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Rivalry between Japan and China has recently been veiled under multilateral initiatives.   © Reuters
Looking ahead 2018

2018 to see growing China-Japan economic rivalry in Asia

As Trump pulls back Tokyo will step up -- and conflict more with Beijing

The "proxy war" waged between China and Japan for economic and strategic influence in Asia is likely to be stepped up in the New Year. It is a conflict hidden temporarily from general view behind a screen of neutral-sounding regional initiatives. But it will eventually come out into the open and draw in most other Asian nations, and many beyond, not least the U.S.

The screen concealing what is really happening is a tangled undergrowth of trade and investment agreements which, seemingly, do not center on the chief protagonists but on the group of 10 nations within Association of Southeast Asian Nations. These agreements are headed by the Japan-led initiative to implement the long-awaited Trans-Pacific Partnership (TPP), even though the U.S. has pulled out, and by China's rival proposal for a Regional Comprehensive Economic Partnership (RCEP). Alongside these trade pacts are the more nebulous ideas for infrastructure cooperation in the form of Beijing's Belt and Road Initiative (BRI) and a competing Japanese-Indian "corridor" scheme.

All this can be cast as a rivalry for Asian leadership between Beijing and Tokyo even though the situation is normally portrayed in terms of China challenging Japan rather than vice versa because China is the rising power that has asserted its position more vigorously in recent decades. Aging -- literally -- Japan has appeared on the defensive.

It is tempting to see China as a would-be global hegemon, intent on displacing the U.S., and President Donald Trump for one appears to see things in this way.

But, as veteran Japanese former senior bureaucrat and banker Toyoo Gyohten observes, China's ambitions for the present at least are limited to being "primary leader of the Asia region." It is not ready to challenge the U.S. in terms of "economic, military, technological, cultural, diplomatic or ideological power" on a global scale.

This analysis of course puts China on a potential collision course with Japan, which has long thought of itself as primus inter pares among Asian nations, possessing most if not all of the qualities noted by Gyohten while lacking the physical size, population and other resources of China.

Japan has sought an economic hinterland, in Southeast Asia especially, in order to compensate for deficiencies in population, domestic natural resources and market size. This has driven its close decades-long ties with the ASEAN. But in the past 20 years, China has challenged Japan by replicating such arrangements for itself.

The U.S. took over the running from Japan in this -- largely economic -- rivalry with Beijing when former President Barack Obama swung Washington's weight decisively behind the TPP in 2010 as part of his China-countering "pivot toward Asia." The TPP was all about exerting U.S. economic leadership in Asia -- and China was not among its dozen members.

Japan did not join the TPP negotiations until 2013, at which time Beijing opted to support a rival in the shape of the RCEP, building on an earlier scheme promoted by the 10 ASEAN states plus China, Japan, South Korea, India, Australia and New Zealand. The U.S. was left out.

With Trump abruptly pulling the U.S. out of the TPP agreement early this year, things were thrown into confusion from Japan's point of view. Its rival, China, appeared set to call the shots from then on in terms of shaping Asian economic integration, not least in the areas of trade and investment rules. Tokyo responded fast.

A step ahead

Prime Minister Shinzo Abe lobbied other TPP members to get the agreement back on track as the "TPP 11" even without the twelfth member (the U.S.). The pact (stripped of some of its original provisions) now looks like being ratified by all members under the name of the Comprehensive and Progressive Trans Pacific Partnership (CPTPP).

But meanwhile, China's President Xi Jinping has already gone one better by launching the BRI in 2013, well before Trump's election was even a distant possibility. The vastly ambitious scheme for linking Asia and Europe with parts of the Middle East and North Africa has attracted wide support.

Not to be outdone, Japan's Abe and Indian Prime Minister Narendra Modi launched a rival plan in late 2016 for an Asia-Africa Growth Corridor (AAGC) which likewise is designed to connect large parts of Asia with Africa via the Middle East. Both sides are now subjecting this plan to comprehensive study.

Both BRI and the AGCC have power-play implications that go beyond infrastructure building. They will impact development financing in scores of states (some 60 in BRI) along the routes of the respective transport networks and could give control over key ports, some of intense military importance.

This is strategic thinking on a grand scale and its significance appears to have been underestimated by Trump (although his repeated references to the "Indo-Pacific" (rather than "Asia-Pacific) region during his recent swing through Asia has led some to believe that he is considering U.S. support for the Japan-India AAGC scheme, in order to counter China's BRI ambitions.

In the end, it comes down not so much to diplomatic clout or negotiating skill as money; he who pays the piper calls the tune. With its huge foreign exchange reserves, China has appeared to be paymaster general for Asian development but those reserves have been depleted by capital outflows. In one sign of strain Beijing now is denominating bilateral foreign aid in Chinese yuan and not in dollars. Also, the progress in actually putting money into BRI schemes is much slower than with sketching them out in glossy presentations.

One key to influence in the coming year or so will probably lie with the China-led Asian Infrastructure Investment Bank. It has won Triple-A international credit ratings and can tap global bond markets for funds for BRI. Japan may respond via the old-established Asian Development Bank, which belongs to the western-led World Bank group. But a deciding factor will be whether the Trump camp commits financial support -- via the ADB and the World Bank -- to countering the China thrust.

Anthony Rowley is a Tokyo-based journalist who has been covering the Japanese economy and politics since 1993. He is a former business editor and international finance editor of the Far Eastern Economic Review, and a former Tokyo correspondent of the Singapore Business Times.

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