China-US tensions: the view from Japan

Professor Yasuhiro Matsuda, from the University of Tokyo's Institute for Advanced Studies on Asia, sees a "very long-lasting" rivalry between the US and China throwing up difficult choices for other countries. 

"There was a fantasy that after China became rich then the lower class will rise and democratisation would follow.” - Matsuda

These include Japan and Australia which both have China as a major trading partner and the US as their major defence ally.

"It’s not a simple rivalry," Matsuda told bluenotes during a recent visit to Melbourne.

"Liberal democracies with a market economy are declining and China has proudly announced there is another alternative to the developing countries. This is a power struggle, economic and technological competition, and also ideological rivalry, so it has the kind of characteristics of a cold war."

Matsuda though does make a crucial distinction: "But it’s not a total cold war. It has new characteristics … the economic intersections. The Soviet Union didn't have much interaction with the United States and the Western world. But China has deep connections."

Matsuda argues US President Donald Trump has acted as a lightning rod for international concerns about China but these views are now broadly held across the US political spectrum.

"There was a fantasy that after China became rich then the lower class will rise and democratisation would follow, like what happened in Korea and Taiwan and the Philippines. But China didn’t do that," he said.

Doorstep concerns

Instead, China last year amended its constitution to lift limits on presidential terms, locking in the rule of President Xi Jinping, while the government stepped up controversial citizen surveillance measures.

For its part, Japan has security concerns on it doorstep, such as tensions with China over the disputed Senkaku islands, North Korea and the future of Taiwan.

Increasingly, the dilemma for Japan is one of being dependent on the US for defence and security while having China as its major trading partner. Matsuda adds:  "And also, China is a neighbour. No matter what happens, you have to deal with your neighbour in a very good manner."

Matsuda says the Japanese government and tech-giant SoftBank decided to exclude the giant Chinese telco Huawei from Japan's 5G Network, a stance also taken in Australia, New Zealand and the US. He sees this as the correct decision, given the strategic importance of communications infrastructure, however such a decision can produce complex reactions and counter-reactions.

For example, China has just announced it will take Australia to the World Trade Organisation over the ban although the Australian government has responded its actions are fully compliant with WTO security exemptions.

Last year, Canada arrested the chief financial officer of Huawei, Meng Wanzhou, under a warrant from the US. The arrest of Meng – daughter of Huawei's founder – was followed by China detaining two Canadian businessmen and, more recently, banning canola imports from Canada on "safety" grounds.

Poison pill

More difficult choices await Japan and other countries with the US pursuing bilateral trade deals after withdrawing from the TPP. The US is negotiating a free trade deal with Japan, which includes a clause that it cannot sign an FTA with a "non-market" economy, a proviso aimed squarely at China.

Canada and Mexico have accepted such conditions - which have been described as a "poison pill" - in the replacement agreement for NAFTA negotiated by the Trump Administration.

Matsuda says a Japan-US trade deal is expected before June, posing difficulties for Japan signing up to the Regional Comprehensive Economic Partnership (RCEP) trade agreement covering the 10 ASEAN members and other countries, including China. Then there are negotiations on a China-Japan-Korea free trade deal (CJK).

Meanwhile, Trump says progress is being made on what he calls an "epic" trade deal with China, which follows tariffs and counter-tariffs being imposed by the two countries.

Both China and the US countries have been circling each other and looking for grapple holds to apply leverage, like two heavyweight wrestlers.  

But Matsuda laughs when asked whether China could make use of its huge holding of US Treasury bonds to pressure the Americans.

He notes that, in past decades, Japan once hinted at using its own holding of US Treasury bonds and saw the US dollar depreciate, along with its own investment.

"It's a mutually assured destruction, it's like a nuclear exchange, you also become very poor. So this measure can never be used … China knows that."

ANZ chief economist, Richard Yetsenga, argued late last year the US had imposed tariffs on $US250 billion of Chinese exports, such as steel, but this had to be seen in the context of China's total exports of $US2.5 trillion.

Yetsenga said "trade wars" were unlikely to cause serious global cyclical problems or to substantially weaken China's overall exports. But he added tariffs did re-organise trade, particularly for other exporting nations (such as Australia).

"Structurally it does seem like a lot has changed and trade wars are now probably a permanent part of the landscape," he said.

Even if Trump and Xi reached an agreement around trade, there was a "broader deterioration of the relationship between the two countries which is likely to be long-lasting, but its effects are only likely to emerge over time".

"Globalisation paid dividends over decades; de-integration is likely to have a similar impact schedule. What’s not going to happen is for the tariff war, as it’s currently applied, to directly knee-cap China's exports."

Uneasy neighbours

The director of ANU's Australia-Japan Research Centre, Dr Shiro Armstrong, says Japan is more comfortable in multilateral trade agreements such as the TPP and had sought to stall negotiating a bilateral free trade deal with the US to avoid the so-called "poison pill".

"It’s politically difficult to do bilateral deals with the US to open their markets," he says.

"The Japanese are quite worried about it. Making concessions to the US in the TPP grouping was the preferred approach, by far."

Dr Armstrong said the proposed RCEP trade deal based around ASEAN is more advanced than the China-Japan-Korea (CJK) negotiations, which involve three often uneasy neighbours that find it easier to engage in trilateral negotiations rather than one-on-one.

Australia already has free trade agreements with numerous counties – including the US, Japan and China – and does not (yet) have to sign new deals containing a "poison pill".

However, Dr Armstrong says heightened trade tensions and deals between the US, China and Japan are a clear concern for Australia. For example, if Japan kept stalling on signing a free trade agreement with the US, the response could be tariffs on Japanese cars. 

A US-China deal could temporarily resolve tensions between them but would impact the rest of the world. For example with China likely to agree to purchase US energy and agricultural products, Australian exports would be displaced.

"The big powers are making deals outside the established rules and frameworks," Dr Armstrong said. "That has significant implications for us and the overall trade framework. We will be severely impacted."

Big national rivalry

Professor Matsuda, who is completing a fellowship at Peking University, says Trump has won support from market-orientated reformists in China, which is ironic given the growing grip on power held by President Xi.

Indeed, Matsuda argues Trump has changed China's policy discourse, with that country having stopped talking up the "Made in China 2025" plan to evolve from being the world's "factory" to producing higher-value products and services.

"China is trying to change itself but a state-owned company is the core of socialism with Chinese characteristics. I think they would never change this core. It means US requests and pressure will continue," he says.

"China will never make a drastic change, for example, privatisation of all those major state-owned companies ... They will never let it happen. They will make a series of minor changes but never make major changes.

"I think this big national rivalry will continue a very long time."

Mark Skulley is one of Australia’s most-respected business journalists, a veteran of more than two decades at Fairfax Media including The Australian Financial Review.