China territorial deadlocks hurt regional trade

Tensions between China and several East Asian countries have heated up over the last year. Is it simply another round of disputes that have occurred multiple times since 2007, or something new?

The historical wounds in East Asia never heal. Neighboring countries can live in peace and do business together as long as no one brings up the unsettled land disputes among them. But no country can really forget about its claimed lands. The moment one party lays eyes on the disputed lands, the old wounds in the region fester. So far, none has come up with a solution to such a vicious pattern.

Since 2007, China has been in frequent territorial disputes with the Philippines, Japan, Malaysia and Vietnam, which eventually led to some level of military standoff in the South China and East China Seas. In November 2013, China set up its East China Sea Air Defense Identification Zone that covers the disputed Diaoyu Island with Japan, justifying its military presence in the area.

Several close encounters between Chinese and Japanese planes ensued. In May 2014, China Oilfield Services Limited, a Chinese state-owned company, deployed its oil rig in the contested waters, which eventually triggered riots against China in Vietnam. It seems that China is getting more assertive about its territorial claims and not shying away from competition.

Although tensions have escalated, it is unlikely that they will lead to larger scale military confrontations or even war in the next decade. Most of the East Asian states have important domestic mandates that would require a relatively peaceful international environment. China is gradually restructuring its domestic economy. According to some analysts, it would take over ten years for China to complete a series of reforms to evade the middle-income trap.

In the meantime, Southeast Asian countries are China’s potential export markets and sources of cheap labor, while Japan and South Korea could provide China with investments and technology. Unless fired upon, it is unwise to wage a war that would benefit so little compared with what China could achieve after its successful economic transformation.

Countries in dispute with China also have incentives that will prevent them from going too far. With a US military pact, Japan can afford to take a tougher position against China’s demands, as it has during Abe’s term. Indeed, Japan’s hawkish stance successfully deterred China from sending more patrol ships to the contested waters since late last year.

However, the US expressed its unwillingness to see a war between China and Japan and urged Japan to resort to diplomatic solutions in multiple occasions. Moreover, Abe’s administration is also trying to revitalize Japan’s domestic economy, which is currently falling short of its original goals. While fiscal expenditure on the military cause may be less effective in bolstering Japanese economy than Abenomics, any belligerent moves would surely drive investors away.

Without any backing from the world’s powerhouse, Vietnam is in an even weaker position when dealing with China, making it less likely to proactively start a war. As Vietnam’s economy relies heavily on foreign direct investment (FDI) and tourism, investors’ confidence has a big impact on Vietnam’s policies.

Following the anti-Chinese riots in Vietnam in mid-May 2014, 60,000 local workers became jobless as many foreign-invested factories were forced to shut down for an indefinite date. Facing such crisis, the local government arrested 241 people for causing the unrest, hoping to regain investors’ trust. This also suggests that the Vietnamese government values economic stability over hotheaded nationalism.

In the long-term, however, the territorial disputes in the region leave no room for optimism. And as seen in China and Japan, long lasting quarrel among nations can drive away bilateral FDI.

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Categories: Economics, Pacific Asia

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