China’s big stick: trade reprisals

by Michael Richardson

China’s ascent as a trading power and its push for control of disputed islands and seas in East Asia are confronting the region with a new challenge: how to cope with Chinese moves that make recognition of its sovereignty claims a condition for access to its huge market and strategic resources.

Japan, the United States and Europe have so far borne the brunt of Beijing’s policy of taking trade reprisals against countries perceived to contest its assertion of jurisdiction over Tibet, Taiwan and an extended area of the East China Sea.

Alarm bells started ringing when Japan reported last month that China had blocked shipments of key minerals for political reasons, after Tokyo detained a Chinese trawler captain in a bitter dispute between Asia’s two top economies over ownership of the Senkaku islands as well as valuable fisheries and seabed energy resources in the East China Sea.

The minerals, known as rare earths, are essential for many advanced civilian and military products. China supplies over 95 percent of global demand for rare earth oxides. Japan, the world’s largest importer, needs the minerals for its high technology manufacturing industry.

Japanese officials said it was the first time that China, Japan’s biggest trading partner, had imposed commercial sanctions in the East China Sea dispute.

Without naming China, 37 leading companies and business groups from the U.S., the European Union, Japan, South Korea, India and Brazil sent an open letter to the recent G20 summit in Seoul expressing alarm at rare earth restrictions and calling for an end to government “interference with commercial sale of rare earth elements, domestically or internationally, to advance industrial policy or political objectives.”

Although China has denied imposing an embargo, Japanese officials and rare earth industry sources say that all Chinese shipments of the minerals to Japan had been blocked since Sept. 21, when the long-standing East China Sea dispute flared anew. Following the expressions of concern from Japan and other leading economies, Japan’s Trade Minister Akihiro Okato said Nov. 13 on the sidelines of the APEC summit meeting in Yokohama that he had been assured by a senior Chinese official that rare earth exports to Japan would be accelerated.

Some shipments to the U.S. and Europe were also halted in mid-October, after the U.S. said it was bound to support its Japanese ally in any military crisis over the Senkakus.

In late October, most rare earth exports to China resumed to the U.S. and Europe, but not to Japan. If this was an attempt to divide Japan from the West, it has not worked. Prices for some rare earths have risen as much as nine times this year, as China cut export quotas and then imposed the overseas shipment bans, affecting all foreign consumers and increasing the likelihood of shortages.

Although Beijing has not used its trade muscle in the East China Sea sovereignty dispute before, it has used or threatened trade reprisals against countries allegedly violating Chinese territorial integrity over Taiwan and Tibet.

China became the world’s leading international trader last year. It is already the biggest single foreign trading partner not just of Japan but also of South Korea, Taiwan, ASEAN and Australia. China is projected to be the largest economic partner of every significant Asia-Pacific economy within the next decade.

Earlier this year, Beijing said it would penalize U.S. high-tech imports after Washington announced a major arms sale to Taiwan. In 2004, China suspended talks with Singapore on a free-trade agreement after Lee Hsien Loong visited Taiwan shortly before he became prime minister. Singapore said the visit was unofficial but it was highly publicized by Taiwan. The China-Singapore free trade agreement was eventually signed in 2008. This pattern of temporary trade punishment followed by normalization has also been applied by Beijing in relation to Tibet.

Recent research has shown that countries officially receiving the exiled Tibetan spiritual leader, the Dalai Lama, whom Beijing accuses of trying separate Tibet from China, are punished by cuts of as much as 12.5 percent in their high-value exports to China for periods of up to two years. The survey covered exports to China from 159 countries between 1991 and 2008.

The two German economists who did the research said that the linkage between Tibet sovereignty disputes and trade was established since President Hu Jintao became China’s leader in 2002. Hu’s rule has been marked by a surge of nationalism in Chinese foreign and defense policies, and also by China’s turbo-charged trade growth.

Asia’s export dependence on the Chinese market has risen sharply in recent years. For example, nearly one- fifth of Japan’s exports went to China in 2009, giving Beijing a significant trade lever that can be used for either political or commercial purposes.

Two-way trade between China and Japan rose 31 percent in the first nine months of 2010, to $216 billion, compared with the same period a year ago.

China has also become Southeast Asia’s largest foreign trade partner, buying 13.3 percent of the combined goods exports of the 10 member-states of ASEAN in 2009 and providing 10.1 percent of the group’s imports. ASEAN’s exports to China registered a 50 percent year-on-year growth in the first seven months of 2010, totaling $84 billion, according to China’s commerce ministry.

At the same time, China has been increasingly assertive in claiming ownership of contested islands in the South China Sea as well as some form of control over as much as 80 percent of the total sea area. The South China Sea is the maritime heart of Southeast Asia. It contains valuable energy and fisheries resources. It is also an important artery for international trade and the movement of naval vessels between the Pacific and Indian oceans.

Beijing has overlapping claims to the biggest group of islands, the Spratlys, with Vietnam, Taiwan, the Philippines and Malaysia. In the past few years, Beijing has told at least two major multinational energy companies, BP and ExxonMobil, to stop the search for oil and gas off Vietnam in waters claimed by China or be denied lucrative contracts in the Chinese energy market.

Given Beijing’s readiness to apply trade leverage in its sovereignty disputes, ASEAN policymakers will be watching closely to see whether China’s economic embrace of Southeast Asia leads to a squeeze rather than a hug in the South China Sea dispute.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.