Inaugural Issue
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Asia-Pacific Studies
Volume 1, Issue 1, 2014, pp. 1-16
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
James R. Masterson[a],*
[a]
basis for regional stability. Can interdependence alone
provide stability even between powerful rivals such as
Japan and China? Buszynski (2009, p.164) finds that
indeed interdependence alone is not sufficient to provide
stability among regional rivals such as Japan and China,
though it is a step towards stability. Domestic actors
face pressure from the security community especially
where the military has an autonomous voice over national
security and the ability to implement strategic plans for
the state (Buszynski, 2009, p.164). Additionally, Ming
Wan’s research shows that despite heightened levels of
economic interdependence between China and Japan,
since the normalization of relations between the two
former adversaries, political relations have steadily
declined. In Wan’s (2006, p.2) words the relationship be
can describe as “dispute-prone, cyclical, and downward
trending but manageable politically; as troubled and
uncertain militarily; as integrating economically; and
as closer in people-to-people contact yet more distant
psychologically.”
In contrast to the downward trend in which Wan
described Sino-Japanese political relations, Sino-Korean
relations have experienced a markedly different trend.
Political relations between the two states have gradually
improved post-Tiananmen Square. As China gradually
moved away from support to the North, relations with the
South began to thaw.
Graph 1 shows the general trend of bilateral political
relations between China and Japan and China and South
Korea. Because this graph allows for only one numerical
representation of the bilateral relations for a given year,
data have been combined based on annual start data using
an arithmetic mean. Data for the graph comes for the
International Cooperation and Regional Conflict in the
Post-Cold War World, 1987-1999 developed by Goldstein
and Pevehouse (1999). Extensions were made to the
dataset based on news reports from the New York Times
using the same coding methodology.
Ph.D., Assistant Professor, Director of International Education,
Department of International Studies and Interdisciplinary Studies,
Morehead State University, United States.
*Corresponding author.
Received 20 October 2014; accepted 15 November 2014
Published online 26 November 2014
Masterson, J. R. (2014). Economic Interdependence and Its Limitations:
A Case Study of Recent Sino-Japanese and Sino-Korean Economic
and Political Relations. Asia-Pacific Studies, 1 (1), 1-16. Available from:
http://www.dcthink.org/index.php/aps/article/view/0013
Abstract
This paper addresses the following puzzle: Why have
increasing levels of economic interdependence (EI) led
to improved political relations between China and South
Korea but have not had the same effect on political relations
between China and Japan? Using a most similar system
design, this paper compares the relationship between trade
and financial investments and political relations with the
Sino-South Korean and Sino-Japanese dyads.
This research examines EI and political relations
within the two dyads during four major events from 1987
to 2005. The findings show that high levels of EI can
improve political relations during events that do not have
broad security implications. However, when security
concerns are paramount in the crisis, the effects of EI are
likely to be limited by the need for national leaders to
react strongly to the posed threat, consolidating national
support for policy.
Key words: Interdependence, Conflict, Liberal peace,
Foreign direct investment, Trade, Chinese foreign policy
INTRODUCTION
Johnson (Johnson & Keehn, 1995, pp.103-114) wrote
that interdependence within East Asia could provide a
Copyright © Developing Country Think Tank Institute
1
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
The graph shows that political relations between China
and South Korea have gradually improved throughout
the 1990’s and into the new millennium. However,
political relations between China and Japan have often
been conflictual, trending downward since a period of
cooperation after the Tiananmen Square incident and have
recently been volatile. The question this research seeks
to resolve is how it is that economic interdependence (EI)
can lead to improved relations between China and South
Korea but not between China and Japan.
Figure 1
Sino-Japanese and Sino-Korean Political Relations
Note. Source: Political relations dats comes from Goldstein, Joshua S., and Jon C. Pevehouse. International Cooperation and
Regiomal Conflicts in the Post-Cold War World 1987-1999 [Computer file]. ICPSR version.
1. BRIEF LITERATURE REVIEW
attempt to resolve issues in a more peaceful manner.
