Is China a Competitive Threat to Japan?

Earlier this year, the Economic and Social Research Institute (ESRI) of Japan produced a report on the role of China in the international economy. You might find the overall conclusions of this report to be interesting.

Question 1: Does China pose a serious economic threat to Japan under the present circumstances? In general, when China is said to pose a threat, a sense of danger is often expressed in the following statements:

(a) China is making great economic progress and will soon become a world's major economic power.

(b) Chinese products have strong international competitiveness, China is going to become the "factory of the world" in the near future.

(c) The increased imports from China cause the hollowing-out of the Japanese industry.

In regard to (a), although the Chinese economy is developing fast, it is necessary to take into account that the GDP in 2001 did not exceed 1/4 of the Japanese and GDP per capita was no more than approximately 1/40.

In conjunction with (b), it is necessary to keep in mind that China has a competitiveness not in every industry, but only in those of labor-intensive goods such as clothing, footwear, textile goods, miscellaneous goods and others in addition to the consumer electronics and electronic components, for example, desktop computers, cellular telephones, DVD players and TV sets assembled with imported core parts.

Concerning (c), the share of China in the total imports of Japan is 16.6% and rising, it is less than approximately 1.3% of the Japanese GDP. Notwithstanding a sharp increase in import of manufactured goods from China to Japan, the Japanese overseas production ratio in all industries does not exceed 14.5%. It can be hardly said high when compared with about 25% of Western industrialized countries'. Besides, production expansion by the overseas affiliated companies leads to an increase in the Japanese exports of intermediate goods to those and, thus, contributes to the growth of the Japanese exports. The Japanese trade with China records a significant deficit, but looking at the trade balance including Hong Kong whose exports is mainly to China, it becomes clear that Japan maintained a surplus of balance of trade until recently. In addition, since China mainly exports low-tech products while Japan exports mainly high-tech products, the Japan-China trade relation is not competing, but complimentary in most of the cases.

According to the ESRI report, China is said to pose no serious threat at this moment. (I would add a comment here. Japan is as interested in selling to the Chinese market as any other country. Sounds like some political soft-peddling in the ESRI report. I suspect the threat is much larger than what the ESRI report portrays.)

Question 2: Will China pose a threat in the future?

The comparative advantage of China lies still in an abundant laborforce, contrary to Japan that has comparative advantage in technology. (I would add in some areas.) For example, in the manufactured imports of the U.S. from Japan and China (out of 10000 items), only 16% of goods from Japan and China compete with each other while 84% is compliment each other. Japan should reinforce the complementarity of the Japan-China trade relation and work on the policy of development without causing hollowing-out by combination of a shift of depressed industries to China and development of new domestic industries.

(My comment is that China will pose a major threat to Japan and will pressure Japan to provide even greater technological and financial support for Chinese economic development in the future in exchange for access to the Chinese market.)

As we attempt to gauge the threats and opportunities associated with China, it is important to consider other vantage points beyond our own view here in the United States. Can a perceived zero-sum game be converted to a win-win game for Japan? That remains to be seen, and this is also the question that the U.S. and other nations should be asking themselves.

Go here to read more. (Note: Only a part of the ESRI report has been translated into English.).