peace and security in east asia

The Pacific Review, Vol. 22 No. 2 May 2009: 205–232

The Senkaku/Diaoyu dispute and Sino-Japanese political-economic relations: cold politics and hot economics?

Min Gyo Koo

Abstract Can economic interdependence reduce conflicts among states in East Asia? The so-called ‘cold politics and hot economics’ has become a defining feature of Sino-Japanese political-economic relations. This puzzling pattern of interaction is clearly illustrated in the sovereignty dispute over the Senkaku/Diaoyu Islands. The island dispute has unfolded in five rounds of distinct clashes thus far. From one perspective, the competitive elements in the island dispute make it difficult for both Japan and China to give way to the other side on the territorial and maritime issues. At the same time, the two countries have successfully managed to contain their respective territorial and maritime claims thus far. Drawing on the liberal peace theory, this article systematically demonstrates that economic interdependence has repeatedly fostered the de-escalation of Sino-Japanese conflict over territorial and maritime rights.

Keywords Sino-Japanese relations; Senkaku/Diaoyu Islands; East China Sea; East Asian territorial dispute; liberal peace.

Introduction

Political wariness and rivalry have characterized postwar Sino-Japanese relations. Diplomacy continues to fail to ease deep mutual suspicions. Nevertheless, the two countries have forged closer economic ties, currently making them one of the most important economic partners for each other.1

Min Gyo Koo is Assistant Professor in the Department of Public Administration at Yonsei University, Korea. His areas of research interest include East Asian territorial disputes, the political economy of the Asia Pacific, and East Asian economic and security regionalism.

Address: Department of Public Administration, Yonsei University, Seoul 120-749, Korea. E-mail: [email protected]

The Pacific Review ISSN 0951-2748 print/ISSN 1470-1332 online C© 2009 Taylor & Francis

http://www.informaworld.com/journals DOI: 10.1080/09512740902815342

206 The Pacific Review

As one commentator notes:

There is a huge disconnect between the economic and political re- lations of China and Japan . . . Japanese business enthusiasm for the China economic miracle continues. But at the political level, there is no talk of integration. Rather, there is a stiffening back of nationalism in both countries.

(Gerald Curtis quoted in Marquand 2005)

The so-called ‘cold politics and hot economics’ (seirei keinetsu in Japanese or zhengleng jingre in Chinese) has thus become a defining feature of their bilateral relations.

Nowhere is this puzzling interaction more clearly illustrated than in the unsettled sovereignty dispute over a small group of rocks in the East China Sea. These offshore islands – known as Senkaku Retto (Rocky Hill Islands) in Japan and as Diaoyutai (Fishing Platform Islands) in China – are effec- tively controlled by Japan, but the Chinese challenge its sovereignty claim. The Senkaku/Diaoyu Islands may lack the same degree of strategic and eco- nomic value as the Paracel and Spratly Islands for China and the Northern Territories/Kurile Islands for Japan.2 Yet the competitive elements in the Senkaku/Diaoyu dispute, which has symbolic, political, economic, and his- torical significance, make it difficult for both China and Japan to give way to the other side on the territorial and maritime issues. Furthermore, a conces- sion of sovereignty over the Senkaku/Diaoyu Islands and nearby maritime zone could possibly jeopardize their respective claims to the other disputed islands.

Empirically, we see the Senkaku/Diaoyu dispute persisting, neither reaching a peaceful settlement nor escalating into a full-scale militarized conflict. Conventional explanations for this phenomenon have largely fo- cused on one or more of the following factors: the validity of contending historical evidence, domestic legitimization processes, competition for en- ergy and marine resources, historical animosities, and the role of the United States as an architect of the postwar Asian system. Despite their partial ex- planatory utility, these approaches cannot fully capture the continuing pat- tern of the rise and fall of conflict over the Senkaku/Diaoyu Islands.

This article argues that a liberal peace perspective offers a better account. The liberal peace argument hinges upon an assumption that economic in- terdependence fosters peaceful relations by giving states an economic in- centive to avoid costly military disputes. I show that both Japan and China have found it in their interest to de-escalate conflicts because of concerns over damaging their economic relationship, thus supporting a liberal peace interpretation.

The remainder of the study proceeds as follows. The second sec- tion characterizes the key feature of the Senkaku/Diaoyu dispute in the broad context of East Asian island disputes. After reviewing conventional

M. G. Koo: Cold politics and hot economics? 207

explanations, the third section develops an alternative thesis that links dif- ferent channels of economic interdependence to the prevention of inter- national conflict. From this liberal peace perspective, the fourth section examines the transition between, and conclusion of, five different rounds of clashes. To summarize the main findings, the initial impetuses of the is- land dispute tend to come from ultra-nationalist activities either in Japan or China, or both. At first, both Beijing and Tokyo used them to mobilize polit- ical support for their regime or particular policy goals. Eventually, however, both governments sought to minimize diplomatic damage, fearing that con- tending Sino-Japanese nationalisms could snowball into a larger, possibly destabilizing movement that would undermine bilateral economic ties. The fifth section draws conclusions and policy implications.

Characteristics of East Asian island disputes

East Asia is home to many of the world’s most vexing territorial disputes. There are at least thirty-five territorial dyads in the region contiguous on land or within 400 nautical miles (nm) – the sum of two hypothetical countries’ 200 nm exclusive economic zones (EEZs) – of water between their undisputed land territories. Most of these dyads have outstanding territorial disagreements with each other: China–Taiwan, China–Japan, China–Vietnam, China–Philippines, North Korea–South Korea, South Korea–Japan, Japan–Russia, Philippines–Taiwan, Thailand–Myanmar, Thailand–Cambodia, and Cambodia–Vietnam, among others.

The territories in dispute need not cover the entire soil of a particular country, as in the cases of the two Chinas and the two Koreas, in order to se- riously strain interstate relationships. Even small, barely habitable offshore islands can serve as the most persistent and explosive bone of contention. Aside from the Senkaku/Diaoyu dispute, examples of unresolved island disputes include competing sovereignty claims to the Dokdo/Takeshima Islands in the East Sea/Sea of Japan, the Northern Territories/Kurile Is- lands in the Northwest Pacific Ocean, the Islands of Sipadan, Sebatik, and Ligitan in the Celebes Sea, and the Paracel and Spratly Islands in the South China Sea.

In the East Asian Seas, few target countries, whose sovereignty claim is challenged by revisionist countries, recognize the existence of disputes at all, preventing claimant countries from engaging in negotiations. Further- more, a periodic pattern exists in the iteration of disputes with little indi- cation of early settlement. One can find examples of the aggressive use of military force and intransigent bargaining strategies. For instance, China has the most assertive and controversial claims to the Paracel and Spratly archipelagos. Although Vietnam is not the only party to the many territo- rial disputes with China, it has had the sharpest differences with its longtime archrival, particularly since China took the Western Paracel Islands by force from what was then South Vietnam in 1974 (Lo 1989).