Recently, there have been a number of empirical tests
demonstrating the pacifying effects of international trade
(Polachek, 1980; Domke, 1988; Mansfield, 1994; Oneal
& Russett 1997, 1999; Russett & Oneal 2001; Gartzke,
Li, & Boehmer, 2001). Work by Keohane and Nye
(2001) shows that when states reach a level of complex
interdependence there are multiple channels of contacts
between the societies, there is no clear hierarchy of
agenda issues between the states, and the use of military
force to solve an interstate dispute is not an option.
Furthermore, work by Rosecrance (1986) shows that as
interdependence grows, states can more efficiently gain
needed goods through trade rather than war; therefore,
states will opt for trading relations. Conversely, barriers
to trade stimulate conflict (Viner, 1951).
The theory of comparative advantage holds that the
nations should produce and export those goods and
services for which they hold a comparative advantage,
and import those items that other nations can produce
at lower opportunity costs. The states will choose what
to manufacture based on their factors of production and
will trade according to their comparative advantage to
maximize the state’s welfare. Therefore a disruption
of trade can lead to a direct reduction in the state’s
welfare.
Economic liberalism focuses on the economic interactions
between states. This theory claims that EI reduces conflict
primarily by increasing the costs of war. Economies that
are interdependent find themselves, during the occurrence
of a disruption of trade, needing to restructure and adjust
to new trading pattern, rules and regulations. These
adjustments require costs and therefore act as deterrent
for a state to aggress against another state with which
it is interdependent (Polachek, 1980). A variant of this
situation is the relative cost argument that Rosecrance put
forth. As the benefits of trade increase, the relative gains
from war decrease, changing the incentive structure of the
state (Rosecrance, 1986).
The links between economic and political relations
have roots in the political writings of Montesquieu,
Smith, Stuart-Mill and Marx among others. For example,
for liberals such as Adam Smith, those who pursue their
self-interest also, by no intent of their own, promote
the interests of society, often more so than when they
strongly and purposefully intend to promote it (Smith,
[1776] 1937). For trade liberals, trade policies motivated
by self-interest may lead to peaceful relations among
actors because states are motivated by trade benefits
when conflict is restrained (which otherwise would bring
about a loss of gains from decreased trade) and instead
Copyright © Developing Country Think Tank Institute
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James R. Masterson (2014).
Asia-Pacific Studies, 1 (1), 1-16
3. NEO-REALIST HYPOTHESES
Economic liberalism is well suited to explain China’s
relations with its neighbors as China has “energetically
cultivated a ‘friendly neighborhood’ policy, especially in
the aftermath of the Tiananmen crackdown” (Aggarwal
& Koo, 2008, p.133). Currently, security for China
rests in its ability to maintain domestic stability, which
is best accomplished through economic growth and
international trade (Carpenter & Wiencek 2004, p.108).
As such, this research adopts the assumption that there
will be less conflict between China and its interdependent
trading partners as they experience higher levels of
interdependence, and conversely, there is more likely
to be unstable, conflicting relations when the two states
experience low levels of EI.
In contrast to liberal theories of interdependence and
conflict, realist theory leads to a diametrically opposed
relationship. Hirschman (1945) found that as a result of
asymmetrical trade, the benefits accrued by one state may
not equalize over time and could thus lead to changes in
the bilateral relationship. These shifting power relations
are regarded as a source of military confrontation (Gilpin,
1981; Levy, 1989; Mearsheimer, 1990). Waltz claims
that since interdependence leads to increased closeness
of contacts, it raises the prospect of at least occasional
conflict. Thus, he asserts that the liberal myth is false
(Waltz, 1970).
Finally, drawing from heightened levels of international
trade prior to the outbreak of WWI and low levels before
WWII, realist scholars have shown that interdependence
has no systematic effect on conflict. Conflict is largely a
result of political-military relations and power relations
underlie any apparent effect interdependence may have on
interstate relations (Mansfield & Pollins, 2003).
2. LIBERAL HYPOTHESIS
Extending from economic liberalism is what Barbieri
(2002, p.2) terms the “unconditional liberal hypothesis.”
This hypothesis states that economic linkages reduce
the likelihood of conflict regardless of the “nature
and context of the economic linkages.” Proponents of
this hypothesis believe EI is likely to reduce harmful
conflicts and hostile outcomes that come about as a result
of a conflict of interest and therefore improve interstate
relations. As the economic and political structure of the
international system becomes more intertwined interests
are increasingly affected when conflict emerges. When
two governments are highly interdependent, conflict
between them is likely to have serious consequences.
