and there are early indications of a shift in approach. One example is the Japan External Trade Organisation’s (Jetro) recently unveiled plans to promote partnerships between Japanese and Indian companies going into Africa. The aim, to combine the experience and knowledge of Indian firms in the African market with the technical and funding capabilities of Japanese companies, is in line with a joint statement issued by Japan and India in November last year that underscored “the importance of India-Japan dialogue to promote co- operation and collaboration in Africa, with the objective to synergise efforts and explore specific joint projects”.
Meanwhile, in an apparent about-face, Japanese Prime Minister Shinzo Abe has indicated that his country is now ready to co-operate with China’s OBOR initiative, under certain conditions. He has also reportedly expressed willingness to consider Japan joining the AIIB, a move which would go some way toward positioning Japan and China as partners, rather than opponents, in the fight for global influence through development finance.
These top-level linkages have been accompanied by a flurry of co-operation between corporations. In September 2016, Chinese conglomerate Dalian Wanda Group closed a significant co-financing deal with Sony Pictures that will see the Chinese firm take stakes in some of Sony’s films. The move both strengthens Sony’s presence in the huge Chinese domestic market and gives Dalian Wanda a leg-up into the film business – a win-win.
Meanwhile, a May visit to Beijing by a delegation of Indian IT companies led by the National Association of Software and Services Companies saw the participation of 20 Chinese state-owned companies, including Sinopec, State Grid, China Unicom, Dongfeng Motors, and China Aerospace Science and Technology Corporation.
Speaking at the meetings, the Indian embassy’s deputy chief of mission Amit Narang underscored the immense potential for collaboration between Chinese state-owned enterprises and Indian IT companies and the need for both countries to leverage their respective competitive advantages for mutual benefit. As China seeks to transform its economic driver from manufacturing to services, the injection of high-tech Indian IT skills might be just the ticket, and would also go some way towards reducing the two countries’ bilateral trade imbalance, which reached US$52bn last year in favour of China.
South Korea’s relationship with Japan remains tetchy, with Korean foreign minister Kang Kyung Wha recently announcing plans to launch a task force re-examining a 2015 reparations deal from Japan over World War II-era Korean ‘comfort women’, who were forced into prostitution by occupying Japanese forces. Its ties with China fare little better. That said, a call between Chinese President Xi Jinping and Korean President Moon Jae-In in May this year led to an apparent thaw between the two administrations, with signs that Seoul and Beijing are seeking to reconcile their differences. And with growing aggression from North Korea, Japan and South Korea’s governments have had to put deeper tensions aside in order to focus on more immediate matters.
“Despite the episodes of political tensions and potential short-term impact effects on trade, the trade and investment linkages between China, Japan and South Korea are very deep and are expected to continue to grow over the medium to long term despite potential trade disruptions due to flare ups of political tensions,” says Zenglein.
Much like quarrelsome siblings, China, Japan, South Korea and India have more common goals than they do antagonistic objectives. Whether they will succeed in putting their differences aside to the benefit of economic development is still to be seen, but as the Asian century takes shape, more co-operation on every front is almost inevitable.