China’s air-defense zone ratchets up risk for trade and investment

China’s air-defense zone ratchets up risk for trade and investment

With the announcement of China’s Air-Defense Identification Zone (ADIZ) and the following rise in tensions in the East China Sea, economic—and global—catastrophe may be just a shot away.

Beijing’s November 23rd announcement of its Air-Defense Identification Zone (ADIZ) added a stormy sky to the East China Sea’s already rough waters. This move came after more than a year of escalating tensions between Japan and China over the uninhabited Senkaku/Daioyu Islands. China’s growing power and assertiveness has increased concerns in Tokyo about Beijing’s regional intentions and the adequacy of Japan’s security, while stoking nationalistic politics in both capitals.

Amidst the Asia-Pacific’s shifting geopolitical environment, the East China Sea presents a major source of political risk which could, at the minimum, cause increased damage to bilateral and regional trade and investment and, at worst, lead to an armed clash that not only includes Asia’s largest economies but also the world’s largest: Japan’s defense treaty ally, the United States. 

Sino-Japanese tensions in the East China Sea have built steadily since September 2010, when Japan seized a Chinese trawler and its crew after it collided with two coast guard vessels near the Senkaku/Daioyu Islands. In September 2012, the Japanese government bought three of the five islands it did not already own to block nationalist Tokyo Governor Shintaro Ishihara from using public money to buy the privately owned islands. This move had the inadvertent effect of angering China, triggering widespread protests and attacks on Japanese business. China has since responded with incursions of surveillance vessels, patrol aircraft, and, recently, an unmanned drone around the Senkaku/Daioyu Islands. Japan’s threat to shoot down the next Chinese drone drew the response that such a move would be considered an act of war.

The Senkaku-Diaoyu dispute has disrupted bilateral trade and investment between Japan and China, and the recent increase in tensions driven by the China’s new ADIZ could increase this economic damage. During the flare-up beginning in September 2012, Japanese investment fell a third from the previous year and Japanese sales to China slumped 11%. Japanese consumers goods were most affected, with the market share of Japanese cars briefly falling from around 20% to 8%. Local sales of Japanese manufacturing subsidiaries in China fell around 25% year-over-year in the first quarter of 2013.

Ultimately, Japan’s total trade with China dropped 10.8% to $147.3 billion in H1 of 2013, marking the first drop in four years since 2009 after the fall of Lehman Brothers. While Japanese investment into China subsequently recovered with a 6.3% increase in the January-October period, Chinese investment into Japan fell 37.3%.

Further disruption of bilateral trade and investment between Japan and China is a likely immediate outcome of China’s new ADIZ. However, by ratcheting-up regional tensions, this could lead to even more dire and expansive results. The ADIZ encompasses territory claimed by both Taiwan and South Korea, and could similarly damage the economic (and political) relationship between China and these actors.

Moreover, the ADIZ increases the risk of an accidental clash. This potential outcome is supported by a Japanese Maritime Self-Defense Force (MSDF) report that a Chinese frigate locked its firing radar on the Japanese destroyer Yudachi on January 30, 2013. Trapped by their own nationalist rhetoric and domestic political pressure, China and Japan would struggle to deescalate the conflict. In turn, the ADIZ increases the potential for the United States to get drawn into conflict with China through its commitment to defend the Japan-controlled Senkaku/ Dioayu Islands. This would not only be a disaster for the China and the United States but also for the global economy.

The escalating crisis in the East China Sea represents a political risk of the highest order, one in which the multiplicity of actors, the projectionary nature of international politics, the nationalist drive of domestic politics, and the grand strategic framework in which the competition is to be played out all combine to create a powerfully negative inertia. While the immediate economic challenge is pressing in itself, the potential outcome of conflict involving the world’s top three economies—and potentially others—would have repercussions far beyond the actors themselves. Without resolution of the dispute in the East China Sea, economic—and global—catastrophe may be just a shot away.

Categories: Asia Pacific, Security

About Author

Taylor Wettach

Taylor is a participant in the Government of Japan-administered Japan Exchange and Teaching (JET) Program. Previously, Taylor worked for the Office of the Senior Vice President for Asia and Japan Chair at the Center for Strategic and International Studies (CSIS). He graduated magna cum laude graduate of Georgetown University’s Edmund A. Walsh School of Foreign Service.