China and Japan: New Economic Diplomacy

China and Japan: New Economic Diplomacy

by Chae-Jin Lee
China and Japan: New Economic Diplomacy

China and Japan: New Economic Diplomacy

by Chae-Jin Lee

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On the basis of a judicious use of indigenous materials and field research conducted in China and Japan, the author examines Sino-Japanese economic diplomacy. This original in-depth analysis concentrates on a few salient cases of Sino-Japanese economic interaction: a multibillion-dollar steel complex at Baoshan, the joint offshore oil development in the Bohai Sea, and Japanese government loans provided to fund China's important construction projects.

Product Details

ISBN-13: 9780817979720
Publisher: Hoover Institution Press
Publication date: 09/01/1984
Series: Hoover Institution Press Publication Series , #297
Edition description: 1st Edition
Pages: 174
Product dimensions: 5.80(w) x 8.90(h) x 0.60(d)

About the Author

Chae-Jin Lee is a Professor of Political Science and East Asian Languages and cultures at the University of Kansas, where he also serves as Associate Dean of the College of Liberal Arts and Sciences. He received a Ph.D. in Political Science from the University of California at Los Angeles. He has been a Visiting Professor at the University of Washington and a Visiting Foreign Scholar at Tokyo University. In addition to numerous journal contributions, his publications include Japan Faces China: Political and Economic Relations in the Postwar Era, U.S. Policy Toward Japan and Korea (coauthored with Hideo Sato) and Political Leadership in Korea(coauthored with Dae-Sook Suh).

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China and Japan: New Economic Diplomacy

By Chae-Jin Lee

Hoover Institution Press

Copyright © 1984 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8179-7972-0


Patterns of Economic Relations

The conclusion of the eight-year war (1937-1945) between China and Japan abruptly terminated their close economic relationships, which had been developing since the late nineteenth century; especially during the 1930s and early 1940s, Japan had not only strengthened its exploitative industrial programs in Manchuria (and Taiwan), but had also expanded its substantial economic and commercial activities in China proper. In the immediate postwar period, the possibility of renewing Sino-Japanese economic interaction was effectively eliminated because of the uncertain domestic conditions of both countries and the changing U.S. policy in East Asia. While the United States was embroiled in the abortive negotiations and the military confrontation between the Chinese Communist Party (CCP) and the Kuomintang (KMT), Japan, under U.S. Occupation, was not ready to consider an independent economic policy toward China. The Japanese government was preoccupied with the immense tasks of rehabilitating its war-torn economy with massive U.S. assistance and taking care of the influx of its military and civilian repatriates from abroad, including more than 3 million returnees from China.

When the People's Republic of China (PRC) was established in 1949, it cautiously reopened modest trade with Japan, but any hope for revitalized Sino-Japanese economic relations quickly evaporated after the outbreak of the Korean War in June 1950. As a result of China's direct armed involvement in the war, the United States adopted a trade embargo policy against China and imposed it on Japanese exports to China as well. The war also accelerated U.S. efforts to transform Japan into an anticommunist bastion in East Asia and to restructure the Occupation in accordance with the emerging bipolar regional alignment. In September 1951 Japan concluded the multilateral peace treaty with the United States and 47 other nations in San Francisco — over the protest of the Soviet Union and China. A U.S.-Japan security treaty was also signed. On the day (April 28, 1952) that both treaties came into force, Japan signed a bilateral peace treaty with the Republic of China (ROC), which voluntarily renounced its right to demand war reparations from Japan. Intense U.S. pressure compelled Prime Minister Yoshida Shigeru to establish diplomatic relations with the ROC, and this relationship made it difficult, if not impossible, for the Japanese government to conduct direct economic diplomacy with the PRC for the next two decades. Hence China and Japan utilized a variety of unofficial or private channels to negotiate and implement their economic agreements.

Unofficial Economic Agreements

The list of Chinese complaints against the Yoshida government was long and the charges serious. It was accused of supporting the U.S. anti-Beijing containment policy, colluding with the "remnant KMT reactionaries," and cooperating with the Coordinating Committee (COCOM) and its China Committee (CHINCOM), which were set up to control exports of strategic commodities to communist countries. Yet the PRC showed a degree of economic realism in signing the first private trade agreement with three prominent Japanese individuals in June 1952. They and Nan Hanchen (president of the Chinese People's Bank and chairman of the China Council for Promotion of International Trade) agreed to conduct a barter-based trade until the end of 1952. (From June to December of that year, such trade totaled £30 million.) The agreement was completely devoid of any political message and received a tacit blessing from the Yoshida government, which wished to promote trade with China under the principle of separation of economic and political (and diplomatic) issues.

