China’s proclamation of an Air Defense Identification Zone (ADIZ) in an area that is mostly international airspace has sparked a round of tensions and uncertainty in the East China Sea. The ADIZ, which includes the disputed Senkaku/Diaoyu islands claimed by Japan, China, and Taiwan, overlaps with the existing Japanese and Korean ADIZs. While the world powers try to find a way to maintain a frail status quo, the question we should be asking ourselves is, what lies behind China’s provocations?
Some argue that the implementation of the ADIZ was an impulsive reaction to Japan’s threat that it would shoot down the next Chinese drone to appear in the skies over the disputed islands. However, the implications of the announcement by China’s President Xi Jinping of diplomatic, economic, and domestic agendas all seem to point to a more radical shift in the regional geopolitical balances whose roots go deeper than what appears on the surface.
It’s all about the Party
If we look at the recent history of tensions over the Senkaku/Diaoyu islands—which started shortly after the 1969 discovery of potentially huge natural gas fields in the adjacent seabed—we can find recurring patterns in China’s behavior toward Japan. In many cases, tensions escalated following provocations by nationalist groups in China. The flares in tensions of 2003, 2004 and 2006, just to cite a few, were sparked when Chinese nationalist groups attempted to land on the islands; these actions led to diplomatic, economic and military tensions between China and Japan. Nationalist groups are an important piece of the Senkaku/Diaoyu puzzle that cannot be overlooked.
In China, a place where the word “Diaoyu” is, along with “Tibet” and “Taiwan,” on the blacklist of words constantly monitored by the government, nationalist groups possess a power that is inaccessible to many: they can express their thoughts and influence the opinions of others. Most, if not all, of these organizations are backed by the Communist Party, and their impact on political and diplomatic affairs is considerable. Domestic pressure from nationalist groups has often influenced the outcome of tensions over the Senkaku/Diaoyu islands, this is of of prime importance for the Chinese Communist Party to satisfy this segment of the population.
Historical studies show that provocations such as the creation of the ADIZ, have been used by China as a means to achieve some kind of internal political objective. Observers have pointed out that Xi Jinping, who assumed office last year, has been fueling anti-Japanese sentiment to distract attention from China’s social and economic problems, a technique known to have been used in the past by Presidents Jiang Zemin and Hu Jintao. Portraying Japan as a threat also maintains support for the party’s ever increasing allocation of resources to the military. Peripheral border disputes cannot be decoupled from the internal power struggles of Mainland China.
It’s all about the money
As domestic pressures are influencing the decision making of leaders in China, diplomatic pressures are influencing the decision making of Japanese investment. An economic trend is being observed in this conflict; Japanese foreign direct investment (FDI) outflow to China in relation to outflow to the world has shrunk for several years. FDI represents a sensitive subject for China. As a result of the rise in Chinese wages over the past few years, factories in China have been suffering considerable loses with companies relocating their production elsewhere, particularly to Southeast Asia where labor is cheaper. A report by Ifty Islam, published in the Financial Times, argues that recent events surrounding the dispute will accelerate this trend, with major implications for FDI flows in the rest of the region.
The report points out that total Japanese outward FDI has increased for over the past two years, with 2012 being the second highest increase in history (an increase of 12.5 percent over the previous year), but that the largest portion of this growth was directed toward ASEAN nations. For example, companies such as Aoyama Menswear and Funai Electric have moved production to Myanmar and Thailand, respectively, to name just a few. Japan is now Malaysia’s largest FDI investor, and money is quickly flowing into Cambodia and the Philippines. China, which still continuing to be the developing world’s largest recipient of FDI, is starting to feel that a fundamental shift may soon be in the cards.
Protests and historical recriminations, led by Chinese nationalist groups, have often escalated to negatively impact Sino-Japanese economic relations. The constant reiteration of Japan’s war misdeeds in the Chinese media, combined with persistent tensions over the Senkaku/Diaoyu dispute, are beginning to influence changes in the regional flow of capital. China’s provocations may continue to raise tensions in the East China Sea, but the biggest risk may be felt by Chinese companies at home.