In its dealings with Japan and China, the U.S. would do well to keep a weather eye on the fast-growing economic alliance being forged by the two Asian nations. For one thing, Japan's direct investment in China has begun to take off, jumping by 78% last year and outstripping U.S. investments by 40% (chart). Indeed, economist Chen Zhao of The China Analyst, a publication of the Bank Credit Analyst Group in Montreal, reports that Japanese companies now regard China as their main investment target and plan to place half of their overseas capacity increases there.
Moreover, Joseph P. Quinlan of Dean Witter Reynolds Inc. estimates that Sino-Japanese trade flows exceeded U.S.-Chinese trade last year for the first time since the 1980s. At the same time, with U.S. exports to China running only about one-third the size of China-bound Japanese exports, America's $38 billion trade deficit with China dwarfed Japan's $12 billion shortfall.
Looking ahead, Chen observes that Japan's China policies may well give it a leg up vis-a-vis the U.S. in building trade relations. It rarely has mixed business with politics, for example, and since 1979, it has provided China with over $33 billion in government loans, export credits, and other forms of financial aid, compared with a paltry $300 million in export credits extended by the U.S.
Japan also is more sympathetic to China's slow-paced economic reforms and its desire to maintain a strong government role in economic policy. By contrast, the U.S. has pushed rapid liberalization and market-oriented reforms, as well as human-rights issues.
Ironically, says Quinlan, Japan's growing investment in China may well exacerbate U.S. trade frictions with the Chinese. That's because many Japanese products that were once exported from Japan are now being assembled and shipped from China, widening America's huge trade deficit with that nation.