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China, Japan, Taiwan and US: Four to Party in Diaoyutai

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By EconMatters

With Bin Laden and Gaddafi out of the picture, the geopolitical headline is now shifting to Asia/China.  The most recent excitement came from a 3-way bitter territorial feud over eight small and uninhabited islands in the East China Sea.    


Historically, these uninhabited islands are rich fishing grounds with military strategic importance.  It was also discovered in 1968 that there could be oil and gas reserves under the sea near the islands.  It is estimated that the East China Sea region may hold as much as 160 billion barrels of oil.  Today, these islands have different names depending on whom you talk to - Diaoyu in China, Diaoyutai in Taiwan, and Senkaku in Japan.  

 

 

Chart Source: FT.com (h/t Mark Turok)

 

Duel in the East China Sea

 

Physically, Taiwan is the closest to Diaoyutai among the three; however, China and Japan have been portrayed as seemingly the only two players by the western media in this island row.  Taiwan has always maintained a low profile in most international or diplomatic matters.  But that changed about two weeks ago when Taiwan officially asserted its claim on Diaoyutai by dispatching 12 coast guard vessels along with some 50 civilian fishing boats to the islands.  The resulted water cannon duel between the vessels of Taiwan and Japan has officially landed Taiwan squarely on the map of Diaoyutai, so to speak, before the eyes of world media.      


Japan Purchase Angers Chinese

 

The history of this dispute has been a regional “undercurrent” that could be traced all the way back to Qing Dynasty.  But tension erupted high above surface after Japan’s attempt to “nationalize” these islands by purchasing them from a private owner for 2.05 billion yen ($26.18 million).  This tactic, not that much different from the provocation by Japan to start the previous two Sino-Japanese Wars, has brought up lots of bad memories.  Needless to say, Chinese (from both sides of the Strait) are livid and large scale anti-Japan protests have broken out in a dozen of cities in Mainland and Taiwan. 

 

Japan Sales Crash

 

China was Japan’s largest trading partner last year, and Japan is China’s second-biggest trading partner after the United States with two-way trade totaling $342.9bn.  China is also the largest auto market in the world and represents one significant “life line” for Japanese automakers.  The renewed anti-Japanese backlash in China has already caused the “disastrous” decline of Japanese auto sales of up to 50% YoY in China last month.  


Chart Source: China Daily, Oct. 10, 2012

Japan's loss is another rival's gain as BMW, GM and Korea’s Hyundai are reporting surging YoY sales in September.  China Daily quoted IHS Automotive that output and sales for Japanese automakers in China is estimated to be cut by 200,000 units this year, or 20% of sales.  China communist party also threatened that Japan's economy could suffer for up to 20 years if China chose to impose sanctions over the escalating territorial row.

 

The Role of U.S. in Diaoyutai

 

Based in historical documents, Diaoyutai Islands were formally part of China, but Taiwan (along with the associated islands including Diaoyutai Islands) was ceded to Japan by the Qing Dynasty in 1895 via Treaty of Shimonoseki after losing the First Sino-Japanese War.  Taiwan was returned to the Republic of China formed by the Nationalist Party (KMT) in 1945 after the end of WW II in accordance of Cairo Declaration, and Potsdam Proclamation.

 

However, Diaoyutai was not returned to China along with Taiwan.  And in the aftermath of a civil war in China, and two treaties between the US/Allied and Japan--without the presence of China--the U.S. somehow ended up “administering” the Diaoyutai Islands from 1945 before transferring the “administration” to Japan in 1972, which is part of the basis of Japan’s claim and in essence the direct cause-and-effect of the current 3-way row.

 

Further ReadingThe Inconvenient Truth Behind the Diaoyu/Senkaku Islands (NYT, Sep. 19, 2012)


Communist China did launch a protest at the time of the administrative transfer by the United States to Japan.  So a logical question would be:       

Why did the U.S. return the “administration” of Diaoyutai to Japan in 1972 with China protesting knowing full well there was an unresolved territorial dispute?

 

How “Neutral” Can The U.S. Be?

 

So far, the U.S. has tried hard not to get involved by simply asserting “a neutral position on the competing claims of Japan and China over the islands.”  However, the U.S. also affirms that it will protect Diaoyutai as part of "the territories under the administration of Japan" according to the US-Japan Security Treaty.  With that gold-plated safety blanket in the back pocket, it is not a surprise that Japan resorts to anything less than the so-called “diplomatic blunder” to force the claim over Diaoyutai via an outright purchase?  It is also part of the reason China is calling the United States to “walk the talk” regarding being neutral on the China-Japan territorial dispute.    

