China-Japan diplomatic row: Gravest in years

Photo: Financialpost

ON 7th September, a collision between a Chinese fishing vessel and the Japanese coast guard near a chain of disputed islands sparked a diplomatic spat between the two countries, marking the latest in a series of maritime tiffs stoking territorial tension among China and Japan.
The Chinese boat crashed into two Japanese patrol boats after it failed to heed authorities' warnings to leave Japanese waters north of the islands in the East China Sea, according to reports from the Japanese foreign ministry.
Claim of disputed Islands
Both countries claim authority over the uninhabited lands, known in Japan as the Senkaku Islands and in China as Diaoyu. The tiny archipelago is located between Taiwan and Okinawa in southern Japan, and is under Japanese control, though China and Taiwan also claim possession of the territory.
China estimates that the islands hold nearly 17.5 trillion cubic feet of natural gas and 20 million barrels of oil. Talks on joint development of the resource have broken down.
Japan arrested the captain of the Chinese fishing boat (since released by Japan), despite demands from Chinese Vice Foreign Minister Song Tao that Japan stop "illegal interception" of Chinese boats, according to the state-run Xinhua news agency.
The Chinese captain was being questioned on suspicion of deliberately steering the fishing boat into one of the Japanese patrol boats, according to Japanese media reports. The vessel and its crew were moved to an area off Ishigaki island while the captain was questioned, the reports said.
China's government summoned the Japanese Ambassador in Beijing, Uichiro Niwa, for a second time on 8th September, less than 24 hours after it lodged its first formal protest.
Tokyo lodged its own complaint with Chinese Ambassador to Japan Cheng Yonghua by phone on 7th September, according to Japan's Ministry of Foreign Affairs.
The maritime spat also comes on the heels of jabs between the two Asian economic powerhouses over business issues. Chinese Premier Wen Jiabao, during a visit by Japanese Foreign Minister Katsuya Okada, suggested a recent wave of labor disputes in China was caused by relatively low pay for workers at Japanese factories. Mr. Okada shot back, warning that China risks losing foreign investments unless it introduces more transparency and consistency into its business rules, including its legal framework to deal with labor issues.
Impact on trade
The diplomatic row may have impact on trade between the two countries. Global supply of the rare-earth metals, which are vital to the mechanisms of hybrid cars, wind turbines, iPods, lasers, super-efficient light bulbs and radar systems, is 95 per cent controlled by China.
The country's dominance of the market is the result of a deliberate, 20-year bid by Beijing to cast itself as the "OPEC of rare earth metals".
A Chinese document that has sent shockwaves through Japanese industry and government is a White Paper produced by the Chinese Ministry of Industry and Information Technology, which proposes an export ban on rare earth metals including the particularly critical dysprosium.
Although the paper's proposals, published only days ago, have yet to be acted on, the draft document has proved incendiary and spurred Sumitomo into accelerating a project in Kazakhstan to secure a non-Chinese supply.
The Chinese threat of an export ban or limited export to Japan on minerals critical to the modern world may end a phase of polite negotiation between Tokyo and Beijing on the issue.
A senior Japanese official told The Times that if China does ban or limit the supply of some rare earth metal exports by 2015, Japan may use the WTO to block such a ban or may get the materials from other sources, if the supply is limited.
China's apparent plans to tighten the leash on world lanthanide supplies come on the eve of a landmark decision by the Australian government on the future of Lynas, one of its leading rare-earth mining companies.
The Foreign Investment Review Board of Australia is debating whether to allow the state-owned China Non-Ferrous Metal Mining to buy a 51 per cent stake.
Senior member of Japan's Rare Earth Metal Association observed that in a world before everyone had a mobile phone and wanted to drive fuel efficient cars, China's rare earth monopoly was less meaningful -- now it has created a dominance of globally strategic importance.
Others, particularly those within the Japanese automotive sector, believe that the rare earth metals will become the centrepiece of numerous international trade wars.
Chinese export quotas of rare earth metals fall below Japan's demands, forcing even the largest consumers there to rely on smuggled material to meet about a quarter of their annual needs.
A draft of the Chinese plan has been seen by senior executives at several of Japan's largest trading houses and has sparked fears that China is aiming to step up dramatically its program of quota reductions.
Beijing has cut export quotas by about 6 per cent annually over the past decade. China's rare earth monopoly arises from a combination of aggressive empire building by Beijing and long complacency on the part of the big consumers.
The metals occur naturally in China, but Australia, the United States and South Africa all used to produce rare earth metals with a refining process that is dirty, mildly radioactive and expensive.
It is widely believed in the industry that by skimping on costly clean-up provisions, China has been able to undercut all its competitors, forcing them out of business and earning itself its 95 per cent monopoly.
An attempt by China to further constrain -- or ban -- lanthanide exports would effectively force companies to re-open rare earth mines around the world or develop new ones.
Sumitomo's joint venture with Kazakhstan's largest nuclear power company is expected to unleash a land grab for rare earth mines in the former Soviet country. A Sumitomo spokesman said that the draft proposal from Beijing had "speeded-up our project there".
But China is not keen to let its dominance slip. Lynas Corporation, an Australian miner, had been poised to open a new rare earth refinery project in Kuantan in Malaysia, which would eventually have met a large portion of demand from Japan and elsewhere.
The credit crunch derailed Lynas's funding plans for that project and has opened the door for China to step in with a bid that would give a state-owned company effective control of the Australian company.
Wider implications
Japan has also raised the issue of military expenditures of China without transparency which have seen double-digit growth for much of the past two decades and voiced concerns about China's military muscle.
Washington has weighed in saying it considers the peaceful resolution of disputes in the South China Sea in its national interest and stressing the importance of "freedom of navigation" in the area.
The Wall Street Journal said in an editorial Beijing's behaviour "will do lasting damage to China's standing in the region, where governments will not easily bend to a form of diplomacy that smacks of an imperial tribute system."
One implication seems to be that China's move would draw the US and Japan closer together and most Japanese, even Okinawans, could now support the US base in the Island. Furthermore analysts believe Japan got the better of the dispute in the region because it had established a fresh anti-China consensus in the Asia-Pacific.
Diplomats say that Japanese new Prime Minister's tough line against China seems to be based on Japanese strong assertion on sovereignty on the islands since Prime Minister Naoto Kan's party -- the Democratic Party of Japan -- favours soft policy towards China and to ease the Chinese concerns, Prime Minister Kan and his cabinet colleagues did not visit the Yasukuni shrine where Japanese war criminals of the Second World War were buried.
Move to repair relations
On 5th October, Japanese Prime Minister Naoto Kan and his Chinese counterpart, Wen Jiabao, have met for the first time since a diplomatic dispute erupted last month. The meeting which was held on the sidelines of Asia Europe Meeting (ASEM) in Brussels is seen as a significant step in starting to repair strained relations.
Both spoke of the need to improve ties at the brief meeting and China said they agreed to hold high-level talks, at an appropriate time. However no date was set.
Both countries seem to realize that diplomatic confrontation does not help their economy and dialogue is the answer to resolve disputes peacefully while both countries can move on to concentrate on economic growth as European countries are having drastic austerity measures to cut the budget deficits.

The author is a former Bangladesh Ambassador to the UN, Geneva.