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Despite regular outbreak of tension, military inaction and accommoda- tive diplomacy have equally been evident. For instance, the postwar dispute over the Dokdo/Takeshima Islands has shown a periodic pattern of continu- ity and mutual restraint. Although either natural resources or ultra-rightist activities have provided the initial impetuses for regular flare-ups since the early 1950s, both South Korea and Japan have followed restrained policies to prevent the island dispute from undermining bilateral economic relations (Koo 2005: 84–140).

A similar pattern is evident in the Senkaku/Diaoyu dispute. The first flare-up of the dispute started in late 1968 when the findings of a high probability of oil and gas deposits near the disputed islands made every- one scramble for energy. Yet the island issue gradually took a back seat by the end of 1971. The second round surfaced in a more serious manner in spring 1978, but both China and Japan successfully shelved the island issue towards the end of the same year. Catalyzed by lighthouses built on the is- lands by an ultra-nationalist Japanese group, the third and fourth rounds of dispute took place in September 1990 and in July 1996, respectively. However, by the ends of the respective years both governments once again sought to defuse the tension. Finally, the latest round in 2004 was catalyzed by a group of Chinese activists and further exacerbated by intense resource competition in the East China Sea throughout 2005. Although the latest flare-up effectively brought Sino-Japanese diplomatic relations to the low- est ebb, both countries again chose to exercise restrained policies for fear of escalating the sovereignty and resource issues out of control. How might we account for the pattern of a repeated rise of tensions and then subsequent de-escalation in the Senkaku/Diaoyu dispute? It is to this question that we now turn.

Conventional explanations and the liberal peace perspective

We can characterize existing explanations of the Senkaku/Diaoyu into three categories: (1) the first accounts for the dispute’s ongoing nature and mo- tivations for dispute escalation; (2) the second examines the factors that account for the mutual restraint that has repeatedly been shown in past dis- putes; and (3) the third attempts to account for periodic patterns of dispute escalation and de-escalation. Despite their partial explanatory utility, none of these traditional accounts fully explain the patterns we see. After review- ing the strengths and weaknesses of these different approaches, I develop a liberal peace hypothesis to account for the lacunae in these explanations.

Explanations for continuity and escalation

In this category of work, some arguments are based directly or indirectly on historical and cultural approaches to international relations. Symbolic at- tachment of territory to national identity and pride often makes territorial

M. G. Koo: Cold politics and hot economics? 209

conflicts all the more intractable and difficult to resolve. This can be the case even when pragmatic solutions – for example setting aside sovereignty claims in favor of shared ownership – may appear applicable in theory. From this perspective, China’s growing irredentist tendency, combined with Japan’s habit of glossing over its war past, increases the likelihood of territorial conflicts by fueling nationalist sentiments in its neighbors (Suganuma 2000: 3–10; Suzuki 2007: 23–47).

Other accounts within this category treat the Senkaku/Diaoyu dispute as a result of competition for locations of strategic and economic value. At a time of rising oil prices, this view contends that the island dispute has unfolded as an issue of resource nationalism concerning hydrocarbon po- tentials. Another tangible value of the disputed area lies in its potential to provide bases for air and naval operations. Given the growing economic and strategic value of the disputed maritime area, this perspective pre- dicts that China and Japan are likely to pursue maximal territorial demands frequently backed by the threat or use of force (Kenny 2004; Park 1973; Valencia 2000).

The validity of contending historical evidence – such as government documents and maps – provides a near constant source of turbulence at sea. Differing interpretations of international treaties – ranging from the 1895 Treaty of Shimonoseki to the 1951 San Francisco peace treaty – also serve as sources of heated debate (Hara 2001). The global trend to adopt the United Nations Convention on the Law of the Sea (UNCLOS) fur- ther complicated the picture in the East China Sea, as both Japan and China ratified it in 1996. Negotiating with each other over how to de- marcate the overlapping claims of their respective 200 nm EEZs near the disputed islands became the hottest area of contention. Yet neither side presents conclusive evidence of territorial and maritime boundaries, which in turn provides a constant source of differences (Austin 1998; Matsui 1997; Park 1973).

In sum, most explanations in this category of work predict that the Senkaku/Diaoyu dispute would likely continue and escalate, as long as both material and symbolic, as well as legal and historical, issues remain unre- solved. However, these claims do not stand up to scrutiny, as all the pre- vious flare-ups have eventually been calmed rather than further escalating out of control.

Explanations for mutual restraint

In contrast to the first category of work, structural accounts explain why the tensions surrounding the Senkaku/Diaoyu Islands have not spun out of control. From this perspective, the Sino-Japanese dispute over the islands almost certainly involves the United States as a hegemonic power balancer. Through its alliance and commitment to defend Japan, the United States has allowed Japan to avoid direct confrontation with China, thus ensuring

210 The Pacific Review

that Sino-Japanese disputes take place within certain confines (Blanchard 2000; Hara 2001; Lind 2004).

However, US preponderance has not necessarily facilitated a Pax Americana. The pacific role of the United States vis-à-vis East Asian island disputes remains inherently limited. The US government has taken a neu- tral stance over these disputes, claiming that America’s involvement could in no way prejudice any underlying claims and that any conflicting claims are a matter for resolution by the parties concerned (Hara 2001: 376–80; Park 1973: 233).

Furthermore, existing structural accounts for mutual restraint do not adequately capture the rise of China as the biggest source of structural un- certainty in contemporary East Asia. Although not all draw worst-case con- clusions about a nascent China threat, uncertainty about the ways in which a more capable China would employ its power has made everyone scramble (Christensen 2006; Friedberg 2005; Goldstein 2005). During the Cold War period, the United States and the Soviet Union both had geopolitical inter- ests of their own, but not territorial ambitions. By contrast, China presents a different landscape to the future of East Asian territorial disputes since it has both geopolitical and territorial ambitions.

The evidence is mixed on China’s territorial ambitions. Johnston (1998: 1–30) contends that China is more likely to resort to force when disputes involve territory and occur in periods where the perceived gap between as- cribed and desired international status is large or growing. However, Fravel (2005: 46–83) argues that China has been more cooperative and peaceful in its territorial disputes than is commonly believed. He finds that China has participated in twenty-three unique disputes with its neighbors on land and at sea since 1949, of which it has settled seventeen disputes peacefully.

Explanations for repeated ups and downs

To better understand the repeated ups and downs of the Senkaku/Diaoyu dispute, the third category of work opens up the black box of the domestic decision-making process. From this perspective, the timing and the manner in which dispute escalation has taken place have been driven by domestic actors, especially state elites and opposition groups, who attempt to defend and enhance domestic legitimacy and public support for their regime or particular policy goals. Many scholars in this camp thus explore how state elites’ desire to remain in office allows domestic coalitions and/or electoral politics to influence their decisions on conflict behavior (Bong 2002; Chung 2004; Deans 2000; Downs and Saunders 1998–99; Fravel 2005; Hagström 2005).