 

Global Multi-lateral Implications

 

Now, this regional diplomatic row has evolved into a global multi-lateral economic and geopolitical event when China’s Finance and Central Bank officials, along with several Chinese major bankers, boycott IMF and World Bank meetings in Tokyo this week.       

 

Ratings agency Standard & Poor’s already warned that “if the political confrontation [between China and Japan] drags on and further worsens ties between both countries, it may hurt Japan’s macro economy and affect the credit quality of rated Japanese companies on a large scale.”

 

Alarmed by the recent development, Christine Lagarde of IMF also warned that China and Japan should not be distracted by territorial division as “the current status of the global economy needs both Japan and China fully engaged." 

 

China & Taiwan -  Not Nemesis on Diaoyutai  

 

China and Taiwan have remained hostile to each other ever since the separation some 60 years ago.  Both sides disagree on almost anything and everything for decades.  However, the common bond of defending Chinese sovereignty from Japan seems to have pushed them closer. 

 

China asked Taiwan to have a joint sovereignty claim (which was turned down by Taiwan), and said it will continue vessel patrols and will extend protection to Taiwan civilian fishing boats around Diaoyutai.  Then interestingly, after China Daily taking out full-page ads in New York Times and Washington Post to broadcast and support its claim over Diaoyutai, Taiwan also took out ads in four major U.S. newspapers to assert its claim as well.      

 

China’s First Aircraft Carrier Worries Many

 

What has raised quite a few heart beats from the Kremlin to the Pentagon was that as a show of force to Japan, China put its first aircraft carrier--Liaoning—into commission right in the middle the Taiwan-Japan vessel showdown.    

 

Partly in response to the Chinese carrier launch as well as the increasing tension over Diaoyutai, two nuclear-powered aircraft carrier strike groups of the US Navy's 7th Fleet have been deployed since mid-September to the Western Pacific

 

Backing Down Is Politically Incorrect

 

Right now, the political environments in Taiwan, China and Japan would suggest it is highly unlikely any of them would back down from their current stance.      

 

Many are keeping a watchful eye as China has been beefing up its military defense budget with quite a sizable naval fleet in the Pacific region to boot.  Meanwhile, the U.S. has been preoccupied with the Middle East region, particularly since 9/11, leading to a much diminished presence in the Asia-Pacific. 

 

However, with so much more at stake, it is now almost impossible to really have a third Sino-Japanese War.  Nevertheless, when push comes to shove, China still has the bigger gun over Japan on many other levels, and the U.S. most likely has to at least sit in the bed it’s made so far.  And also don’t discount the potential wild card role of China’s nemesis – Taiwan either.  

 

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Fri, 10/12/2012 - 08:11 | 2880787 suteibu
suteibu's picture

In addition, argument over whether Beijing or Taipei is the real government of China, whether Taiwan is an SAR or deserving of full independence are largely futile: the scale of cross-straights investments alone is such that the two economies already effectively function as a single unit.

Except that the US has an interest in maintaining the independence movement on Taiwan if, for no other reason (though there are more directed at controlling the PRC) than to continue to sell military hardware, the irony of which is that such assets will someday become the property of the PRC.  That America's big three in Asia (Japan, S Korea, and Taiwan) are at odds with each other is problematic.  If the US backs Japan too strongly, it may lose in Taiwan and S Korea.  Chickens are coming home to roost.

Thu, 10/11/2012 - 23:33 | 2879855 Arthur Borges
Arthur Borges's picture

For deep background, the ultrawealthy Soong family had ties to the CPC, KMT and western banking interests dating back to the days of Sun Yat-sen and the first republic in 1912. One of the three legendary "Soong Sisters" married Chiang Kai-shek and another ended up as president of the People's Republic in 1968-72 -- this latter sister's death in 2003 made frontpage headlines all over the Mainland, where her passing was widely mourned. The third, and eldest, had married a finance minister in the early days of the first republic. Moreover, both Beijing and Taipei have always shared the same laundry list of territorial claims and had secret contacts to coordinate defense of  those claims date back to at least the early 1970s.

In addition, argument over whether Beijing or Taipei is the real government of China, whether Taiwan is an SAR or deserving of full independence are largely futile: the scale of cross-straights investments alone is such that the two economies already effectively function as a single unit. Nobody knows how much of each the other owns and there is only agreement that, whatever its size, it is way bigger than what Taiwanese laws allow.

On the refurbished Soviet-built Liaoning bought from Ukraine, Beijing says it's a "training and scientific research platform" where the term "scientific" should be replaced by "technological" and that seems true because it doesn't carry a single aircraft and western analysts say it will take about five years to become operational. An aircraft carrier with no aircraft is an "aircraft non-carrier". And the absence of any battle group to support it would seriously abbreviate its service life in a shooting war.

