09 October 2010
By Joshua Pidek, Oregon Catalyst’s International Affairs Reporter
Sino – Japanese Tensions Threaten To Disrupt World Markets
The recent imprisonment of a Chinese fishing boat captain for 17 days by Japanese authorities has caused a significant controversy in both China and Japan. While much of the long-term impact of the controversy is not immediately apparent, the short-term effects are already impacting both the local Asian Pacific economic sphere and the global economy.
The main disagreement is over who has ownership of the Diaoyutai Islands (also called the Senkaku Islands) in the East China Sea. Both nations claim an Exclusive Economic Zone (EEZ) of 200 nautical miles, but the East China Sea is only 360 miles wide, sparking arguments over where the median point should be. This is complicated by the Chunxiao natural gas field, which lies almost exactly on the current median line. Japan claims that China is infringing on drilling rights to the field by tapping reserves that lie across the median line in Japan’s EEZ. The field, which has estimated reserves of 3.8 billion barrels of oil and an additional 1.7 billion cubic feet of natural gas, is expecting to become a major producer in the next ten years. Beijing and Tokyo were scheduled to hold discussions over who has rights to the disputed region of the Diaoyutai/Senkaku islands and the surrounding oil and gas reserves in mid-September, but the talks have since been postponed in the wake of the most current incident.
The most recent dispute is over a Chinese fishing trawler that allegedly collided with two Japanese Coast Guard ships near the Chunxiao petroleum field on the morning of 7 September 2010. Japan stated that the fisherman was in Japanese waters and was obstructing the coast guard ships. This announcement was followed by a decision in Japan’s Ishigaki Summary Court on 10 September to incarcerate the captain and his 14 crew members until the matter had been sorted out.
The fallout from the incident is already beginning to sink in. Though the fishing boat’s crew was released on September 13, China temporarily cut off diplomatic relations with Japan at the provincial level and above on September 19 after repeated calls to the Japanese ambassador failed to secure the release of the fishing boat’s captain.
Tensions remained high even after Japan freed the captain on 24 September. Beijing demanded that Tokyo pay reparations for the incarceration of the crew and the damage to the fishing vessel. Japan refused to comply and countered with a demand that China pay for the damage sustained by the two Coast Guard ships. On September 29, the 38th anniversary of the establishment of Sino-Japanese diplomatic relations, Japanese nationalists in Fukuoka surrounded a bus full of Chinese tourists and began kicking and beating against the windows of the bus, screaming abuse at the riders. China responded by issuing a travel warning for Chinese tourists in Japan.
The economic consequences of the dispute are also worrisome. China blocked exports of rare earth elements to Japan, its largest buyer, and has not yet lifted the ban. China provides about 97% of the world supply of rare earth elements, due to the difficulty and cost of mining them elsewhere. In another incident, four Japanese citizens were suddenly arrested the next day while conducting a field survey in Shijiazhuang for Fujita Corp., which is planning on building a facility to dispose of World War II chemical weapons shells. They were charged with “illegally videotaping a military site,” and placed under residential surveillance; as of 30 September, three of the four Japanese employees had been released.
Japan and China are not the only nations affected by this recent incident. While the controversy over the imprisonment of the fishing boat captain is already beginning to wane, the economic consequences of the spat are still mounting. Unease over the possibility of China using its near monopoly on rare earth elements as a weapon, similar to the restrictions of oil exports in 1956, 1967, and 1973 by the Arab oil states, is building. The announcement by Chinese Premier Wen Jiabao at the current session of the UN General Assembly that China “would not compromise” on issues of “sovereignty, national unification, and territorial integrity” raises warning flags for investors, who are wary of strong nationalist sentiments, especially in a country as tightly controlled as China.
The ban on rare earth elements will also have far reaching effects beyond a temporary price jump. Japanese Prime Minister Naoto Kan signed an agreement 2 October with Mongolian Prime Minister Sukhbaatar Batbold to develop rare earth mineral mines in the country, as part of an initiative to reduce reliance on Chinese exports. The United States, another major consumer of rare earth elements, is also working to shift away from use of Chinese rare earth minerals in the wake of a 40% cut in exports announced in July. The House Committee on Science and Technology is scheduled to review a bill to subsidize the reopening of the Mountain Pass rare earth mine, closed since 2002. The House Armed Services Committee conducted a hearing on 5 October to examine the degree of American military dependence on Chinese exports of rare earth elements.
Impact on the United States
Although tensions at the surface between Japan and China will fade, the underlying conflict is still there. China is still growing rapidly, and becoming more assertive both militarily and economically as it expands. Japan and the United States must both strengthen their own positions if they wish to maintain the status quo.