In the subsequent private trade agreements concluded in October 1953 and May 1955, the Chinese introduced politically inspired demands and obtained various promises and concessions from Japanese negotiators, some of whom were influential leaders of the ruling political parties. The two sides decided in 1953 to exchange resident trade missions and in 1955 further agreed to provide diplomatic privileges to trade representatives. Strongly pressed by China's persistent request, the Japanese negotiators obtained an explicit commitment from Prime Minister Hatoyama Ichir that his government would "support and assist" implementation of the private trade agreements. However, the Hatoyama government was not yet prepared to allow China's resident trade mission in Tokyo. The prime minister felt constrained by the absence of policy consensus in his own cabinet and among Japan's conservative leaders, and also by the Eisenhower administration's rigid anti-Beijing attitude as exemplified by the U.S.-Taiwan security treaty (1954) and the congressional resolution on Formosa (1955).

The timing of the private trade accords was not conducive to any substantive improvement in Beijing-Tokyo diplomacy, but as shown in Table 1, they stimulated dramatic increases in the amounts of two-way commercial transactions: in 1953, such trade totaled approximately $34 million (121 percent increase over the previous year); in 1954, $60 million (75 percent); in 1955, $109 million (83 percent); and in 1956, $151 million (38 percent). These increases were accompanied by various exchanges of industrial exhibits and economic delegations and by other private agreements on fisheries and cultural programs. However, the value of Sino-Japanese trade remained relatively modest in terms of the countries' respective global trade; the $151 million represented 4.5 percent of China's total foreign trade during 1956 and only 2.6 percent of Japan's total foreign trade.

The inauguration of Prime Minister Kishi Nobusuke (ex-director of the General Affairs Board of Manchukuo and minister of commerce and industry in Tj Hideki's wartime cabinet) in 1957 was not welcomed by the Chinese. Kishi was the first Japanese prime minister to visit Taiwan, and he repeated his anti-Beijing rhetoric in his travels throughout Asia and the United States. Premier Zhou Enlai publicly attacked Kishi's collusion with Chiang Kai-shek and cooperated with the Japan Socialist Party (JSP) in denouncing the Kishi government. The growing hostility between the two governments was reflected in the extremely difficult unofficial trade negotiations. After protracted discussions, both sides finally signed the fourth private trade agreement in March 1958, which included the conditions that the Japanese government accept China's resident trade mission in Tokyo, provide Chinese trade personnel with semidiplomatic privileges, and allow them to use their national flag at the mission. Confronted with mounting pressure from Taipei and Washington, the Kishi government then refused to extend any special privileges to Chinese trade representatives, including the right to fly their national flag in Japan. Angered by the Kishi government's negative response, the Chinese seized upon a minor flag incident at Nagasaki in May 1958 to suspend all economic and cultural relations with Japan and to terminate private agreements on trade, fisheries, steel exports, and other related matters.

Foreign Minister Fujiyama Aiichir's efforts to relax Tokyo-Beijing hostility failed because the Chinese asked the Kishi government to accept "three political principles": (1) not pursue a policy inimical to China, (2) not join a two-China plot, and (3) not obstruct normalization of Sino-Japanese relations. On the request of the JSP and the General Council of Trade Unions (Sohyo), in early 1959 the Chinese granted a special trade concession to small and medium-sized Japanese companies, which were particularly hard hit by China's trade suspension. However, this action did not arrest the drastic decline of two-way trade to approximately $22 million during 1959-a 78.5 percent decrease from the preceding year.

