China vs. Japan: Asia's Other Great Game

Soldiers of China's People's Liberation Army (PLA) raise a Chinese national flag during the military parade to commemorate the 90th anniversary of the foundation of the army at Zhurihe military training base in Inner Mongolia Autonomous Region, China, July 30, 2017. China Daily via REUTERS

Beijing and Tokyo will undoubtedly compete long after U.S. foreign policy has evolved.

November-December 2017

In recent years, Beijing has begun to increase its activity in both spheres, as part of a comprehensive regional foreign policy. Perhaps most notable has been China’s recent attempts to diversify Asia’s regional financial architecture by establishing the Asia Infrastructure Investment Bank (AIIB). Proposed in 2013, the AIIB formally opened in January 2016 and soon attracted participation from nearly every state, except Japan and the United States. The AIIB explicitly sought to “democratize” the regional lending process, as Beijing had long complained about the rigidity of the ADB’s rules and governance, which gave China under 7 percent of the total voting share, compared to over 15 percent for both Japan and the United States. Ensuring China’s dominant position, Beijing holds 32 percent of AIIB’s shares, with 27.5 percent of the voting power; the next-largest shareholder is India, with just 9 percent of shares and just over 8 percent of the voting power. Compared to the ADB’s asset base of approximately $160 billion and $30 billion in loans, however, the AIIB has a long way to go in reaching a size commensurate with its ambitions. It was initially capitalized at $100 billion, but only $9 billion of the that so far has been paid in—$20 billion is the goal. Given its initially small base, the AIIB disbursed only $1.7 billion in loans its first year, with $2 billion slated for 2017.

For many in Asia the apparent aid and finance rivalry between China and Japan is welcome. Officials from countries that desperately need infrastructure, such as Indonesia, hope that there will be a virtuous cycle in the ADB-AIIB competition, with Japan’s high social and environmental standards helping to improve the quality of China’s loans, and China’s lower-cost structure making projects more affordable. With an estimated need for $26 trillion in infrastructure development by 2030, according to the ADB, the more sources of financing and aid the better, even if Tokyo and Beijing view both financial institutions as tools for larger goals.

Chinese president Xi Jinping has pegged the AIIB to his ambitious, some would say grandiose, Belt and Road Initiative, essentially turning the new bank into an infrastructure-lending facility along with the older China Development Bank and the newer Silk Road Fund. In comparison to Japan, China has focused the majority of its overseas aid on infrastructure, and the Belt and Road Initiative (BRI) serves as the latest, and largest incarnation of that priority. It is the BRI, also known as the “new Silk Road,” that represents one of the key challenges to Japan’s economic presence in Asia. At the inaugural Belt and Road Forum, held in Beijing in May 2017, Xi pledged $1 trillion of infrastructure investment spanning Eurasia and beyond, essentially attempting to link land- and sea-based trading routes in a new global economic architecture. Copying a page from the ADB, Xi also promised that the BRI would seek to reduce poverty around Asia and the world. Despite widespread suspicion that the amounts ultimately invested in the BRI would be significantly less than promised, Xi’s scheme represents as much a political program as an economic one.

Functioning as a quasi-trade agreement, the BRI also highlights the free trade competition between Tokyo and Beijing. Despite what many consider a timid and sluggish trade policy, Japanese economist Kiyoshi Kojima had actually proposed a “Free Trade Area of the Asia-Pacific” as far back as 1966, although the idea was not taken seriously until the mid-2000s, by the Asia-Pacific Economic Cooperation (APEC) forum. In 2003, Japan and the ten-member Association of Southeast Asian Nations (ASEAN) began negotiating a free-trade agreement, which came into effect in 2008.

Japan’s major free-trade push came with the Trans-Pacific Partnership (TPP), which it formally joined in 2013. Linking Japan with the United States and ten other Pacific nations, the TPP would have accounted for nearly 40 percent of global output and fully a quarter of global trade. However, with the United States withdrawing from the TPP in January 2017, the pact’s future has been thrown into doubt. Prime Minister Abe has been loath to renegotiate the pact, given the political capital he spent on getting it passed in spite of agricultural-lobby opposition. For Japan, the TPP still remains the germ of a larger community of interests based on enhanced trade and investment, and adoption of common regulatory schemes.

China has sought over the last decade to catch up with Japan on the trade front, signing its own FTA with ASEAN in 2010, and updating it in 2015, with the goal of reaching two-way trade totaling $1 trillion and investment of $150 billion by 2020. More significantly, China has adopted a 2011 ASEAN initiative, the Regional Comprehensive Economic Partnership (RCEP), which would link the ten ASEAN nations with their six dialogue partners: China, Japan, South Korea, India, Australia and New Zealand. Accounting for nearly 40 percent of global output, and linking close to 3.5 billion people, the RCEP increasingly has come to be seen as China’s alternative to TPP. While Japan and Australia in particular have sought to slow final agreement over RCEP, Beijing has been given a huge boost by the Trump administration’s withdrawal from TPP, and the widespread impression that China is now the global economic leader. Tokyo is finding little success in combating such opinion, yet continues to try to offer alternatives to China-dominated economic initiatives. One such approach is to remain engaged in RCEP negotiations, and another is to have the ADB co-fund certain projects with the AIIB. This type of cooperative competition between Japan and China may become the norm in regional economic relations, even as each seeks to maximize its influence in both institutions and with Asian states.