Seeking to avoid reducing its own welfare, a state is
likely to avoid conflict with others with whom it is
highly interdependent. War, however, is found to be
related with a decreased trade (Anderton & Carter
2003).
Lastly, interdependence is thought to enhance
integration, because each state recognizes the consequences
of its policies on the other state. To protect a state’s own
interest, it is wise to develop in-depth integration with the
state upon whom it depends through reduction of trade
barriers, creating more extensive trade routes, and an
increase of exchanges of people (de Vries 1990).
Polachek (1980) shows that states are deterred
from instigating conflict from a trading state due to the
potentially high costs associated with the loss of that
particular trade. Governments seek to avoid these losses,
particularly in democratic societies where businesses have
access to form pressures against government policies that
increase the costs of business and decrease profits, and
therefore are less likely to use aggressive policies towards
these trading partners. While China is not a democracy the
legitimacy of the ruling Chinese Communist Party (CCP)
rests on its ability to lift the masses out of poverty. To this
end the CCP has engaged in market reform, export-led
growth, and the creation of a nascent business interest.
4. INTERDEPENDENCE AND CONFLICT
Drawing from the theoretical approaches above,
the literature addresses three possible effects that
interdependence can have on interstate relations.
Increasing levels of interdependence can decrease
conflict and thereby improve interstate political
relations. However, realists find the increasing levels of
interdependence lead to an increase in conflict and thus
a deterioration in interstate political relations. Last, some
scholars believe that increasing levels of interdependence
have no effect on interstate political relations.
This research tests the claim of the liberal hypothesis.
For this study, EI is taken to mean bilateral trade and
financial flows and the two will only be separated to
describe important differences between them during the
events discussed below.
References to trade interdependence are based on the
sum of the ratio of bilateral trade with China relative
to GDP and provide a rough estimate of the importance
of each trading partner and the benefits received
through trade. 1 For instance, Sino-Japanese trade
interdependence in 1987 is the sum of the bilateral trade
divided by Japan’s GDP in 1987 and the bilateral trade
divided China’s GDP in 1987. In 1987, the bilateral
trade between these two states was roughly US $16.5
billion. Japan’s GDP was US $3,500 billion and China’s
1
Formula is a simplified version of trade interdependence borrowed
from Oneal et al. (1996) and is adapted for trade interdependence
by substituting each state’s world trade for the appropriate states’
GDP. The Pearson correlation between this simplified calculation
and Oneal’s more complex formula is 0.999 and is significant at the
p < .01 level for a 2-tailed test. For overview of Chinese EI see
Masterson (2012).
3
Copyright © Developing Country Think Tank Institute
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
trade.2 Second, both states have a security alliance with
the Unites States, and have US troops on their soil. This
alliance and troop presence acts as a potential source of
balance against China. The security alliances with each
state also help control for the effects that the United States
may have on interstate relations in East Asia through
pressures aimed at Japan and South Korea to influence
their interstate actions. Therefore, the military presence
of the United State cannot alone be the primary cause of
the difference between Sino-Korean and Sino-Japanese
political relations. Third, South Korea and Japan boast
some of the most technologically sophisticated weaponry
in the region as well as the most advanced military among
states in East Asia. These past military imbalances
have been a driving force of military modernization
in China, potentially leading to an arms race in East
Asia. Fourth, and lastly, these two states, together with
China, participate in a number of regional institutions.
These international institutions provide a forum for
peaceful resolution of disputes between these three states.
was US $370 billion. Therefore, Sino-Japanese trade
interdependence for 1987 was calculated as 16.5/3500
+ 16.5/370 which equals 0.0047 + 0.0446, resulting in
0.0493.
5. EXPLANATION OF THE CASES
The cases of Japan and South Korea are being
investigated for several reasons. These two states,
coupled with China, are the most significant states in
the region economically, politically, and institutionally.
