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The Asian side of the world

Jean-François Sabouret

Part two. National challenges and their strategies to overcome them

Comparative studies on China and Japan

Denis Tersen

Texte intégral

1January 2005

2In April 2001, the Japanese authorities were worried about the rise of imported tatami mats, leeks and shiitake mushrooms from China, thus for the first time in their trading history they implemented clauses to protect their local producers. China retaliated with a 100% import tax on a few selected Japanese products (cars, air conditioners and mobile phones). After pretending to stand their ground, Japan gave in and will remove additional taxes on Chinese products. In 2003, Japan was once again the most dynamic economy in the G7, owing to its exportation of products to China. The threat from China had become an opportunity. In December 2004, the Japanese White Paper on defence strategy explicitly named China – along with North Korea – as a potential hostile power that was to be observed. Furthermore, Japanese companies no longer hesitated to sue their Chinese competitors in order to protect their copyrights. It was clear that the geopolitical and economic balance in North-East Asia was not stabile.

3Japan is not afraid to be assertive, and political factors are naturally present. The country is especially economically confident, thanks to their companies’ ability to find the solution to the challenge put forward by the Chinese, by striving to be at the top.

4The first step to their solution is based on economic integration. It is true that it was difficult to continue ignoring the two major rules of international commerce: the law of gravitation (“the closer my partner is, the more I will trade with him”) and the law of comparative advantages (“the more our economic structures differ, the more it is in our interest to trade”). Yet the choice to integrate their economies without restrictions was decided quite recently – in the late nineties. This integration stimulated a strong increase in Chinese products imported to Japan. In 1990 Chinese products represented 5% of Japanese imports. In 1999, they represented 138%, and in 2004, they increased to 20,5%. In the meantime, in 2002, China replaced the United States as the main supplier to Japan. The increased trade relations now work both ways. It is balanced by the growth in sales of Japanese products in China: + 28% in 2002, + 44% in 2003, + 30% during the first months of 2004. China absorbed 2% of Japanese exports in 1990, 5,6% in 1999 and 13% in 2004. If sales to Hong Kong are included, in 2004 China will receive the equivalent of 86% of exports bound for the United States. By the end of 2006, China/Hong Kong will be Japan’s biggest client.

  • 1 Figures from the Japanese Ministry of Finance.

5Economic integration also means foreign direct investment (FDI), essentially Japanese investments in China, although we are now seeing the first purchases of Japanese companies by Chinese firms. In 2002, less than 5% of the “global” FDI was invested in China, 8,7% in 2003 and 14,6% in 20041. While Japanese companies are careful not to put all their eggs in the Chinese basket and to keep up their investments in other East Asian countries, more than 50% of the Japanese FDI in Asia now goes to China.

  • 2 The concerns of Japanese business sector and Nihon Keidanren who called for a change in Jun’ichiro (...)

6Although political relations have hit a low since Prime Minister Koizumi took office, they have not prevented the two economies from working together. Yet it seems that poor political relations risk hampering trade dynamics2.

7The second element of the solution is “vertical” economic integration with Japan at the top of the hierarchy. Production is broken down and “modularised”. Products of high added value are made in Japan while those requiring intensive labour or of low added value are produced in China. For a range of products, the division of labour plays a full role. The more innovative products, which need to be introduced and validated by the Japanese consumer, have to come from Japan, while standard products are assembled or even entirely made in China. Thus Sino-Japanese exchanges are “vertically” organised through trading products that are integrated in the end product within the same company, unlike, for example, German-French relations, which are based on “horizontal” trade between industries, where partners trade equivalent products from competing companies.

  • 3 Source: METI, “Investigation” on the activities of Japanese companies abroad. (2003).

