China contemplates using economic ties as a weapon again

Escalating Sino-Japanese tension, at a time when China’s senior political leadership echelons are competing for positions in the Chinese Communist Party (CCP)’s most powerful bodies in the  penultimate weeks before the 18th Party Congress, appear to be compelling China to articulate its position regarding the weapons in its arsenal that it will use to resolve contentious territorial issues.

The recent rapid escalation in tension between China and Japan has sparked a tirade of articles in China’s media, all of which are predictably critical of Japan.

A hint that US defence secretary Panetta might discreetly broker de-escalation in tensions, as Washington did last month between China and the Philippines, was inherent in the remark by a senior US military official who said the US would not get “dragged into a conflict over fish, or over a rock”.

Panetta reached Beijing on a four-day visit on September 18. China’s official view was nonetheless enunciated by Senior Colonel, Zhao Xiaozhuo, who wrote in China Daily on September 13 that “the circle around China orchestrated by the US seems to be tightening.”

More significant is that Beijing is again contemplating using trade and economic ties as a weapon. Memories of the three month-long ban imposed by Beijing in 2010, on the export of rare earth minerals to Japan, have not receded.

Last August China’s official news agency, ‘Xinhua’, separately bluntly warned Japan and the Philippines, just days prior to high level visits from those countries, that improving economic ties do not translate into good bilateral relations. During the stand-off this July between Philippines Navy and armed Chinese vessels around the contested Scarborough Reef, Beijing prohibited the import of bananas from the Philippines and quickly ratcheted pressure by prohibiting the import of pineapples and instructing Chinese tour operators to cancel tours to the Philippines.

Its economy and job market adversely affected, Manila was coerced into withdrawing its ships. China had amply demonstrated its ready willingness to use economic ties as a coercive instrument of foreign policy.

Obviously targetted at a wider audience, China’s solitary official english-language China Daily on September 17, published an article by Jin Baisong, deputy director of the Department of Chinese Trade Studies at the Chinese Academy of International Trade and Economic Cooperation affiliated to the Ministry of Commerce.

Describing the current tension as a “well orchestrated plan” by right-wing Japanese politicians, it recommended strong counter-measures and especially economic sanctions. The military option was mentioned as the last resort.

Listing potential retaliatory measures it portrayed Japan as more dependent on trade with China. It said China’s “exports to Japan in the first seven months of this year was $86.3 billion, accounting for 7.6% of its total exports” and imports totalled $104.59 billion. Japan, in turn, exported $73.72 billion worth of goods to China in the first six months of this year, or 18% of its total exports while imports from China were $91.34 billion, or 20.5% of its total imports.

By end June 2012, Japan’s investment in China was $83.97 billion while China’s investment in Japan was only $1.03 billion. It added that approximately 55-60% of China’s exports to Japan were actually goods sent by Japanese enterprises operating in China.

Jin Baisong argued that the $345 billion two-way trade was crucial in helping Japan avoid another recession in 2003 and was currently giving Japan’s economy impetus.

It finally pointed to Japan’s huge government deficit and likelihood of a recession by 2013, observing that China held short-term and long-term Japanese government bonds worth $230 billion by the end of 2011 and had become Japan’s largest creditor in 2010.

China Daily’s warning was reiterated the same day by the Party mouthpiece, People’s Daily. Using economic ties as a coercive instrument of foreign policy is not new for Beijing.

When in 2010, Argentina reacted to a trade deficit with China and instituted anti-dumping measures against Chinese footwear and textiles, Beijing responded by halting imports of soya oil, Argentina’s major export to China. Buenos Aries withdrew the case.

Japan and the Philippines have been recent victims and European countries have similarly suffered Beijing’s ire. Many witnessed a downturn, or suspension, in exports to China for over a couple of years for receiving the Dalai Lama or raising human rights issues, and all capitulated.

Countries having extensive economic ties with China and those hoping that burgeoning trade links will translate into good bilateral relations, require to closely watch Beijing’s moves. It will be prudent to diversify trade and investment, regulate outflow of natural resources and raw materials, and ensure that domestic strategic industries are not irreparably weakened as Chinese goods financed by Chinese loans enter their markets. India especially needs to take heed.