International relations experts have made no secret of the fact that frosty political relations between China and Japan have begun to have an effect on their economic ties. Many even declare that economic cooperation has already started to atrophy in certain areas. In reality, Sino-Japanese trade volume has registered impressive growth despite the claimed slowdown in cooperation. Japan’s direct investment in China has also maintained aggressive growth, indicating Sino-Japanese economic ties hold the key to an accurate assessment of Sino-Japanese ties.
　　In modern international relations, political and economic relations between two countries usually rely on each other. However, political factors are after all an external force, while decisive economic factors remain very much an internal influence.
　　
　　Economic reality
　　
　　Before making any judgment about Sino-Japanese trade, there are several issues that need clarification. First, a long-term perspective must be adopted as it is illogical to base analysis on data gathered over a short term. Second, comprehensive rather than standardized figures must be considered. Third, we should not only measure the impacts on China, but also those on Japan. Last but not least, we should research whether the partial freezing in economic relations is attributed to pure economic factors or political reasons.
　　To guarantee comprehensiveness and objectivity, the postulations in this article are based on a long-term study over 15 years of the indexes in Sino-Japanese economic exchanges and a medium-term study on figures since 2001, when bilateral relations soured after Japanese Prime Minister Junichiro Koizumi’s controversial Yasukuni Shrine visit.
　　According to statistics from the Japanese side, since 1990, bilateral trade volume and Japan’s direct investment in China, whether in total or as a proportion of the total figure, have climbed steadily. That is to say, for Japan, the Sino-Japanese economic commitment has never been in jeopardy. According to Chinese statistics, although the ratio of Sino-Japanese trade against China’s total foreign trade keeps dropping, the absolute figures in trade and direct investment have grown steadily.
　　Meanwhile, the quality of economic cooperation has also been upgraded. In the 1980s, processing trade accounted for a large part of the bilateral import-export volume. In the 1990s, the cooperation was enlarged to electrical appliances, electronics and machinery. Recent years have seen increased cooperation in the auto and telecom industries.
　　Now Chinese companies have debuted Japanese investment initiatives. Though the scale remains small, the growing momentum shows great potential.
　　In the first two months of 2006, Sino-Japanese trade volume reached $14.9 billion, up 11.6 percent year on year. As against China’s over 20 percent annual growth in foreign trade, the growth rate seems modest. But considering the long history and maturity of bilateral trade, the figure is quite impressive.
　　In terms of direct investment, against the 0.5 percent decrease of foreign investment in China in 2005, Japan’s investment in China hit a record high of $6.53 billion, 2.1 times the investment from the United States and up 19.8 percent over the previous year, which is testimony to the buoyant Sino-Japanese economic exchanges.
　　
　　Cooling down?
　　
　　It is obvious that the growth speed of China-Japan trade has been reduced, which is accompanied by the dropping ratio of bilateral trade against China’s total foreign trade volume. In 2004, Japan dropped from China’s largest trading partner to the third largest. The seeming decline is not only caused by political reasons.
　　For example, it is natural for the United States, the world’s largest developed country, to become No.1 trading partner of the largest developing country. While the EU keeps absorbing new member countries, it is nothing unusual that its trade with China has taken a leap. Nonetheless, China-EU economic ties are not as close as those between China and Japan. The EU is a union of 25 independent states while Japan is only one country. The two are not very comparable in terms of trade with China.
　　In addition, when talking about particular countries, the trade between China and the EU economic locomotive Germany stood at one third of Sino-Japanese trade in 2005, despite the Germany’s position as the world’s second largest trading power.
　　Some people cite the soaring trade between China and South Korea to prove the recession of Sino-Japanese trade. But it must be kept in mind that the sharp surge of Sino-South Korean trade is the result of multiple factors. As a unique case, the rise in China’s trade with South Korea is not sufficient to indicate a decline in Sino-Japanese trade.
　　Another noteworthy point is that it is economic factors as much as political reasons that have led to Japan’s steady cutback in Official Development Assistance (ODA) to China. Recent years have witnessed worsening fiscal balance sheets in Japan. As Japan’s ODA was designed to assist underdeveloped countries, people should not make a fuss over ODA deductions or cancellation when the economic development of ODA-receiving countries reaches a certain level. Moreover, Japan’s ODA proportion in China’s GDP is nominal.
　　In 2005, China’s trade with the EU, the United States and Japan was respectively 15.3 percent, 14.9 percent and 12.9 percent of the total. As long as Japan maintains its edge as one of the top three trading partners, we cannot conclude that Sino-Japanese economic cooperation has cooled down.
　　
　　Political repercussions
　　
　　Although there is no fundamental change in the buoyant economic cooperation between the two Asian countries, they would no doubt benefit from better political relations.
　　However, the invisible force of the market has always helped push forward the commercialized merchandise trade and direct investment.
　　The dampened political ties, which could only exert limited harm on conventional merchandise trade and direct investment, can take heavy tolls on cooperation on projects of grander political dimension, like high-speed rail construction, East Asia regional economic cooperation and Free Trade Areas involving China and Japan. One big problem over the development of bilateral economic relations is the lack of a driving force from large-scale projects. The push over trade and investment would be enormous if the two could agree on cooperating on projects like the high-speed railways.
　　By contrast, the vigorous growth in Sino-South Korean trade is directly related to the close political ties between the two countries. Similarly, when talking about the robust Sino-U.S. trade, the Chinese Government’s regular shopping sprees have made consistent contributions. For example, an order for 150 Boeing aircraft can stimulate small and medium-sized projects. Due to the political tension between China and Japan, the long-term distrust between them will also strain merchandise trade and direct investment considerably. As a matter of fact, governmental trading branches and business partners from both countries have already felt the pressure and negative forces caused by an icy political climate, which deserves attention from both countries.
　　One thing worth noting is that moderate economic setbacks should not be exaggerated. Otherwise, media sensationalization would dampen the confidence of Japanese investors, which could place unnecessary hurdles in the normal development of Sino-Japanese economic cooperation.
　　
　　Reaching for harmony
　　
　　The rigidity of political confrontation between China and Japan and the inflexibility of the Japan-U.S. Security Treaty have meant that the three major political problems between China and Japan, namely historical issues, territorial issues and the Taiwan issue, could not be resolved in a short period.
　　In the foreseeable future, the Chinese economy will continue its rising trajectory while the Japanese economy tries to sustain its rejuvenation. Thanks to the high level of co-dependence between the two economies, carrying forward bilateral economic cooperation is the only choice for both countries. That means the unbalanced picture in Sino-Japanese economic cooperation and politics will become normal. Under such circumstances, both countries and related companies must learn to maintain economic cooperation in a cool political environment. In dealing with diplomatic tensions, both governments should insist on the common ground of not hindering economic interests.
　　Sabotaged economic cooperation is in neither party’s interest. It is China’s consistent national policy to boost Sino-Japanese economic cooperation. In dealing with diplomatic relations with China, Japan has shown restraint in the economic field despite a tough political stand. For example, Prime Minister Koizumi has on many public occasions rebuffed the rhetoric of “China threat,” sending a positive message. Over the issue of the appreciation of the renminbi, although Japan invented this topic, its attitude is not as aggressive as that of the United States. This illustrates that Japan attaches great importance to Sino-Japanese economic relations and tries to avoid further deterioration of overall ties.
　　The complementarity of the two economies and two markets is a long-term fact. The economic exchanges between the two countries will continue, provided that political relations are not in a critical state. From China’s strategic perspective, the optimal choice is to stick to the policy of separating politics and the economy and keep enhancing economic cooperation and friendly neighborly relations with Japan.

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