 

Thu, 10/11/2012 - 23:01 | 2879764 Muppet Pimp
Muppet Pimp's picture

Japan is on the right track, they need to secure themselves some new turf!  I will take Japanese quality over China junk any day of the week, bring back Japanese innovation in electronics like the good old days!  Little buzzed heer

Thu, 10/11/2012 - 22:55 | 2879733 Bicycle Repairman
Bicycle Repairman's picture

"It is estimated that the East China Sea region may hold as much as 160 billion barrels of oil."

Did Hubble include this in his estimate?

Thu, 10/11/2012 - 21:50 | 2879473 The Shootist
The Shootist's picture

They'll work it out...

Thu, 10/11/2012 - 20:51 | 2879315 DeadFred
DeadFred's picture

Why did this come to a boil now? Both the Shanghai and Nikkei are tanking and about to go over cliffs. What sort of drugs were the Japanese leaders taking when they thought this was a good idea? The pictures show they're fairly nice looking if you ignore the typhoons that blow through almost on a regular schedule, but they aren't worth the bother and everyone knew this for decades.

Tue, 10/16/2012 - 23:12 | 2897177 matrix2012
matrix2012's picture

@ DeadFred,  it's just part of currency wars...

 

Diaoyu Islands issue is INDEED a U.S. GAMBIT as retaliation against China due to RMB (renminbi or yuan) internationalization. The many bilateral swap agreements conducted by China with its major trading partners, incl. JPN, GER, RUS, SEA and so on to do the trade settlements using own currencies are perceived as disturbing the U.S. dollar status!

Read through the "Currency Wars" sequel by Song Hongbing, the vol. 1 (2007) has its rough translated ver into eng using google translator (not a neat translation but still provides some insights)... just dig the net piles.

 

Thu, 10/11/2012 - 20:44 | 2879300 SmittyinLA
SmittyinLA's picture

The islands are an easy fix, and a sideshow.  Jap car sales in China are falling because China is just now making their own cheaper ones, they'll learn just like the folks that had to try a Yugo and a beamer and a caddie.

Japan is quality, and everybody in China knows it, a boycot ain't gonna work, as a market, China is a herd of stray cats.

Thu, 10/11/2012 - 23:55 | 2879908 Arthur Borges
Arthur Borges's picture

Japanese car sales have been down 20% since the Diaoyu Islands flare-up, all to the benefit of BMW, GM and Hyundai -- all made locally.

If you have an easy fix for the dispute, then national leaders in Beijing, Taipei, Tokyo and Washington are all eager to hear from you.

Thu, 10/11/2012 - 20:44 | 2879299 SmittyinLA
SmittyinLA's picture

The islands are an easy fix, and a sideshow.  Jap car sales in China are falling because China is just now making their own cheaper ones, they'll learn just like the folks that had to try a Yugo and a beamer and a caddie.

Japan is quality, and everybody in China knows it, a boycot ain't gonna work, as a market, China is a herd of stray cats.

Fri, 10/19/2012 - 07:53 | 2903768 katezoe
katezoe's picture

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Thu, 10/11/2012 - 20:34 | 2879264 Septicus Maximus
Septicus Maximus's picture

Another worthless example of slapdash "me too!" analysis from a demonstrable know-nothing. 

The fact of the matter is, the strength of China's claim to the Senkaku islands is about as strong as Mexico's claim to Alcactraz. 

 

 

 

Thu, 10/11/2012 - 20:15 | 2879228 Lord Drek
Lord Drek's picture

Lol. Water cannon battle.

Thu, 10/11/2012 - 18:22 | 2879046 sethstorm
sethstorm's picture

You keep on referring to the Senkaku islands by the Chinese name.

Thu, 10/11/2012 - 19:05 | 2879102 EconMatters
EconMatters's picture

Is that not obvious?  I'm not from Japan. 

Thu, 10/11/2012 - 23:53 | 2879905 old naughty
old naughty's picture

Not from Japan...

This may offer an alternate perspective. Except someone should update it now that Russia is no show (real-ly)?

http://pillowsurgeon.blogspot.hk/2012/06/strip-mahjong.html

I am not sure if it was orignated from '68, '72 might be? Re-peat nevertheless.

Thu, 10/11/2012 - 22:50 | 2879714 suteibu
suteibu's picture

So, are you advocating for the PRC or Taiwan?  Or is Taiwan simply a special administrative region?

Thu, 10/11/2012 - 20:39 | 2879283 Septicus Maximus
Septicus Maximus's picture

Do you call the Falkland Island the "Malvinas" as well? 

Do NOT follow this link or you will be banned from the site!