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ISSUE BRIEF

Does China Mix Business with Politics?

June 21, 2013

In an apparently conscious decision, the Government of India blanked out the media from the deliberations, border meetings, diplomatic parleys and formal talks that brought an end to the Chinese intrusion in Ladakh . This led to intense speculation in the media with some quarters terming the Indian response to be soft and weak. Amongst the theories doing the rounds, one that some analysts seemed to endorse was that ‘upping the ante’ against China would jeopardise our bilateral trade, already under strain due to a yawning deficit of $29 billion in favour of China.1 The question that begged response is – does China feel like wise? Does China go soft when trade is threatened? Does China mix business with politics? The answers to these questions drew some interesting conclusions while researching China’s trade figures with those countries with which it has strained political relations.

In a revealing piece on CNN blogs, “Does Upsetting China Matter?”, Kerry Brown argues that in the recent past China has had diplomatic rows with Britain and Norway, the former over David Cameron’s meeting with the Dalai Lama in May 2012 and the latter over the award of the Nobel Peace prize to Chinese dissident Liu Xiaobo in 2010. Both nations have been politically ignored by China. Yet in 2012, China’s exports to Britain rose 4.9 per cent to $46.3 billion and imports from Britain rose 15.5 percent year-on-year to $16.8 billion. Similarly trade with Norway has risen by 19 per cent between 2011 and 2012.2 Kerry Brown’s argument is compelling- “China may be upset, but it has still been willing to engage - just not with the prime minister”! I decided to test this argument in the Asian context by looking at China’s trade with some of the countries in Asia where China’s ties have been strained, viz, Japan, Vietnam and Philippines.

Japan

China and Japan have been involved in a territorial dispute over the Diaoyu/Senkaku islands in the East China Sea for decades. The issue took an ugly turn in 2012 when Tokyo Governor Ishihara announced plans to purchase the Senkaku islands from its private owners sparking a protest from China. The issue flared up in August when Chinese and Japanese citizens tried to land on the islands. By September Japan announced that it had purchased the islands and they were national property. This triggered a wave of violent protests across China hurting Japanese businesses and forcing closure of some factories. Tensions continue to remain over the sensitive issue raising nationalistic fervor amongst Japanese and Chinese alike. Ships of the PLA Navy and Japan Maritime Self Defence Force (JMSDF) are on alert while the coast guards of both countries have fired water cannons at each other. Even fighter aircrafts have been scrambled as air space violations have led to ugly exchange of words between the leadership of both nations.

But how much has this issue of China’s territorial integrity and sovereignty impacted trade?

China’s exports/imports to Japan 2005-20123

YEAR

EXPORTS

IMPORTS

BALANCE

TOTAL TRADE

2005

80,340,099

109,104,815

-28,764,716

$190 billion

2006

92,851,689

118,516,332

-25,664,643

$210 billion

2007

109,060,309

127,643,646

-18,583,337

$237 billion

2008

124,035,383

142,337,115

-18,301,732

$ 266 billion

2009

109,630,428

122,545,120

-12,914,692

$ 231 billion

2010

149,086,369

152,800,714

(3,714,344)

$300 billion

2011

161,467,319

183,487,439

- 22,020,120

$344 billion

2012

144,686,177

189,018,794

- 44,332,617

$333 billion

In a poll carried out by The Asahi Shimbun in September 2012, 63 percent of Chinese disliked Japan and just 10 percent liked Japan, whereas, only 3 percent Japanese liked China. Interestingly, in terms of the respective weight of their economies, 78 percent of respondents in Japan said the Chinese economy exerts a major influence on Japan. In a comparatively similar response in China, 44 percent of respondents said the Japanese economy exerts a major influence on China. Clearly, despite their obvious dislike for another, both realise that economic considerations weigh heavier on their relationship.4 The data of trade between the two countries over the last seven years shows a steady rise in bilateral trade despite their often turbulent international relations.

Let us analyze the trade figures in the run up to the Diaoyu/Senkaku islands dispute which resulted in open hostility in 2012. According to a report released in February 2011 by the Japan External Trade Organization (JETRO), Japan’s total trade with China (imports and exports combined) rose 30 per cent year-on-year to US$301.9 billion in 2010, exceeding US$300 billion and setting a new (year-on-year) record. In 2011 the total trade rose 14.3 per cent to US$344.9 billion. Both imports and exports made record highs; imports from China rose 20 per cent to US$183.4 billion, while exports to China rose 8.3 per cent to US$161.5 billion. In 2012, the year that saw so much animosity, near war situations with both navies putting each other in their crosshairs and aircrafts violating airspace, overall bilateral trade dropped just 3.3 per cent to US$333 billion the first drop since 2009. In fact imports from Japan rose 3 per cent to US$188 billion, setting a record high with single-digit growth, while exports to Japan fell 10.4per cent to US$144 billion. ‘ Japan-China Trade in 2010 Exceeds US$300 Billion to Set New Record’, Japan External Trade Organization, available at http://www.jetro.go.jp/en/news/releases/20110512035-news. Also see http://www.jetro.go.jp/en/news/releases/20130219452-news for exact figures released by JETRO.5 Despite all the war hysteria, China actually made a record of imports from Japan in 2012! Even the 3.3 per cent drop in bilateral trade is barely $11 billion, an amount that pales considering the huge bilateral trade between the two countries. In comparison, China’s bilateral trade with India dropped 9 percent in 2012 alone without any such tensions or strain in relations.