At a time of legitimacy deficit, state elites in both China and Japan have indeed shown a tendency to resort to aggressive territorial policies in or- der to capitalize on nationalist and irredentist sentiments. For instance, at the early stage of the 1996 flare-up, the Chinese government supported the

M. G. Koo: Cold politics and hot economics? 211

public who were upset by the landings of Japanese ultra-nationalists on the disputed islands. In the wake of a series of anti-Japanese protests in China, Vice-Premier Zhu Rongji strongly accused Japan of failing to comprehend China’s sensitivity over the islands issue, presumably in order to display his patriotism. In the middle of the 1996 flare-up, Japanese Prime Minister Ryutaro Hashimoto and his party cohorts were not in a position to show a conciliatory attitude either, as they faced a general election on 20 October that year.

Conversely, when political leaders in both countries enjoy a surplus in political capital or face no major elections, they may take a more prag- matic stance to promote tangible diplomatic and economic gains. During his tenure after 1978, for instance, Deng Xiaoping reiterated China’s claim to the islands, but recognized that it was dangerous to press Japan too hard on the territorial front. He believed that cooperation with Japan was critical not only for China’s economic development, but also for his own domestic power position. In October 1978, Deng thus made an important statement:

It is true that the two sides maintain different views on this question . . . It does not matter if this question is shelved for some time, say, ten years. Our generation is not wise enough to find common language on this question. Our next generation will certainly be wiser. They will certainly find a solution acceptable to all.

(Quoted in Lo 1989: 171–2)

Taken together, these explanations provide an important insight. When forced to choose, both Chinese and Japanese leaders tend to pursue eco- nomic gains at the expense of their nationalist credentials. Yet what is strik- ing is that few studies in this camp have been clearly linked to international relations theory. Therefore, we now turn to the liberal peace theory which offers a novel causal mechanism that links economic interests to the pre- vention of interstate disputes.

The liberal peace theory

The question of liberal peace has long puzzled international relations schol- ars, as the causal links between economic interdependence and conflict are neither simple nor self-evident. Liberals would argue that the territorial dis- putes remain a potential source of conflict, but their salience has been in steady decline as a result of increasing economic interdependence. Realists remain skeptical about the mitigating influence of economic interdepen- dence and emphasize the conflictive aspects of international transactions. An examination of the empirical literature indicates that one can easily find support for either positive or negative aspects of economic interdependence (Barbieri 2002; Mansfield and Pollins 2003; McMillan 1997; Oneal and Russett 1997; Polachek 1992).

212 The Pacific Review

Early arguments that connected economic interdependence with less conflict date back to the seventeenth and eighteenth centuries. As found in the writings of David Hume, the Baron de Montesquieu, Adam Smith, Richard Cobden, John Stuart Mill, and Immanuel Kant, classical liber- als hoped that the rejection of mercantilism and the strict limitation on sovereign states’ intervention in private, entrepreneurial activities would diminish the temptation to impose their own conflicts upon other states (Doyle 1997: 233–4).

Angell (1910), who argued that war, by destroying trade ties, is ‘commercially suicidal’, restated this view in the early twentieth century. Theories about complex economic interdependence carried such integra- tion arguments one step further (Keohane and Nye 1977). Rosecrance (1986) argues that modern conditions push states to be ‘trading states’ rather than ‘territorial states’ obsessed with territorial expansion. Though not all contemporary adherents of liberal peace go as far as Ohmae (1990), who asserts that the world is now ‘borderless’, it is commonly accepted that territorial borders are declining in economic significance (Strange 1996).

Realists turn liberal peace theory on its head. They argue that economic interdependence not only fails to promote peace but actually heightens the likelihood of conflict because interdependence tends to foster asymmetric dependence and inequality between economic partners. It is most likely that asymmetric dependence confers unequal power to the less dependent country. The advantageous bargaining position of the less dependent coun- try may be used to gain economic and/or political concessions. Conversely, asymmetric interdependence can foster aggressive action from the more de- pendent country, particularly when its leaders attempt to divert public frus- tration and aggression toward an outside target (Gasiorowski 1986; Heldt 2003).

According to Waltz (1970), increased interdependence at the system level leads only to increased conflict because increased contact creates poten- tial opportunities for discord. Furthermore, state actors under anarchy must worry that others will gain more from cooperation than they will, as those relative gains might later be turned into military advantage (Grieco 1990). Under these circumstances, states may choose to trade with allies in order to avoid granting the gain from trade to adversaries (Gowa 1994). For real- ists, the inference that trade promotes peace is spurious, because the condi- tions that facilitate trade – such as nuclear deterrence and military alliance – simultaneously promote peace.

Against this theoretical backdrop, this study tests a liberal peace hypothesis for the Senkaku/Diaoyu dispute. I hypothesize that if China and Japan have low (high) levels of trade ties, they are more (less) likely to esca- late the territorial dispute to higher levels of hostility. The Senkaku/Diaoyu case is particularly interesting not only because the two countries have en- gaged in various patterns of behaviors, both conflictive and cooperative, in addressing their respective territorial claims but also because their bilateral

M. G. Koo: Cold politics and hot economics? 213

economic interdependence has varied significantly over time, thus provid- ing an ideal laboratory to test the liberal peace argument.

Different studies use a wide variety of indicators of trade interdepen- dence – such as trade volumes and values, systemic trade levels, trade as a proportion of GDP, elasticity of supply and demand, and the trade of strate- gic goods. One of the simplest but most useful ways to measure bilateral trade interdependence is to construct a trade dependence index, defined as the bilateral trade flows (the sum of imports and exports) as a pro- portion of GDP (Barbieri 2002: 56–8).3 Drawing on these data, I test whether or not bilateral trade ties are negatively associated with levels of hostility, although not econometrically. I supplement this approach with qualitative analysis to investigate the causal influence of bilateral eco- nomic interdependence on the repeated patterns of dispute escalation and de-escalation.

The evolution of the Senkaku/Diaoyu dispute

The first flare-up in 1968–71

Initiation and escalation

The initial impetus of the first flare-up of the Senkaku/Diaoyu dispute came in late 1968. A geological survey, conducted by the Committee for Coordi- nation of Joint Prospecting for Mineral Resources in Asian Offshore Areas (CCOP) under the auspices of the United Nations Economic Commission for Asia and the Far East (UNECAFE), suggested that ‘a high probabil- ity exists that the continental shelf between Taiwan and Japan may be one of the most prolific oil reservoirs in the world, with potential estimated at between 10 to 100 billion barrels’ (1968: 39–40).

The UNECAFE report caused a great sensation among the oil-hungry coastal states. In a pre-emptive move, the Taiwanese government and the Gulf Oil Corporation entered into a concession contract in July 1970 to develop oil from an area that included the disputed islands. Tokyo issued a grim warning to Taipei, while indicating that it was willing to negotiate the question of the adjacent continental shelf with Taiwan. In December 1970, Japan and Taiwan (as well as South Korea) formed the United Oceanic Development Company and agreed to freeze the sovereignty issue for later resolution (Park 1973: 227–9).