First, of China’s neighbors these two states are the most
developed, and this level of development allows for
potentially high levels of interdependence with China. In
fact, both Korea and Japan manifest the highest levels
of trade interdependence with China at the end of the
studyperiod relative to both GDP and total trade. Bilateral
trade with Japan and Korea represented more than 15
percent of China’s GDP and 23 percent of China’s total
Table 1
Similarities and Differences on Key Variables for Japan and Korea
Dependent variable
● Level of conflict/cooperation
System 1: Korea
System 2: Japan
Similar or different
High levels of cooperation
Minimum levels of conflict
Different
● Level of economy based
interdependence
High and increasing (.13 in 2004)
High and increasing (.20 in 2004)
Similar
● Level of partner trade based
interdependence
High and increasing (.31 in 2004)
High and increasing (.27 in 2004)
Similar
● Level of financial interdependence
High and increasing
High and decreasing
Different
● Trend of relative power to China
Increasing (Korea was 1.5 times as
strong as China in 2000)
Decreasing (Japan was 2 times as
strong as China in 2000)
Different
● Level of development
High
High
Similar
● Political system
Liberal democracy
Liberal Democracy
Similar
● Market system
Capitalist
Capitalist
Similar
● Participation in Asian institutionalism
High
High
Similar
● Military Exp. As % of GDP
High (3% in 2002)
Moderate (1% in 2002)
Different
Independent variables
Other Variables
This study adopts a most similar systems design to
investigate why, among a sea of similarities, do higher
levels of EI increase cooperation between China and
South Korea but seemingly have no effect on cooperation
between China and Japan. Using Japan and South Korea
allows for control of a large number of variables that
are similar between the two states, and then focusing
on the dissimilarities between them. Table 1 shows a
basic outline of the similarities and differences between
the cases on key variables in the study. The illustration
shows that the most significant differences relate to
military power: China’s power relative to the two cases
and each case’s military expenditure as a percent of GDP.
Another evident difference is in the level of financial
interdependence. The analysis that follows will examine
Copyright © Developing Country Think Tank Institute
how EI influences political relations differently in South
Korea and Japan.
6. METHODOLOGICAL ISSUES
South Korea and Japan, coupled with China, the world’s
fastest and largest developing country, are the most
significant players in East Asia in terms of military
power, economic gravitas, and as strategic partners of the
United States. The goal of this research is to show the
limitations of EI when buttressed against relative power
concerns, thus allowing assessment of real world behavior
2
Statistics come from author’s calculations based on data of IMF
Direction of Trade Statistics, various years.
4
James R. Masterson (2014).
Asia-Pacific Studies, 1 (1), 1-16
removed from large-n statistical analyses. This study will
demonstrate why high levels of EI between China and
South Korea can lead to cooperation whereas the same
conditions have no effect on political relations between
China and Japan.3
The cases presented here illustrate the general trend
of Sino-Japanese and Sino-Korean relations within the
timeframe of the study. The cases provide an illustration
of the ebb and flow of real world economic and political
relations between the actors during important and familiar
crises between the states.
Work by King et al. (1994, pp.4-6) illustrates that
the differences in qualitative and quantitative works
are primarily in style and that neither is superior to the
other as long as they are based on sound principles of
logic and inference. The strength in this research lies
in its ability to derive details and sequencing from the
historical chronology in which particular events occurred,
permitting a better understanding of the plausibility and
logic of formal models of EI as applied to the study of
interdependence and Chinese foreign policy. It is in this
instance that the case studies presented here are assessing
the logical consistency of formal interdependence
models.4
The lay out for this study is straightforward. Japanese
and South Korean relations with China are examined
during four significant events between 1989 and 2005.
The events are: the Tiananmen Square crackdown of
1989, Taiwan Strait Crisis and nuclear tests during 1995
to 1996, and historical differences over territorial claims
that surfaced in 1990 and 2005. Discussion about the
events is organized into three sections: An overview of
the event, assessment of the level of EI between the states,
and an analysis of how economic and/or security concerns
influenced decision makers thus effecting political
relations. The paper concludes with an overall assessment
of how and when EI effects interstate political relations
between the dyads, particularly when military security
considerations are predominant.
suffered deteriorating relations with China as a result of
political expediency of the Communist Party leaders in
China. This case follows the liberal hypothesis showing
that in general, states with high levels of EI with China
are more likely to have cooperative relations compared to
states with lower levels of EI when China’s relative power
is not increasing. While the Tiananmen Square incident
was a show of domestic force by the PRC, it occurred at
a time when China’s military power was relatively weak
regionally. At most, it signaled warnings to the Japanese
and South Koreans as how a future Chinese power in the
region may use its military force if its regime survival
were at stake.