Vietnam

China’s relations with Vietnam have not exactly been cordial. In 1988, China and Vietnam clashed in the South China Sea after the Vietnamese forces sought to disrupt Chinese construction on the Spratly Islands. The Chinese navy sank three Vietnamese vessels, resulting in the deaths of 74 Vietnamese sailors in one of the most serious military confrontations between the two countries after China got a bloody nose from the Vietnamese in 1979. Now China has laid claim to large stretches of Vietnam’s EEZ purported to be within the ‘nine dash’ line. Vietnam has been showing resistance to China’s territorial claims over Paracels and Spratlys in the South China Sea. Vietnam has also been actively wooing other nations in the region particularly ASEAN countries for support. It is spearheading the Code of Conduct agreement on South China Sea (SCS) to rein in China. It has been involved in a spat with China over oil exploration contracts to foreign companies like OVL, India and in March this year Chinese naval vessels reportedly fired on a Vietnamese fishing boat sparking protests and claims for compensation.

Has that affected trade between the two countries?

China’s export and import to Vietnam 2005-2010 (in thousand USD)6

Year

2005

2006

2007

2008

2009

2010

Imports

2,899

3,228.1

3,242.8

3,646.1

4,850.1

7,742.9

Exports

5,899.7

7,391.3

12,710.0

15,973.6

15,411.3

20,203.1

Total Trade

8,798

10,519

15,925

19,619

20,261

27,945

Over the last seven years, trade between China and Vietnam has been increasing rapidly. According to the Vietnam Chambers of Commerce (VCCI) trade between China and Vietnam during the period 2000-2010 grew at a whopping 32 per cent per annum! Bilateral trade between Vietnam and China was $25.4 billion in 2010. By 2012 it had reached $41 billion making China the biggest trade partner of Vietnam while the country is one of China's most important partners among ASEAN countries. In fact according to Vietnam's Ministry of Planning and Investment, as the end of September, China invested in 869 projects in Vietnam, worth over 4.52 billion U.S. dollars, ranking 14 out of 96 foreign investors in Vietnam. 7 Both sides have now set an ambitious target of reaching $60 billion by 2015.

Philippines

The most serious dispute on territorial and sovereignty issues that China has had recently is with the Philippines. China and the Philippines have competing claims on an island, known as Huangyan Island by the Chinese and Panatag or Scarborough Shoal by the Philippines. In early April 2012, one of the Philippine warships found eight Chinese fishing vessels near the disputed island. Philippine Navy personnel boarded the Chinese vessels claiming they were illegally fishing in their waters. Chinese surveillance ships prevented the arrest of the Chinese fishermen and forced the Philippine naval vessel to leave. Ever since, China has been regularly patrolling the Scarborough shoal area. The situation turned ugly when China used economic muscle by “quarantining”1200 containers of bananas from Philippines endangering $75 million exports from Philippines. China also issued a travel advisory to tourists visiting Philippines crippling the tourism industry. Meanwhile, Philippine military commenced maritime exercises with the US navy and Marines exacerbating the situation. In January this year, Philippines formally approached the International Tribunal for the Laws of the Sea (ITLOS) to resolve its disputed claims in the SCS. Incidentally, the Philippines renamed the SCS as West Philippine Sea.
What has been the impact on this dispute on trade between the two countries?

China trade relation with Philippines (FOB) (in thousand USD)8

Year

2007

2008

2009

2010

Imports

4,001,235

4,245,553

3,807,418

4,627,559

Exports

5,749,864

5,466,881

2,933,923

5,724,467

Total

9,751,099

9,712,434

6,741,341

10,352,026

While details of trade figures between China and Philippines was not forthcoming, a comparison of FOB( freight on board ) figures for years 2007-2010 clearly indicate a positive trend , save the year 2008-9 which was impacted possibly by the financial crisis of 2008.

In 2011, the total bilateral trade between the two was $32.254 billion up from $27.764 in 2010. Both leaders Hu and Aquino declared 2012-13 as Year of ‘China- Philippines Friendly Exchanges’ pledges a trade target of $60 billion by 2015. China is Philippines third largest trade partner. 55.6 percent of its export to China is electronics alone and trade with China accounts for 11.28 per cent of Philippines total trade.9 New project contracts signed by Chinese firms in the Philippines grew by 63.2 per cent to $1.02 billion in 2012 and bilateral trade was $36.37 billion, an increase of 12.8 per cent year-on-year despite the tensions and standoff in SCS!10

What is the takeaway from this argument?

From the analysis above it is evident that China maintains a twin track relationship with most countries. While its political differences are handled diplomatically it has continued to engage such nations economically. The strain in relations with Britain and Norway are purely of a political nature while those with Japan, Vietnam and Philippines are territorial and impact on its rights to sovereignty. Yet there has been minimal impact on trade. For Indian policy makers, dealing with China should be likewise – separate the political engagement from the economic. The argument that we need to show restraint because it may jeopardise a $ 66 billion bilateral trade needs to be revisited. If we do so, we may be missing the wood for the trees.

Assisted by Dolma Tsering, an intern with East Asia Centre in IDSA.

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Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.