However, Chinese intervention abruptly terminated the development boom. Beijing claimed that the Senkaku/Diaoyu Islands (and Taiwan) were China’s sacred territory and that foreign exploitation of the area would not be tolerated (Park 1973: 232–3; 1983: 107). The conclusion of the 1971 Okinawa Reversion Agreement between the United States and Japan in- creased the tension even further. Taiwan held the position that Okinawa was not Japanese territory and opposed its reversion to Japan. China also

214 The Pacific Review

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216 The Pacific Review

criticized this reversion, while calling it a fraud because the US military remained on the islands (Hara 2001: 376–80; Park 1973: 233).

The initiation and escalation period lacked deterring economic forces. Before the Sino-Japanese diplomatic rapprochement of 1972, their mutual economic dependence was insignificant at best, as indicated by the low lev- els of trade dependence scores at less than 1 per cent of their respective GDPs (see Table 1). Contending resource nationalisms aside, the liberal peace theory anticipates dispute escalation in the absence of the mitigating force of mutual gains from trade. The actual outcome during this period is in accordance with such a prediction.

De-escalation

Despite a series of Chinese protests between late 1970 and early 1971, the island issue began to take a back seat from March 1971 in favor of get- ting on with more pressing geopolitical and economic affairs. Both Japan and the United States quickly responded to the Chinese protests. On 11 March Tokyo clearly signaled that, in order to avoid friction with Bei- jing, attempts to develop oil from the disputed area would be suspended and that the return of Okinawa to Japan by the United States would be delayed until May 1972. In addition, Tokyo wanted to defuse the ten- sion with Beijing in the middle of the Japan–Taiwan de-recognition cri- sis and the negotiations for Sino-Japanese normalization (Hara 2001: 376- 80; Park 1973: 233). At first, Washington supported the Japanese claim but it then decided to take a neutral stance over the dispute, which it has maintained ever since, claiming that America’s involvement could ‘in no way prejudice any underlying claims . . . The United States . . . considers that any conflicting claims are a matter for resolution by the parties concerned’ (quoted in Park 1973: 255). The obvious intent was to pre- vent the oil dispute from affecting the détente between Washington and Beijing.

In hindsight, increasingly positive expectations about the Sino-Japanese economic relationships began to take a front seat at the turn of the 1970s, thereby shelving territorial issues as well as other thorny bilateral prob- lems. During this period, the increase in bilateral trade was remarkable. Ac- cording to Chinese statistics, its imports from Japan expanded from US$3 million in 1960 to US$636 million in 1971, while its exports to Japan in- creased from US$19 million to US$293 million in the same period. China’s trade dependence on Japan thus broke the one percentage point in 1972 (see Table 1). It is quite plausible that a steady growth in commercial ties provided the backdrop for the 1972 normalization of the quasi-enemy re- lationship, and the abrupt de-escalation of the first round of the island dispute.

M. G. Koo: Cold politics and hot economics? 217

The fishing expedition and the 1978 flare-up

Initiation and escalation

The island dispute surfaced again in a more serious manner in spring 1978. It was closely related to the Peace and Friendship Treaty (PFT) negotiations, the process of which had been delayed by a number of factors including the death of Mao Zedong in 1976, the post-Mao succession struggle, and the Japanese reluctance to accept the Chinese proposal to include an ‘anti-hegemony’ clause in the PFT to counter the Soviet threat (Park 1976: 476–90).

The initial impetus for the 1978 flare-up came on 7 April 1978 when a group of anti-PFT Japanese politicians, consisting mostly of right-wing and pro-Taiwan Liberal Democratic Party (LDP) members, urged that the Senkaku/Diaoyu matter be resolved as part of the PFT negotiations. During this period, the Soviet Union was negotiating a similar treaty with China’s arch-enemy, Vietnam. These Japanese politicians believed that China would desperately need Japan’s support for the anti-hegemony clause, thus motivating Beijing to compromise over the offshore islands (Tretiak 1978: 1241). However, raising the sovereignty issue at a very sen- sitive moment in the PFT negotiations caused a virtual collapse of the talks and the contending issue of Senkaku/Diaoyu soon became the focus of the day.

Deng Xiaoping seized power after Mao’s death in China. His immedi- ate reaction was to escalate the island issue. On 12 April 1978, more than 100 fishing trawlers bedecked with Chinese national flags reached the area and more than thirty of them entered the islands’ 12 nm territorial sea. Allegedly under the People’s Liberation Army Navy’s (PLAN’s) command, the presence of Chinese vessels sharply increased the level of tension. It was in fact China’s clear show of intent that it would not tolerate Japanese ter- ritorial claims even at the risk of jeopardizing PFT negotiations. Following the fishing expedition, the Chinese side ignored all Japanese demands for talks on the disputed islands (Tretiak 1978: 1242–3).

The 1978 clash demonstrated how Japanese ultra-nationalist groups could hijack the Sino-Japanese relationship. In a rare demonstration of na- tional solidarity on matters with respect to China, all major Japanese politi- cal groups rallied around the flag and endorsed the Japanese government’s denouncement of the Chinese fishing expedition (Tretiak 1978). In August 1978, Seirankai (Blue Storm Group) attracted public attention when its ultra-nationalist members erected a makeshift lighthouse on Uotsuri Island in the Senkaku/Diaoyu group, apparently without government opposition (Mutsuko 1996). Although the construction of the lighthouse did not aggra- vate the situation any further, it would become a focal point of the island dispute a decade later.

218 The Pacific Review

De-escalation

Despite the growing domestic pressures on both sides for a more aggressive, definitive territorial policy, neither Tokyo nor Beijing wished to exacerbate the already tense situation. Although greatly embarrassed by the fishing expedition and intense public outcry at home, the Japanese government appealed for calm, making it clear that it would not resort to military force to deal with the Chinese fishing operation. On 27 May 1978, in an attempt to defuse the tension that had built up over a period of weeks, Japanese Prime Minister Takeo Fukuda announced that his government had decided to resume PFT talks with China (Chung 2004: 40; Tretiak 1978: 1243).

The Chinese government took a reciprocal step towards de-escalation as well. At a meeting with a group of journalists in May, Deng Xiaoping reiterated China’s claim to the islands, but also promised that incidents like the April fishing expedition would not occur again. For Deng and his co- horts in the Chinese Communist Party (CCP), it was dangerous to press Japan too hard on the territorial front, as cooperation with Japan was crit- ical not only for China’s economic development but also for their own do- mestic power position (Chung 2004: 38–41). The negotiations for the PFT finally resumed on 18 July and the 1978 flare-up ended abruptly when the two countries made a diplomatic breakthrough in Beijing on 8 August, thus shelving the island issue (Tretiak 1978: 1246–7).

From one perspective, such a dramatic turn of events can be attributed to the unique geopolitical circumstances in East Asia towards the end of 1978. The Chinese mood was slightly more conciliatory by the end of summer 1978 than it had been in spring partly because of the severe security threat posed by a renewed Soviet–Vietnamese alliance. By working so hard on the anti-hegemony clause, Chinese leaders impressed their Japanese coun- terparts with Beijing’s seriousness about containing Soviet expansionism by improving Sino-Japanese relations (ibid.: 1237–9).