After months of democratic protests in and around
Tiananmen Square, and the fall of a number of communist
regimes in Eastern Europe, Chinese leaders feared for
their regime’s survival and threatened to use force to clear
the area if protestors would not disperse. The crackdown
began on June 4 th, 1989 when the CCP sent People’s
Liberation Army (PLA) tanks into the streets of Beijing
to close off the square’s entrance. Troops fired on student
protestors refusing to leave, while foreign journalists
claim that PLA troops also fired on fleeing protestors.
While the death toll has become a political figure, NY
Times journalist, Nicholas Kristof (1998) estimates that
between four and five hundred civilian deaths occurred.
With foreign journalists in Beijing, the Western world
looked on in horror, prompting calls from its leaders to
address PRC human rights violations.
Political relations between Japan and China had been
deteriorating before the Tiananmen Square incident, and
were recovering from an increase in tension as a result of
Prime Minister Nakasone’s 1985 visits to the Yasukuni
Shrine, as well as subsequent visits by cabinet members.
After Tiananmen Square, the Chinese changed their tone,
making statements of appreciation for Tokyo’s help in
political rehabilitation as well as economic modernization
(Whiting, 1992, p.46). Japan worked hard to get the G-7
members to lift sanctions and resume loans in July of
1990. Furthermore, the newly installed Japanese emperor
followed with a visit to Beijing in 1992. After Tiananmen,
relations between China and Japan hit an all-time high not
seen since the normalization of relations between the PRC
and Japan in 1978.
For South Korea, the Tiananmen Square incident led
to a withdrawal in relations with China. In the 1970’s,
after normalization with the US, China’s relations with
the South were still limited due to the PRC’s support for
the North. Kim Il Sung shared a common ideology and
revolutionary values with the leaders of the PRC. Beijing
and Pyongyang created a strategic-military alliance, and
according to Kim (1991, p.108), “there was no way to
distinguish between China’s North Korea policy and its
Korea policy in general.” However, as China’s values
turned from ideological pragmatic, the reliance of the old
7. TIANANMEN SQUARE-1989
7.1 Overview of Event
The international conflict created over the Tiananmen
Square incident provides an excellent example of how
Japan, a state with high levels of interdependence with
China, supported China internationally. More importantly,
Japan worked assiduously to resume financial relations
with the CCP while another state, South Korea, had
relatively immature economic relations and thus low levels
of interdependence with China. South Korea, therefore,
3
This relationship was acknowledged by Robert Sutter; see Sutter
(2008).
4
For the importance of this see Alston (1996, pp.25-30).
5
Copyright © Developing Country Think Tank Institute
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
revolutionary fervor for legitimacy began to wane. In
its place sprung up more pragmatic values of economic
growth and sustainability, particularly as these values
related to foreign-policy decision making (Kim, 1991,
p.108). This transition in the late 1970’s into the early
1980’s, however, did not spell an end to the strategic value
of the North. China used North Korea to balance against
the threat that the Soviet Union posed. The perception of
Soviet threat slowly waned as the US and USSR began
arms reduction talks and normalization of relations in the
late 1980’s.
In response to these events between the US and Soviet
Union, China began to establish closer ties with the
South and developed mutual relations with Seoul. This
move was consistent with their new values of economic
pragmatism pushed forward by Deng Xiaoping. South
Korea and China reciprocated with the establishment of
trade offices in each other’s capitals. These trade offices
issued visas and also mediated solutions to trade problems,
both of which helped overcome some of China’s unfair
trade policies at the time. According to Kim (1991,
pp.107-114), “policy differences between Beijing and
Pyongyang became more pronounced” and China began
to formulate peninsular policy taking their interests with
both Koreas in to account. However, relations between
the South and China never fully developed. China began
to reduce ties to the South following the Tiananmen
Square crisis.
The crisis on June 4 th posed a great threat to the
legitimacy of the ruling Communist Party of China. Kim
argues that the most important result of the Tiananmen
Square incident was that, in an effort to overcome its
own domestic political instability, China’s policy toward
the peninsula was to strengthen friendly relations and
cooperation with North Korea; relations with South Korea
were of a secondary nature. The ideological importance
of China’s decision-making process gained hold once
again and the more pragmatic aspects of its foreign-policy
were less visible (Kim, 1991, p.111).