8Everything happens within the Japanese company and its network of pliable subcontractors, enabling it to fully benefit from the competitive advantage over Western companies, given its ability to manage the different phases of the production process while coordinating the entire chain of added value products in a strongly dependant relationship. This is illustrated the weak autonomy of the Japanese companies’ subsidiaries in China, when compared to the Chinese subsidiaries belonging to American and European companies, whose managers are not usually Chinese (28% compared to 46%), local research and development are more limited and concentrated on applied research, and the key components are imported3.

  • 4 Guillaume Gaulier et al., “China’s integration in Asian production networks and its implications”,(...)

9A consequence of this hierarchy of networks is that the technical gap between China and Japan remains wide, with Japan still in the lead. Between 1995 and 2002, Japan even increased its competitive lead, measured by the advantages it showed in the sectors of electronic components, car parts and telecommunication material, in comparison to its big neighbour. CEPII researchers recently recalled that, “it seems that Chinese technological improvements have remained strictly confined to basic production and exportation created in China by Asian companies4”, and mostly Japanese companies, one is tempted to add.

  • 5 Worldwide Electronics Market Research (Fuji Chimera Research Institute) quoted in the White Paper (...)

10The third Japanese solution to the challenge posed by the Chinese is to turn the impressive Chinese appetite for growth into Japan’s advantage by making China an instrument of world competition, whilst bearing in mind that global competition is with the United States and Europe. Consequently, priority is given to innovation in the race to occupy technological borders and everything hinges on Japan, on its model of industrial organisation, its element of competitiveness and the relationship that it maintains with the world’s most demanding consumers. “Flat screens and digital cameras are the holiday season’s big hits”, read the first page of the French newspaper Le Monde on Christmas day. For these products, Japanese companies dominate between 50 to 100% of the market, and their production process, such as that of high-tech digital products, are firmly rooted in Japan. Production accounts for more than 99% of all digital directories or car navigation systems, more than 80% of LED televisions and around 60% of DVD burners or digital cameras5.

11The race for Asian leadership, however, goes beyond a simple exchange of merchandise. Consumption models, J-Pop music and images, cultural creations and design are organised regionally, following the rhythm of Japanese trends. All of northern Asia is undergoing “Shibuya-isation”, named after the famous fashionable district of Tokyo. Hoping to become a “soft power”, Japan exports electronic products to its neighbours, which are wealthy consumers, but also the content used in the products. 80% of foreign visitors who visit the Ghibli museum in Tokyo, named after the production company of the famous cartoonist, Miyazaki, are Asian.

12The emergence of China through the sheer size of its population distorts our view of the country. Of course size counts in economics, especially when making comparisons. Japanese companies, nevertheless, remain dominant. Complementary factors between economies are more important than competitive factors, except for the increasing rivalry to develop access to energy sources and raw materials. In the long run, this gives some leeway to Japanese diplomacy, allowing it to take a late shot in the game of regional Asian integration, to ignore the positive and cooperative Chinese strategy and to stay close to the United States, as the rough relationship between the current “leader” and its future successor is developing. In the long run, this is where Japan must make its final choice. The country can rely on market integration to offer institutional cooperation and shared leadership to China, proving that “where there’s trade, there’s good manners.” In that case, Japan could be the bridge that unites the two shores of the Pacific, benefitting from its technological skills and its aptitude for hybridisation. Or on the other hand, in a new version of the Cold War partially fought in the field of economics, Japan could prefer a strategy of containment, serving as a relay for American power. Such a choice would not be the least risky for stability and prosperity in the region, not to mention the world.


1 Figures from the Japanese Ministry of Finance.

2 The concerns of Japanese business sector and Nihon Keidanren who called for a change in Jun’ichiro Koizumi’s anti-Chinese attitude.

3 Source: METI, “Investigation” on the activities of Japanese companies abroad. (2003).

4 Guillaume Gaulier et al., “China’s integration in Asian production networks and its implications”, RIETI Discussion Paper Series, 2004.

5 Worldwide Electronics Market Research (Fuji Chimera Research Institute) quoted in the White Paper on JETRO’s International commerce and direct investment abroad, 2004.

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