A closer look at the economic relations between China and Japan re- veals that another pacifying force had already begun working. Although it was not until December 1978 that Deng Xiaoping officially announced a new open door policy, the transformation of China’s economy had already started months earlier. His new initiatives fundamentally altered the con- text through which Chinese and Japanese elites calculated their strategies vis-à-vis the island dispute. Some numerical illustrations make the point clearer. After the 1972 Sino-Japanese diplomatic rapprochement, Sino- Japanese economic interdependence began to take off. Between 1972 and 1978, China’s trade dependence on Japan as a share of GDP increased from 1.01 per cent to 3.27 per cent (an increase of 240 percentage points), while Japan’s trade dependence on China increased from 0.37 per cent to 0.53 per cent (an increase of 43 percentage points). These trade dependence scores indicate that bilateral trade became more significant than previously for both China and Japan. At the same time, Sino-Japanese bilateral economic

M. G. Koo: Cold politics and hot economics? 219

relations took an asymmetric path. During the same period, China’s trade deficit against Japan also increased dramatically from US$227 million to US$1.4 billion. As indicated by the widening gap between their respective trade dependence scores, China depended on Japan for trade more than Japan did on China (see Table 1).

On the whole, the positive influence of growing bilateral trade ties out- weighed the negative impact of inequality. Within the policy circles both in China and Japan, it was increasingly recognized that the sovereignty question could possibly jeopardize the PFT negotiations, thus undermining prospective economic gains. After the 1978 clash, shelving territorial claims for economic development seemingly became the two countries’ diplomatic leitmotif in their treatment of the island dispute (Chung 2004: 38; Tretiak 1978: 1247–8).

The first lighthouse incident in 1990

Initiation and escalation

Perhaps the passage of a dozen years was not enough to make political leaders in both countries ‘wiser’ to find common ground with respect to the island dispute. On 29 September 1990, Japan and China clashed again when the Japanese government reportedly accepted an application filed by a right-wing group, Nihon Seinensha (Japan Youth Federation), which sought official lighthouse status for a beacon that Seirankai had built in 1978. Nihon Seinensha repaired the lighthouse in 1988 and 1989 to meet the Japanese Maritime Safety Agency’s (JMSA’s) technical standards, and applied for official recognition (Downs and Saunders 1998–99: 128).

Initially, the 1990 flare-up concerned only Tokyo and Taipei, leaving Beijing outside of the dispute arena. Taipei swiftly issued a statement that it would not tolerate Japanese invasion of Chinese territory (Chung 2004: 42). On 21 October 1990, a group of Taiwanese activists attempted to land on the disputed islands to place an Olympic torch as a symbol of Taiwanese sovereignty against the Japanese lighthouse. The JMSA kept their boats away from the islands, subsequently provoking a series of anti-Japanese demonstrations in Taiwan and Hong Kong. The first lighthouse incident thus demonstrated again how domestic groups could use the sovereignty issue to embarrass their own and other governments. These groups played a central role in driving the dispute beyond political leaders’ control ever since they had contributed to the precipitation of the 1978 crisis (Deans 2000: 124–6).

It was not until 18 October that Beijing began condemning Tokyo’s inten- tion to recognize the lighthouse and demanded that the Japanese govern- ment restrict the ultra-nationalist activities of its citizens (Bong 2002: 28). During the early stage of the first lighthouse incident, Beijing did not take any immediate action against Japan, probably owing to its low international

220 The Pacific Review

status after the Tiananmen Incident of June 1989 and its reluctance to fur- ther antagonize Japan. The initial low-key response severely undermined the CCP’s nationalist credentials. Citizens in Beijing who belatedly learned about the dispute vented their anger towards their leaders who they be- lieved had failed to live up to their nationalist rhetoric in a desperate move of begging for Japanese loans (Downs and Saunders 1998–99: 131–2).

In addition, the geopolitical vacuum left by the sudden collapse of the Soviet Union made the Chinese political elites anxious about their political future. Furthermore, the latter half of 1990 witnessed the start of the Gulf War and heated debate in Japan about its doomed Gulf Cooperation Bill (GCB) that would have dispatched Japanese Self Defense Forces (SDF) to the Persian Gulf, albeit in a non-combatant capacity. Viewing the GCB debate and JMSA action to recognize the lighthouse as more than a sheer coincidence, the Chinese leadership began mounting a major propaganda campaign against Japan to shore up its threatened legitimacy (Chung 2004: 42; Downs and Saunders 1998–99: 127).

De-escalation

After the initial and brief squabble, Japan and China both chose de- escalation as the norm to govern their differences in the East China Sea. On 23 October 1990 Japanese Prime Minister Toshiki Kaifu promised that Japan would adopt a cautious attitude in dealing with the lighthouse ap- plication. A week later, diplomats in Beijing and Tokyo announced that both countries had agreed to quietly drop the dispute and avoid further provocative actions. In April 1991, the 1990 lighthouse flare-up formally ended as the Japanese government rejected the lighthouse application by Nihon Seinensha (Bong 2002: 30; Shaw 1999: 17).

For the Chinese elites, weighing the risks and benefits of de-escalating the controversy about the disputed islands was a complex task. Because of their extremely strained power positions both domestically and internationally, the pro-reform elites had to deal with the dual burden of balancing nation- alist and pragmatic foreign policy goals. A clash of nationalism with Japan would have impeded China’s diplomatic effort to break from the shadow of the Tiananmen Incident. At the same time, greatly alarmed by grow- ing domestic discontent and criticism, Chinese leaders began tightening do- mestic control to prevent public anger towards the lighthouse incident from translating into regime disapproval (Bong 2002: 35–8; Downs and Saunders 1998–99: 131–2).

As it turned out, the intricate dependence of China’s economy upon Japan made Beijing take a more tempered approach to the Japanese claim to the disputed islands. As of 1990, the Chinese economy hit rock bottom following the opening up of its economy in 1978. Its real GNP grew at a rate of 1.8 per cent during the first half of 1990, state enterprises posted losses of US$3.2 billion (twice the 1989 total), and rural unemployment soared

M. G. Koo: Cold politics and hot economics? 221

(Shambaugh 1991: 44). Inflows of foreign investments slowed to a trickle as the World Bank and the Asian Development Bank froze billions of dollars of loans in an effort to censure Beijing’s brutal massacre of pro-democracy advocates in 1989 (Downs and Saunders 1998–99: 127–8).

Japan warmly received China’s genuine effort to shelve territorial claims for economic development. As a de facto owner, Japan had more to lose than China by escalating the sovereignty dispute because it might call for international arbitration or adjudication. In addition, having endured heated criticism from the West when it had decided not to join the US-led embargo against Beijing for the June 1989 massacre, Japan did not want to risk worsening its relations with China. Japan also wanted to reassure China that the GCB debate did not indicate a resurgence of Japanese militarism (Bong 2002: 34–5).

In November 1990, Japan – China’s only dependable source of capital at that time – signed a new loan agreement. China had been the largest re- cipient of Japanese official development assistance (ODA) since 1979, and Japan’s ODA to China in 1990 alone amounted to US$723 million in loans and grants (Chung 2004: 43; Downs and Saunders 1998–99: 115–17). Indeed, the first half of the 1990s was an economic honeymoon between China and Japan. China’s trade with Japan increased sharply, with total values rising from US$1.9 billion in 1990 to US$5.7 billion in 1995 (see Table 1).