7.2 Dyadic Interdependence Levels
Figure 2 displays dyadic trade with China for Japan and
South Korea from 1987 to 2004. Trade interdependence
between China and Japan was relatively high in 1989,
sharing the highest
level of interdependence among all of China’s
neighbors. In 1989, total trade between China and Japan
had decreased by about 1 percent from 1988, reflecting a
slight loss of trade between the two economies as a result
of the PRC response to the Tiananmen demonstrations.
Furthermore, from 1989 to 1990, bilateral trade continued
to decrease by nearly 11 percent, the biggest reduction
that trade levels would experience for the next decade and
a half. However, after this double digit loss in total trade,
trade between China and Japan grew at unprecedented
levels for the next five years. During this time period,
dyadic trade grew annually by more than 20% in 1991,
25% in 1992, 53% in 1993, 22% in 1994, and 20% in
1995, following the strengthening of political relations
between the two Asian powers after the Tiananmen
Square incident. Despite this reduction of trade between
the two economies just after the incident, Japan remained
the neighbor with whom China was most interdependent.
Financially, Japan contributed $3.3 billion in FDI and
loans to China in 1989, an 18 percent increase from the
preceding year.
Table 2
Japanese and South Korean Dyadic Trade With China (USD millions)
Year
Japan
1987
1988
1989
1990
1991
1992
1993
1994
1995
$16,479
19,109
18,929
16,866
20,284
25,385
39,085
47,809
57,474
S. Korea
ND
ND
ND
$669
3,245
5,061
8,220
11,694
16,976
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
Japan
$60,079
60,809
58,025
66,167
83,174
87,889
101,972
133,573
167,886
S. Korea
$20,012
24,021
21,286
25,036
34,500
35,940
44,089
63,231
90,068
10 percent in 1990 (Sutter, 2008, pp.223-224). During the
same year, Japanese Prime Minister Morihiro Hosokawa
characterized Sino-Japanese relations as being equally
important as Japan’s relationship with America.
All through the crisis, trade continued between the
two economies, though at a slightly reduced rate, while
FDI and ODA were restricted as a result of the political
conflict, though these would later get sent on once
sanctions ended. With respect to relations between China
and Japan, economics ruled over politics in the handling
of the Tiananmen Square crisis. Japan could have used
Among China’s neighbors, Japan was its top source
for capital and investment. After the Tiananmen Square
incident, Japan hesitated to the join the G-7 sanctions
on China. Japan eventually gave in, which resulted in
a stoppage of financial support to Beijing, particularly
a loan package worth US $5.2 billion. Additionally,
Japan discouraged travel to China (Drifte, 2003, p.30).
However, for Japan, the sanctions did not last long. In
July of 1990 Japan became the first G-7 member to
resume loans to China and 1991 saw a surge of Japanese
investment enter the Chinese economy after a reduction of
Copyright © Developing Country Think Tank Institute
6
James R. Masterson (2014).
Asia-Pacific Studies, 1 (1), 1-16
the opportunity to push for more democratic reforms
in China and rail against the hard-line approach by the
ruling CCP, but it refrained from undermining the current
regime in China. In fact, according to Drifte, Japan
actively pursued a minimizing of international criticism of
China as well as a quick end to sanctions. These attitudes
exhibited what Yasutomo (1995, p.74) describes as “a rare
aggressiveness in distinguishing its views from those of
other G-7 nations.”
Relations between China and Japan and China and
Korea took different paths following the Tiananmen
Square incident. EI between China and Korea was
much lower during the Tiananmen Square incident than
current levels of interdependence. In fact, of China’s
neighbors, Mongolia, Pakistan and the Philippines each
experienced a greater level of EI with China at the time of
the crisis compared to South Korea. When total bi-lateral
trade is measured in terms of GDP, South Korea’s trade
interdependence with China was .004 in 1990 compared
to Mongolia’s 0.040, Pakistan’s .013 and the Philippines’
.006.5 Japan’s trade interdependence with China in 1990
was .041. South Korea’s total trade with China in 1990
was only $6.7 billion, compared to Japan’s $168 billion.
