China Tops U.S. as Japan Trade Partner

Though old differences remain, Japan is keen to continue its expansion by exporting to booming China, while Beijing wants more Japanese know-how

This decade hasn't been an especially cordial one for Asia's dominant powers. Japan has feared China's economic and military ascendance and clung more closely to the U.S. on national security matters, much to the irritation of Beijing. Chinese leaders have routinely stoked raw national anger directed at Japan over its perceived insensitivity, or outright historical amnesia, about its wartime behavior going back to the 1930s. Some of the Sino-Japanese diplomatic clashes over disputed natural gas assets in the East China Sea have been nasty.

Yet through it all the overall economic linkages have strengthened—even if the politics have been acrimonious. That reality was underscored by new data out on Apr. 25 showing that mainland China (excluding Hong Kong) has eclipsed the U.S. as Japan's biggest trading partner in the fiscal year that ended Mar. 31. Two-way trade between China and Japan shot up nearly 10% to $214 billion, according to new data from the Japanese Finance Ministry (see BusinessWeek Assistant Managing Editor Christopher Power discuss China's new clout with Japan, "Video View: Japan's New Trade Priorities").

None of this is going to completely reshape geopolitics in Asia. However China's economic clout and the diminished stature of the U.S. in Asia since the Iraq War could complicate the U.S. agenda in the region. Five years ago the Bush team could count on Tokyo to side with the U.S. when it came to pressuring Beijing to crack down on fake goods or make its military spending more transparent.

A Stage-Managed Visit

That may not be the case as the years roll on and the Chinese and Japanese economies integrate even more. In fact the growing trade and capital flows between these two giant economies—with a combined $7 trillion-plus in gross domestic product—do explain in part the thawing in relations between Tokyo and Beijing since Japanese Prime Minister Shinzo Abe came to power last fall.

Chinese Premier Wen Jiabao's visit to Japan in mid-April (the first by a Chinese leader in roughly seven years) was a stage-managed kiss-and-make-up session. The two signed a major environmental technology cooperation pact and Wen made a perfectly civil speech to members of the Japanese Diet. Abe visited Beijing back in October just weeks after taking over power from his predecessor Junichiro Koizumi, whose regular visits to a Tokyo Shinto shrine that honored Japan's war dead drove Chinese leaders to fits of anger.

Within the orbit of the conservative ruling Liberal Democratic Party in Japan, Abe is actually more hawkish than Koizumi ever was—but he is far from naive about current global economic realities. Sure, the U.S. economy still matters. Yet with the slowdown in the U.S., the Chinese are now making a more meaningful contribution to Japanese growth.

Growth Envy

This isn't a difficult point to grasp: China is likely to grow 10%-plus in 2007, while the U.S. is probably to going to come in at about 2.4%, many economists figure. In fact, Chinese demand for Japanese cars, construction equipment, and machine tools played a huge role in lifting Japan out of its decade-plus of stagnation a few years back. If you include Hong Kong, China became Japan's No. 1 trading partner back in 2004.

China wants Japanese know-how in making autos and high-end consumer electronics, and to absorb the secrets of how Japan has become one of the most energy-efficient economies on the planet.

Old historical enmities die hard, but right now the burst of mutual prosperity between these two economies seems to have trumped politics.

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