Distinguished Speaker Seminar: Peter Drysdale - Japan and PRC: The Effects of Politics on Trade and Trade on Politics

Peter Drysdale, Emeritus Professor of Economics and Visiting Fellow in Policy and Governance in the Crawford School of Economics and Government, Australian National University, addressed guests on 25 October. His lecture, “The Effects of Politics on Trade and Trade on Politics,” focused on the relationship between Japan and the People’s Republic of China (PRC). Trade between the two countries is growing quickly despite long standing political distance between them. Drysdale also gave a comparative analysis of both countries’ interactions with the United States.

Professor Drysdale pointed out the importance of looking at the huge Japan-PRC relationship in both political and economic aspects. Trade in 2006 was as high as US$211 billion in some estimates. The PRC is Japan’s largest trading partner, measured in terms of the sum of trade flows both ways, and Japan is the PRC’s third largest partner, after the United States and Europe. Although the probability of war or high intensity conflict between Japan and the PRC is low, occasional flash points in the relationship, such as territorial claims, visits by Japanese prime ministers to Yasukuni shrine, and unresolved historical issues, have the potential to escalate. The Japan-PRC relationship is expected to be different from both the United States-PRC and the United States-Japan relationships, the latter of which is much more politically stable.

Discussing how political events, specifically cooperation and conflicts, affect the economic relationship and vice versa, Professor Drysdale defined conflict as an unfriendly or negative political action or stance of one country towards another. Conflict can be thought of interchangeably as the negative of cooperation. He used monthly bilateral trade, conflict, and cooperation variables for the period 1990–2004 to determine whether any relationship exists between trade and political conflict or cooperation, and the direction of its causality in the Japan-PRC relationship.

The main empirical results are that an increase in the PRC’s level of cooperation towards Japan helps explain an increase in Japanese exports to the PRC; in the 1990–1997 period, growth in Japan’s importance to the PRC increased Japanese cooperation towards the PRC; and in the 1998–2004 period an increase in Japanese cooperation towards the PRC helps explain an increase in Japanese exports to the PRC. Growing PRC exports to Japan and the United States are causing a rise in the measure of negative sentiment towards the PRC, but the growth of Japanese trade to the PRC dampens this effect. The large imbalance in the trade relationship between the PRC and the United States is causing tensions to rise in the United States from increased trade in both directions.

The stable and rapidly growing economic relationship, of which trade flows are a big part, constrains political behavior between the PRC and Japan. The rising interdependence between the nations and the concomitant opportunity cost of serious conflict has led to an easing of political tensions and even some movement towards increased cooperation. The structure of the political relationship appears likely, from the analysis, to be increasingly affected by the economic relationship.

Finally, Drysdale pointed out that economic relationships between countries involve a lot more than just trade in goods. An obvious next step would be to undertake a similar systematic study that would include trade in services and foreign direct investment as well as taking account of multilateral, or third party, effects of political distance and trade.