In April 1992, Chinese President Jiang Zemin visited Japan to assure the Japanese government of Beijing’s commitment to more market-oriented economic development and to assuage the growing concern over the new signs of rising nationalism in China. He also advocated the so-called 1978 formula for the Senkaku/Diaoyu issue as ‘a realistic approach that dodged the contradictions while preventing from hurting each other’s feeling’. Pre- sumably in return for Jiang’s efforts, Tokyo finally accepted his request for ¥700 billion in the form of financial assistance for its oil and coal develop- ment projects (Bong 2002: 45–50).

The second lighthouse incident in 1996

Initiation and escalation

The mutual restraint that had shelved the first lighthouse incident did not last long as the island dispute reared its head again in the summer of 1996. Another lighthouse built on one of the islands by Nihon Seinensha provided the initial impetus for the 1996 flare-up. The picture became much more complicated with the introduction of the UNCLOS and the fluid geopoliti- cal conditions in the mid-1990s. The 1996 flare-up turned out to be far more serious in terms of its political salience and its level of hostility than were its predecessors.

On 14 July 1996, seven members of Nihon Seinensha erected a new lighthouse on Kita-kojima Island in the Senkaku/Diaoyu group, and

222 The Pacific Review

subsequently requested that the JMSA designate it an official navigational post (Mutsuko 1996). Having confirmed the landing of Japanese activists on the islands, China demanded that the Japanese government make clear its official stance on the ownership of the islands. The Japanese govern- ment immediately denied its involvement in the incident, but added fuel to China’s suspicion by declaring its EEZ, which included the disputed is- lands, as a part of Japanese territory (Chung 2004: 43–4). Japanese Prime Minister Ryutaro Hashimoto’s visit to the Yasukuni shrine on 29 July 1996 further heightened tensions. On 28 August, Japanese Foreign Minister Yukihiko Ikeda dropped a diplomatic bombshell during his visit to Hong Kong by asserting that ‘The Senkaku/Diaoyu Islands have always been Japan’s territory; Japan already effectively governs the islands, so the terri- torial issue does not exist’ (quoted in Downs and Saunders 1998–99: 134). Ikeda’s ill-timed statement galvanized Chinese nationalism everywhere: the ‘Protect the Diaoyu Movement’ in Hong Kong, Taiwan and the North American Chinese community, and the anti-Japanese activities in China, once again went into full swing (Chung 2004: 46).

Ikeda’s provocative but measured statement, and growing discontent among the Chinese both on the mainland and abroad, forced Beijing to issue a stern warning to Japan. The Chinese Foreign Ministry condemned Ikeda’s remarks as irresponsible, and stressed that the actions of ultra- nationalist Japanese groups were related to the Japanese government’s attitude (Kyodo News 1996). In addition, the Chinese Foreign Ministry de- nied the possibility that Japanese loans would alter China’s sovereignty claims, while stating that Japanese yen loans were helpful for promoting Sino-Japanese economic cooperation and trade, but as far as the issue of sovereignty was concerned, the Chinese government could not make any compromise. The Chinese government also turned a blind eye to Chinese news media awash with anti-Japanese propaganda, presumably in order to counter criticism about its softness towards the sovereignty question be- cause of its valuable trading ties with Japan (Chung 2004: 48).

In September 1996, a series of abrasive behaviors in the East China Sea escalated the initial squabble to a serious diplomatic crisis. On 4 September, the JMSA forcefully detained a Taiwanese fishing boat near the disputed islands. The Taiwanese Foreign Ministry protested at Japan’s use of force. Two days later, the JMSA drove out Hong Kong TV crews near the islands. On 9 September, members of Nihon Seinensha returned to the islands to repair the new lighthouse, which had been damaged by a typhoon. The next day they reapplied for official recognition of the lighthouse. On 13– 14 September, the PLAN practiced blockades and landings on islands off Liaoning Province – acts which were allegedly intended to warn Tokyo against further incursions on the Senkaku/Diaoyu Islands (Downs and Saunders 1998–99: 135).

Aside from the long-running symbolic contests over the sovereignty issue, the material value of the disputed maritime area became particularly

M. G. Koo: Cold politics and hot economics? 223

salient in 1996, as both countries engaged in the final process of ratifying the 1982 UNCLOS, which finally came into effect in November 1994. The UNCLOS considerably expanded national maritime boundaries through the adoption of a wider definition of territorial waters, continental shelves, and EEZs. Negotiating with each other over how to demarcate the overlap- ping claims of their respective EEZs in the East China Sea quickly became a source of contention, placing the Senkaku/Diaoyu issue once again under the spotlight. In early 1996, both Beijing and Tokyo had already begun rein- forcing their claims over this area, while indicating that they would not mind announcing their respective EEZs unilaterally. It was not a coincidence that an increasing number of controversial seabed resource surveys conducted by Chinese vessels met Japanese protests during this period (Bong 2002: 60–1).

The unstable geopolitics also contributed to the escalation of the 1996 flare-up. China’s assertive nuclear tests in the first half of the 1990s seriously strained Sino-Japanese diplomatic relations. After the test in October 1993, Tokyo became concerned with China’s nuclear tests despite its anti-nuclear rhetoric in the past. Following another test conducted in June 1994, Tokyo immediately warned Beijing that the continuation of its nuclear weapons program would prompt Japan to use its economic aid program as an instrument of advancing Japan’s strategic interests. Nevertheless, Beijing conducted three additional rounds of nuclear tests from October 1994 to August 1995, showing that it had no intention of sacrificing sovereign rights in exchange for economic aid (Takamine 2005: 445–6).

The 1995–96 Taiwan Strait crisis further aggravated Beijing’s relations with Tokyo as well as Taipei and Washington. The crisis reached its high- est point in early 1996, shortly before the presidential election in Taiwan, as China continued its military bluffing to intimidate pro-independence Taiwanese voters and the United States sent two aircraft carriers to the vicinity of the Taiwan Strait. China clearly influenced Taiwan’s assessment of the costs of independence and succeeded in reassuring the United States in relation to the ‘One China policy’. Yet China’s threat to use force greatly alarmed Japan and the United States, thus motivating them to further strengthen their mutual security ties in the form of the renewed defense guidelines of 1997 (Ross 2000: 87–123).

Against the background of contending resource nationalisms and fluid geopolitics, anti-Japanese sentiment sharply increased following the death of David Chan, a pro-China activist from Hong Kong who drowned on 26 September after jumping in the water when the JMSA prevented his boat from landing on the disputed islands. Chan’s death inspired large-scale anti- Japanese protests and boycotts in Hong Kong, Taiwan and North America, and prompted a second and more successful attempt by Hong Kong and Taiwanese activists to plant their national flags on the islands in October (Downs and Saunders 1998–99: 135).