Friendship Trade and Memorandum Trade

The failure of the Great Leap Forward Movement, coupled with the deterioration of Sino-Soviet economic relations, forced China's moderate political leaders (such as Zhou Enlai, Chen Yun, and Deng Xiaoping) to readjust the extreme Maoist emphasis on self-reliance and to follow the pragmatic avenue of increasing economic relations with Japan and other noncommunist industrial nations in the early 1960s. This change in China's ideological and economic orientation coincided with the emergence of Prime Minister Ikeda Hayato, who softened Kishi's hard-line cold war rhetoric and attached a high policy priority to Japan's economic expansion abroad. In his discussions with Japanese business leaders in August 1960, Premier Zhou Enlai initiated the concept of "friendship trade" — the resumption of trade with Japanese companies that China specifically recognized as "friendly" toward its policy positions. The number of "friendly companies" grew from 11 in 1960 to 190 in 1962, but they were limited in their ability to satisfy China's growing requirements for long-term credits and complete industrial plants and to exert political influence over the Liberal-Democratic Party (LDP) government's decision-making process.

Hence, in September 1962, Premier Zhou Enlai invited to Beijing Dietman Matsumura Kenz, a senior LDP statesman, who advocated close economic cooperation between Japan and China and who had received an explicit blessing from Prime Minister Ikeda. Zhou and Matsumura decided to start comprehensive long-range "memorandum trade" as a gradual and cumulative way to normalize Sino-Japanese economic and diplomatic relations. They also agreed to exchange trade liaison offices and to adopt a method of deferred payment for Japan's exports of industrial plants to China. As political guarantors of this agreement, they appointed their trusted lieutenants-Liao Chengzhi (deputy director of the Foreign Affairs Staff Office in the State Council) for China and LDP Dietman Takasaki Tatsunosuke (ex-minister of international trade and industry) for Japan. Liao had been born and raised in Japan and was educated at Waseda University; Takasaki had served as president of an industrial corporation in Manchuria before 1945 and had met with Zhou Enlai during the Bandung Conference (1955). The subsequent Liao-Takasaki negotiations produced the memorandum on "overall trade" for the 1963-1967 period, in which the average two-way trade was projected to be about $100 million per year. Unlike friendship trade, memorandum trade enjoyed a semiofficial status because it was sponsored by prominent members of the governing LDP and was partially financed by the government-controlled Export-Import Bank (Eximbank).

The initiation of memorandum trade was the first successful move in China's decade-long efforts to establish its resident trade mission in Tokyo. In 1964, Sun Pinghua (one of China's "old Japan hands" and a former student at Tokyo Engineering College) set up the Liao liaison office in Tokyo, and Sma Tsunetoshi, who had "resigned" from the Ministry of International Trade and Industry (MITI), headed the Takasaki liaison office in Beijing. In the absence of a diplomatic establishment, the Liao liaison office in effect assumed a wide range of political and semidiplomatic activities in Japan. In accordance with the Zhou-Matsumura agreement, the Japanese government was flexible in applying Eximbank funds to finance China trade in 1963, but in 1964 this attitude was challenged by the combined pressure from Taipei and Washington — both vehemently opposed any form of Japanese "foreign aid programs" to China. In May 1964 Prime Minister Ikeda encouraged former Prime Minister Yoshida Shigeru to send a private letter to Taipei; it gave assurances that Japanese Eximbank funds would no longer be used to finance exports of industrial plants to China.

In spite of the Chinese disappointment with the Yoshida letter, the volume of Sino-Japanese trade grew steadily between 1963 and 1966 because China adopted a pragmatic economic policy to expand foreign trade following the disastrous Great Leap Forward Movement of the late 1950s and because the combination of friendship and memorandum trade had positive effects upon their economic relationship. The rates of its annual growth were approximately 62 percent in 1963, 126 percent in 1964, 51 percent in 1965, and 32 percent in 1966. The $470 million figure achieved during 1965 surpassed the declining Sino-Soviet trade ($417 million) and the moderately increasing Japanese-Soviet trade ($408 million). The following year Sino-Japanese trade totaled slightly more than $621 million; it accounted for 14 percent of China's total foreign trade and made China Japan's fourth largest trading partner. The amount dropped to about $558 million in 1967, but Japan still remained China's number one trading partner.