Financially, Korea did not have any significant levels of
foreign direct investment or loans in China at the time,
compared to Japan’s $3.3 billion in 1989 and $3 billion in
1990.6
a resumption of these loans as soon as politically feasible,
balancing its ties to the West.
8. TERRITORIAL DISPUTE I – SENKAKU/
DIAOYU ISLAND DISPUTE 1990
8.1 Overview of Event
The case of the Senkaku Island (referred to as Diaoyu
by the Chinese) dispute shows how high levels of EI,
particularly financial interdependence, constrained
Chinese political action against the aggressor, Japan.
However, the same level of interdependence did not deter
Japan from intensifying the conflict with China on this
most sensitive of state concerns, territorial sovereignty.
Japan has an on-going territorial dispute with China
(and Taiwan) over the Senkaku/Diaoyu Islands in the
East China Sea. Drifte (2003, p.49) reports that this
territorial issue first surfaced as a result of the information
contained in a 1968 UN report on seismic activity that
was commissioned by the UN Economic Commission for
Asia and the Far East (ECAFE). The report mentioned
the possibility of large reserves of oil and natural gas.
According to Austin (1998), China did not assert its
claim until 1970, after Japan had brought the issue of
oil concession grants to the attention of the Taiwanese
government.
While South Korea does not have a border dispute
with China, China has laid claim to a significant area of
the South China Sea. China, along with five ASEAN
members, lays claim to some part of the Spratly and
Paracel Island chains. These various claims lead to
disputes between these ASEAN members. Settlement of
these disputes is significant in both South Korea and Japan
(which abandoned any claim to these islands by signing
the San Francisco Treaty)7 for a number of reasons (Drift,
2003, pp.55-56).
Firstly, the South China Sea serves as a crucial
shipping lane. More than 40,000 ships pass through the
sea annually, surpassing both the Panama and Suez Canals
(Nabers, 2001, p.68). 75 percent of South Korean and 82
percent of Japanese oil imports pass through the South
China Sea, en route from the Persian Gulf. 8 80% of
China’s oil shipments pass through the Malacca Straits
in the South China Sea (Lam, 2004). China is less
vulnerable to a disruption in the flow of oil among the
seas compared to South Korea and Japan. If a disruption
were to occur in the South China Sea, China could secure
oil through a pipeline connecting the Indian Ocean port
7.3 Analysis
To be sure, the Tiananmen Square crisis did not facilitate
states’ interests in military options as a possible solution.
Rather, the relative weakness of the PLA indicates the
insecurity that the CCP had internationally, during a time
when their legitimacy was being challenged domestically.
As China’s relative power was stable and weak, compared
to South Korea and Japan, EI was the predominant factor
in Chinese relations with South Korea and Japan.
This case supports the hypotheses that, as EI
increased, interstate political relations improved. Lack of
sufficient economic ties between South Korea and China
help explain China’s decision to put politics ahead of
economics after the Tiananmen Square crisis. Economic
relations between the two states took a backseat to
political interests, specifically among the Chinese. In
contrast, Japan had strong economically interdependent
ties with China, primarily in terms of trade and financial
loans. Although Japan did freeze loans to China, it did not
curtail trade with its Asian neighbor and pushed hard for
5
1990 is used here to illustrate Sino-South Korean trade
interdependence because data for 1989 is not available. Since trade
flows are unlikely to fluctuate wildly, 1990 provides for a good
examination of the lack of economic ties between China and South
Korea.
6
Trade statistics come from the IMF Direction of Trade Statistics
and Foreign Direct Investment and Loans figures come from the
China Statistical Yearbook from multiple years.
7
Drifte reports that Japan’s position is that it gave up its right to the
title of these islands, but did not specify to whom Japan turned it
over.
8
For statistics on oil imports see the United State government’s
Energy Information Administration at http://www.eia.doe.gov/cabs/
South_Korea/Oil.html
7
Copyright © Developing Country Think Tank Institute
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
of Sittwe in Myanmar with Kunming in Yunnan province
745 miles away. Additionally, China could increase its
oil supplies from the West Siberian oilfields in Russia
and from Kazakhstan where an 1860 mile pipeline
is under construction (Buszynski, 2009, p.159). Oil
shipments to South Korea and Japan could be rerouted
at considerable costs. Second, instability in the South
China Sea could lead to increases in pirating which could
increase the cost of these energy supplies due to the
additional security needed to protect vessels from these
bandits and for ransom payments when protection fails.