224 The Pacific Review

De-escalation

The death of David Chan prompted both Beijing and Tokyo to quickly bring the 1996 flare-up under control. Despite combative rhetoric, both governments became increasingly concerned that the level of their mu- tual hostility had reached one of its highest points since their diplomatic rapprochement in 1972. Despite the successive disruptions by Chinese activists near and on the islands in October, reactions from Tokyo be- came remarkably restrained. China’s ruling elites were also alarmed by the burgeoning ‘Protect the Diaoyu Movement’ across the major cities in China. Although the government crackdown on this movement prompted accusations that the Chinese leadership was illegitimate and unpatriotic, Beijing wasted no time in minimizing the effects of the death of David Chan (Bong 2002: 83–4; Chung 2004: 49–50; Downs and Saunders 1998–99: 137– 8).

Both governments carefully prevented political activities from igniting antagonism on the other side. Japanese Prime Minister Hashimoto’s visit to Beijing in September 1997 and Chinese Premier Li Peng’s reciprocal friendly gesture in November manifested their mutual efforts to restore good Sino-Japanese ties. The immediate payoff was a new bilateral fishery agreement signed on 11 November 1997. The new fishery agreement chose to shelve the thorny sovereignty issue, while the areas near the disputed islands became subject to tight and carefully coordinated management by both governments (Bong 2002: 90–1).

How can we explain such a dramatic turn of events? Of course, in con- trast to its more assertive actions in the South China Sea, military action has never been a feasible option for China to resolve the Senkaku/Diaoyu dispute because of the balance-of-power politics in the East China Sea (Goldstein 1997–98: 52–4).4 Yet a closer examination of the de-escalation process of the 1996 flare-up also reveals that economic considerations strongly motivated the adoption of a conciliatory policy, despite strong nationalist pressures. Contending nationalisms were held at bay, while economics dictated prudence in the handling of the sovereignty dispute, particularly for China. As clearly expressed in President Jiang’s speech at the Fifteenth Congress of the CCP in September 1997, the CCP lead- ers wished to avoid any further damage to Sino-Japanese economic ties during a time when economic reform in China was moving to another stage – namely the ‘building of a complete market system in the national economy’. Challenging Japanese sovereign claims would have negatively affected China’s efforts to secure Japan’s support for its deepening eco- nomic modernization (Bong 2002: 77).

During this period, their bilateral trade continued to grow from US$57.5 billion in 1995 to US$60.8 billion in 1997, although the speed of increase slowed down, as compared to the early 1990s (see Table 1). In terms of financial flows, Japan’s presence in China was also becoming significant. As

M. G. Koo: Cold politics and hot economics? 225

of the mid-1990s, its cumulative investment in China amounted to US$13 billion as compared to US$6 billion in Taiwan and US$14 billion in Hong Kong. Also, Japan became the largest development aid provider to China by contributing an estimated US$19 billion between 1979 and 1995, and the third largest investor in China, behind the United States and Hong Kong. Total Japanese loans to and investment in China were valued at US$3.2 billion in 1995 (Chung 2004: 52).

The 1996 dispute illustrated an interesting pattern similar to previ- ous flare-ups. The initial impetuses came from Japanese ultra-nationalist activities. At first, both Beijing and Tokyo used them, either implicitly or explicitly, to mobilize political support for their regime. Eventually, how- ever, they sought to minimize the damage done to Sino-Japanese relations, fearing that contending Sino-Japanese nationalisms could snowball into a larger destabilizing movement detrimental to their domestic and interna- tional reputations, and ultimately undermine bilateral economic ties (Deans 2000: 122–3).

The 2004–05 flare-up and rising resource competition

Initiation and escalation

During the first decade after the second lighthouse incidence, the Senkaku/Diaoyu dispute was effectively controlled, if not completely dor- mant. Yet in the context of Chinese economic success and military build-up and the resurgence of Japanese assertiveness, their bilateral differences in the East China Sea are increasingly becoming an intense competition for oil and gas.

In contrast to the previous clashes, where Japanese ultra-nationalist groups or Hong Kong-based Chinese activists served as principal initia- tors, the 2004–05 flare-up was catalyzed by a group of Chinese activists who landed on Uotsuri Island on 24 March 2004. The Japan Coast Guard arrested them for violating Japanese law and deported them to Shanghai after two days of detention. Tokyo lodged a strong protest with Beijing only to find an even stronger accusation of arresting Chinese citizens (The Japan Times 2004).

This incident indicates that the recent opening up of Chinese society has created more public space for bottom-up emotional venting and pol- icy advocacy. In particular, the advent of the Internet and information technology has made it easier for small, poorly financed activist groups – such as ‘Protect the Diaoyu Movement’ – to mobilize support for their nationalist agenda. In a chain reaction, ultra-nationalist activities embold- ened the Japanese sense of indignation against China.

Furthermore, intense resource competition in the East China Sea further intensified the stormy clash of rival nationalisms. In May 2004, controversy

226 The Pacific Review

flared up when the Japanese maritime authorities detected a Chinese maritime research ship operating in what Japan considers its own EEZ in the East China Sea. Japan’s request to end the survey activities notwith- standing, China began the construction of a natural gas drilling facility. In response, Japan launched a survey of the disputed area and started explor- ing for natural gas (Pryzstup 2004). In July, the Chinese held a series of emotionally charged demonstrations outside the Japanese embassy in Bei- jing to protest Japan’s ‘illegal’ oil exploration activities (Kyodo News 2004). For many commentators, the summer of 2004 marked one of the lowest points in Sino-Japanese relations in the post-normalization era.5

The year 2005 proved even worse. On 9 February, in an unexpectedly bold move, the Japan Coast Guard took possession of the lighthouse built on Uotsuri Island because the private owner of the lighthouse had given up the ownership claim.6 China strongly criticized the action, but Japan played down China’s protest (Marquand 2005). The tension in the East China Sea came to boiling point when a series of sometimes violent anti- Japanese rallies broke out in the major cities of China in April 2005, dam- aging the Japanese embassy in Beijing and consulates in other cities.7 China acknowledged that diplomatic relations with Japan were at a three-decade low, but blamed the dispute on Tokyo for refusing to face up to its mili- taristic past. Unmistakably, China’s reaction evoked Japanese anger over Beijing’s lack of regret for violent anti-Japanese protests (Associated Press 2005).

De-escalation

In the middle of rising public anger against each other, Beijing and Tokyo tried to mend their strained relationship. The CCP leadership began to pressure the demonstrators, expressing its particular concern about the use of mobile phones and the Internet to organize unauthorized demonstra- tions (The Economist 2005). On 17 April 2005, Japanese Foreign Minis- ter Nobutaka Machimura flew to Beijing to seek an apology for the anti- Japanese demonstrations and compensation for damage. His Chinese coun- terpart Li Zhaoxing declined, arguing that China had not wronged the Japanese. Li told Machimura that Tokyo must take ‘concrete action’ to show that it is facing up to history. Despite the harsh rhetoric, however, both sides agreed to launch a joint study panel on their bilateral history (Associ- ated Press 2005). At the Asian–African Summit in Jakarta, Indonesia on 23 April, Chinese President Hu and Japanese Prime Minister Koizumi made a diplomatic breakthrough by agreeing to make sincere efforts to narrow their bilateral differences, including the vexing territorial and historical is- sues (People’s Daily 2005). Although tentative, this agreement helped to cool the diplomatic temperature.