The political environment of Sino-Japanese economic relations markedly deteriorated during the Chinese Cultural Revolution. Radical Red Guards paralyzed the Ministries of Foreign Affairs and Foreign Trade in 1967 and purged the key personnel of these and other central bureaucracies. The two principal promoters of China's economic relations with Japan, Liao Chengzhi and Nan Hanchen, were temporarily removed from their respective positions. A number of Japanese trade representatives and newspaper correspondents stationed in China were arrested on espionage charges or summarily expelled from China; the number of Japanese trade personnel in Beijing had dwindled from 100 to 20 by mid-1968. Shipments of Japanese goods were held up or disrupted at Chinese ports. The Canton Trade Fair was postponed for one month in the fall of 1967. Japanese trade negotiators were required to praise the Cultural Revolution, to study the little red book of Chairman Mao's quotations, and to listen to prolonged political lectures delivered by their Chinese counterparts. The Chinese trade liaison office in Japan was used to direct a public campaign against the Japan Communist Party, which opposed the Maoists and the Cultural Revolution. The Chinese launched a particularly vicious attack against Prime Minister Sat Eisaku for his state visits to Taipei and the United States.

It was in this political context that the Chinese negotiators, headed by Assistant Minister of Foreign Trade Liu Xiwen, refused to renew the 1963-1967 memorandum trade agreement for another five-year period; in 1968, they accepted only its one-year extension and a projected trade volume of $100 million. In return the Japanese negotiators — LDP Dietmen Furui Yoshimi and Tagawa Seiichi (former secretary to Matsumura Kenzo) — were forced to accept China's "three political principles" and to contradict Sat's China policy. The Japanese companies involved in memorandum or friendship trade were required to engage in a variety of explicitly political activities, such as mass demonstrations and the issuance of joint communiqués, in support of Chinese positions. This overt injection of politics into economic matters, plus the chaos created by the Cultural Revolution, caused a two-year (1967-68) decline in Sino-Japanese trade.

The political relationship between Beijing and Tokyo reached an all-time low during 1969 and 1970 when the Chinese assailed the revival of Japanese militarism. As usual, the Chinese exploited trade as a means to articulate and publicize their anti-Sat stand in Japan. In order to extend the memorandum trade for another year in 1970, Diet-man Furui was compelled to pay a high political price. In a joint communiqué signed with Liu Xiwen, Furui agreed to condemn the Nixon-Sat joint communiqué of 1969 and pledged to "renounce and smash the revival of Japanese militarism." The LDP counterattacked China's growing criticisms but hesitated to censure or restrain Furui's submissive economic diplomacy.

The Chinese practice of linking trade with political considerations reached a climax in 1970 when Premier Zhou announced that China would no longer trade with any of the following Japanese companies: (1) industries and firms assisting South Korea's rivalry with North Korea or supporting Taiwan's design to "recover" China; (2) large capital investors in South Korea or Taiwan; (3) suppliers of arms to assist U.S. war efforts in Indochina; and (4) joint ventures or subsidiaries of U.S. companies. Once again a majority of Japanese industrial and trading firms related to China followed the historic pattern, accommodating to Zhou's "four conditions" and practicing "unprincipled" economic diplomacy. The episode suggested to the Chinese that they could use economic considerations as an instrument to influence Japan's business communities and their political sponsors and that the imposition of the most stringent political conditions did not adversely affect a significant increase (31.6 percent over the previous year) in Sino-Japanese trade during 1970.

Processes of Diplomatic Normalization

As China restored internal political order following the Cultural Revolution and made diplomatic advances to NATO member-states and the United Nations in the early 1970s, a number of significant political and economic developments took place in Japan that directly challenged Prime Minister Sat's anti-China policy. Most important was the organization of a new suprapartisan Dietmen's League for Promoting Restoration of Japan-China Diplomatic Relations in December 1970. It embraced all national political parties and its membership exceeded a simple majority of the members of the national Diet. The league, chaired by LDP Dietman Fujiyama Aiichir, criticized the Sat government's anachronistic ties with Taiwan and urged it to establish diplomatic relations with China. The fact that one-fifth of the LDP dietmen cooperated with the opposition parties to oppose a major foreign policy principle of their own prime minister was an unusual political development. It signified the erosion of the political base for Sato's China policy.


Excerpted from China and Japan: New Economic Diplomacy by Chae-Jin Lee. Copyright © 1984 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents


List of Tables,
List of Abbreviations,
ONE Patterns of Economic Relations,
TWO Steel Industry: The Baoshan Complex,
THREE Oil Development at Bohai and Oil Exports,
FOUR Economic Assistance: The Government Loans and Grant,
FIVE Analysis and Conclusions,
Selected Bibliography,

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