China in Transition

Japan Is Missing the "China Express" While China Is Distancing Itself from Japan

Chi Hung KWAN
Consulting Fellow, RIETI

China is rapidly emerging as a trade superpower, with the total amount of imports and exports reaching $1.15 trillion in 2004. In fact, China has surpassed Japan in terms of both imports and exports to become the third-largest trading nation in the world after the United States and Germany. While Japan's dependence on trade with China is surging against the backdrop of China's remarkable economic development, its relative importance, from China's viewpoint, is declining, along with its presence in the global economy (diagram).

Despite the frigid political relationship between Japan and China, Japan's trade with China continues to be brisk. According to the Ministry of Finance's preliminary trade statistics for 2004, Japan's trade with China and Hong Kong accounted for 20.1% of the country's total trade, exceeding the U.S. share (18.6%) for the first time. This shift toward China is expected to continue, and China, even excluding Hong Kong, may soon surpass the U.S. to become Japan's largest trading partner.

However, while the bilateral trade relationship may seem warm when viewed from the Japanese side, it is only lukewarm from China's perspective. In 2004, growth in China's trade with Japan (25.7%) was significantly lower than that for the world as a whole (35.7%). By contrast, trade with the European Union rose 33.6%, trade with the U.S. increased 34.3%, and trade with South Korea jumped 42.5%. What is more, this is not a recent trend; Japan's share of China's total trade has been falling since the latter half of the 1990s. Japan had been China's largest trading partner, but in 2004 it fell to third place behind the EU and the U.S.

Thus, while Japanese statistics clearly show that the Japanese economy is shifting toward China, Chinese statistics indicate that its economy is distancing itself from Japan. This asymmetry mainly reflects the rapid strides made by the Chinese economy compared with Japan's own sluggish economic growth. Countries the around the world are increasing their trade with China as they take advantage of business opportunities that utilize the country, both as a production base as well as a market for finished products. Although from Japan's perspective trade with China is logging higher growth than that with the rest of the world, from China's viewpoint Japan's position has declined relatively since the growth of Sino-Japanese trade has fallen short of the pace at which China's trade is expanding overall. In fact, Japan's importance as a trading partner has waned not only for China but also for most countries against the backdrop of its protracted post-bubble recession.

The fact that economic ties between Japan and China are already cooling becomes even clearer when we look at the changes in the bilateral "trade intensity," which excludes the share the trading partner has in global trade scale factor from "trade dependency." Trade intensity, as used here, is defined as follows:

Trade intensity of Country A vis-a-vis Country B

If we calculate China's trade intensity with Japan and Japan's trade intensity with China based on the above equation, we can see that in both cases the figure has been falling since the latter half of the 1990s (note). This signifies that China's trade dependency on Japan is falling at a pace faster than the shrinking of Japan's share in global trade; on the other hand, although Japan's trade dependency on China is increasing, it falls short of the pace at which China's share of global trade is increasing (table). Thus, recent changes in the bilateral trade intensity clearly show that not only is the Chinese economy distancing itself from Japan, but Japan is also failing to catch the "China Express" as it runs at full tilt, suggesting that the cool political relations between the two countries might have already harmed their economic relations.

Diagram:Contrasting changes in the bilateral trade dependency of Japan and China
Diagram: Contrasting changes in the bilateral trade dependency of Japan and China
(Source) Based on the Ministry of Finance's "Trade Statistics" and Chinese Customs Statistics.

Table: Decomposition of bilateral trade dependency
Table: Decomposition of bilateral trade dependency
(Note) Some figures are estimates.
(Source)Based on the Ministry of Finance's "Trade Statistics," Chinese Customs Statistics and the WTO's "International Trade Statistics."
February 18, 2005

As some readers may have noticed when looking at the definition of trade intensity, China's trade intensity with Japan and Japan's trade intensity with China must be equal, because the scale of bilateral trade is conceptually the same whether seen from China or Japan. However, in reality there is some disparity between the two because of differences in the way trade statistics are compiled in the two countries (such as how trade via Hong Kong is handled and the asymmetry arising from the fact that exports are calculated FOB (i.e., free on board, or the cost incurred up to the point the product is put on a freighter at the port of export), while imports are calculated based on CIF (i.e., cost, insurance and freight, or the amount including shipping and insurance costs).

February 18, 2005