Currently, the haggling is over precisely which areas should be developed. In fall 2005, Japan proposed to China the joint development of

M. G. Koo: Cold politics and hot economics? 227

four natural gas fields, which straddle the median line suggested by Japan and lie between the two areas proposed by China. Beijing does not recog- nize the median line, because the Japanese side of the median line includes China’s continental shelf. After several official rounds of negotiations, how- ever, the two countries tentatively reached an agreement on joint develop- ment in mid-June 2008. The expected agreement would likely sidestep the thorny sovereignty issues by simply leaving it unresolved for now. By allow- ing Japanese companies to invest in Chinese development of the gas fields, the agreement would allow Japan to share the profits from their develop- ment (Fackler 2008). This latest development supports the argument of this study: Economic considerations have repeatedly fostered the de-escalation of Sino-Japanese conflict over territorial and maritime rights.

Future challenges

Is the complex partnership characterized as ‘cold politics and hot economics’ sustainable? The structure of Sino-Japanese economic inter- dependence deserves special attention, as it is currently undergoing dra- matic transformation. For a long period after the diplomatic normalization of 1972, the economic ties with Japan carried much more weight for China than did ties with China for Japan. More recently, however, their bilateral economic relationships are increasingly becoming important for Japan as well in both absolute and relative terms. The changes in the structure of Sino-Japanese economic interdependence are represented by Japan’s in- creasing reliance on China vis-à-vis its economic growth. Japan’s trade de- pendence on China almost trebled from 1.48 per cent to 4.32 per cent during the period 1997–2006 (see Table 1). There is little doubt that Japan’s eco- nomic recovery in the mid-2000s owed much to its soaring exports to China. In addition to the acceleration in the number of Japanese companies set- ting up business in the Chinese market, the expansion of Chinese domestic demand, and other factors, has caused Japan’s dependence on trade with China to drift upwards.

This new development has both positive and negative implications. On the one hand, rising interdependence provides greater economic incentives for both parties to avoid costly conflict. On the other, rapidly increasing Japan’s dependence on China means that Japan’s bargaining power vis- à-vis China has declined significantly. China may feel less constrained to challenge Japan than any time hitherto. Hence their bilateral relationship could get worse before it gets better.

Conclusion

In the East China Sea, the territorial status quo has been challenged repeat- edly, while leaving both Japan and China unsatisfied. Since the potential of abundant oil and gas deposits in the East China Sea was found in the late

228 The Pacific Review

1960s, the Senkaku/Diaoyu dispute has unfolded in five rounds of distinct clashes. As the de facto owner, Japan is unwilling to negotiate the settle- ment of the territorial issue. To the Chinese, the Senkaku/Diaoyu dispute represents an attempt by Japan to keep from the Chinese what it stole from them during half a century of invasion and occupation.

According to the conventional wisdom, the Senkaku/Diaoyu problem arose both directly and indirectly as a consequence of US Cold War policy in East Asia. As the architect of the island dispute during the San Francisco peace treaty negotiations, the United States has officially remained neutral on the sovereignty issue, but its hegemonic position has helped to ensure that the dispute takes place within certain confines. Yet the growing percep- tion of the ‘China threat’ has resulted in Tokyo’s toughening China policy, which in turn has consolidated China’s anti-Japanese (and anti-US) preju- dice. Further fueled by energy competition, the Senkaku/Diaoyu incident indeed has the potential to inflict substantial damage not only on already strained Sino-Japanese relations but also on the fragile balance of power in East Asia.

The combination of fluid geopolitics and competitive domestic politics fueled by contending territorial and resource nationalisms has repeatedly hijacked Sino-Japanese bilateral relations. Ultra-nationalist groups on both sides have exerted considerable pressures for more assertive territorial and maritime policies. The Senkaku/Diaoyu dispute might not trigger any ma- jor conflicts immediately. Yet the accumulation of grievances could esca- late minor quarrels, such as those involving energy developments near the islands, into major conflicts.

Nevertheless, conventional explanations alone cannot fully capture the dualistic nature of the Senkaku/Diaoyu dispute: notwithstanding the desta- bilizing influence of resource competition, fluid geopolitics, and contending nationalisms, the two countries have successfully managed to contain their respective territorial and maritime claims thus far. This article has argued that the two countries have been deterred from pushing for a more defini- tive political showdown with respect to the island dispute in the interest of maintaining the lucrative trade and investment relations that both countries have enjoyed since 1972. In spite of the fact that the island dispute remains unresolved, both parties have found it a convenient strategy to shelve final resolution attempts rather than to risk the rupture of vastly more conse- quential common strategic and economic interests.

In conclusion, the relationship between the Senkaku/Diaoyu dispute and Sino-Japanese economic interdependence could be explosive, particularly if Chinese economic success allows Beijing to be more aggressive towards Japan either economically or strategically. Yet, as long as profitable eco- nomic opportunities continue for both sides, it is likely that a system of control and restraint will become a stable feature of the Senkaku/Diaoyu dispute.

M. G. Koo: Cold politics and hot economics? 229

Notes

1 Bilateral trade has increased dramatically, with the total value rising from US$1 billion in 1972 to US$211 billion in 2006. In addition, both private and public investments and capital flows have boomed. Aside from its investment in Hong Kong, the cumulative total of Japan’s foreign direct investment (FDI) in China was US$66.6 billion as of 2004. Until fiscal year 2004, the cumulative total of Japanese loans, grants, and technical cooperation to China was �3,133.1 billion, �145.7 billion, and �150.5 billion, respectively (Ministry of Foreign Affairs of Japan 2006).

2 For the dispute over the Paracel and Spratly Islands, see Lo (1989). For the dis- pute over the Northern Territories/Kurile Islands, see Hara (1998).

3 Barbieri (2002: 56–8). Formally,

Trade Dependencei = (

Importsij + Exportsij )

GDPi = Tradeij

GDPi ,

where Tradeij denotes bilateral trade between states i and j. 4 For more details about China’s military actions in the South China Sea, see Koo

(2005: 196–239). 5 Interview with Japan’s Ministry of Foreign Affairs (MOFA) officials conducted

in Tokyo in June 2004. 6 Japanese ownership claims over the island group are multilayered. Privately held

Kuba-jima Island and the Islands of Uotsuri, Kita-kojima, and Minami-kojima have allegedly been rented out to the Japanese government since 1972 and 2002, respectively, while Taisho-jima Island has always been owned by the Japanese government. For more details, see Urano (2005: 206–7). I would like to thank one of the anonymous reviewers for bringing this book to my attention.

7 These Chinese protests were inflamed by the Japanese government’s authoriza- tion of history textbooks in early April that have reinforced Japan’s territorial claim to the islands as well as glossing over its wartime atrocities. The Japanese campaign for a permanent UN Security Council seat was also a target of Chinese public anger.

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