Third, and lastly, a South China Sea dominated by China
could be used as leverage by Beijing in the settlement of
other on-going disputes, which would increase China’s
influence in Southeast Asia at the expense of Japan and
South Korea.
South Korean and Japanese interests in the South
China Sea have been generally aligned with much of
Southeast Asia. These interests include: open sea lanes of
communication, preventing regional hegemony, continued
US presence to provide stability and cautious management
of China’s increasing role in the region (Sutter, 2008). A
South China Sea dominated by China has the potential to
alter the security perceptions of Southeast Asian states in
the area. How China handled its conflict with Japan in
the East China Sea over the Senkaku/Diaoyu Island can
provide insight into how it may act in the South China Sea
as well.
Conflict over the Senkaku/Diaoyu Islands erupted
in September of 1990 when a small group of Japanese
nationalists landed on the largest of the uninhabited rock
islands and repaired a previously erected lighthouse.
Tokyo increased the intensity of the conflict between
Japan, Taiwan, and China over this incident by allowing
the newly repaired lighthouse to be illuminated as an
official beacon. Despite high levels of economic trade
interdependence with Taiwan, Japan used military force
to keep a Taiwanese group, who consisted of athletes,
local officials and reporters, and who planned on placing
an Olympic torch that would have symbolized Taiwan’s
claim to the territory from landing on one of the islands.
The Japanese repelled the group using its Maritime Safety
Agency patrol boat and a helicopter to block a successful
landing of the Taiwanese vessel. 9 Taiwan’s Chief
government spokesman said that Taiwan will not rule out
any necessary means to preserve their territorial integrity
and that if their military gets involved, the responsibilities
would be borne by the Japanese.
China took a more tepid approach to this crisis. Beijing
had been requesting loans from Japan, most of which had
been suspended due to Beijing’s crackdown in Tiananmen
Square. “Premier Li Peng was virtually begging for Japan
to expedite resumption of loans,” reports Allen Whiting
9
(1992, p.48). Whiting argues that Chinese leaders chose
to limit their response to “official protests supplemented
with cooperative proposals.” Chinese leaders refused to
allow National People’s Congress delegates from Hong
Kong to debate the issue thereby forcing ministerial
action over claims to the islands. Furthermore, CCP
leaders went to great lengths domestically to protect the
Japanese by imposing a media blackout on the mainland,
disallowing the reporting of any demonstrations or even
limited harsh commentary by the Hong Kong press. How
is it that financial interdependence between China and
Japan could not deter Japan from ratcheting up tensions
over the conflict while simultaneously constraining the
Chinese response to Japanese actions?
8.2 Dyadic Interdependence Levels
For China, high levels of financial interdependence
between Beijing and Tokyo restricted their political
behavior, forcing them to place economics ahead of
politics, but not the Japanese. After the Tiananmen
Square incident Japan had desired not to restrict economic
activity between the two states. Japan, however, felt
too much pressure from the West and subsequently
relented, agreeing to sanctions on the PRC. Japan was,
however, the first nation to resume normalization of
relations with China and resume its loans. Japan was
just as eager as China to return to pre-Tiananmen Square
relations. Despite these high levels of EI, Japan was not
deterred from recognizing this lighthouse as an official
navigational beacon and reaffirming its territorial claim
to the Senkaku/Diaoyu Island chains in breach of its
agreement a decade ago with China to settle the issue at a
later date.
In order to protect financial relations with Japan,
Chinese leaders went to great lengths to silence domestic
criticism of Japanese actions, despite the fact that doing
so could damage the legitimacy of the CCP to protect
Chinese sovereignty. Protests against Japan raged on
in Hong Kong, Taiwan, and by Chinese in the United
State, however on Mainland PRC “leadership sought
to quell expressions of anti-Japanese sentiment by
imposing a blackout on coverage of the protests occurring
overseas… while the Beijing municipal government
refused permission for rallies on university campuses and
increased security in the university district” (Downs &
Saunders, 1998/99, p.132). In light of Taiwanese direct
involvement in the issue of the threat to CCP legitimacy
in China was real. For instance, Hu Sheng, the president
of the Chinese Academy of Social Sciences, warned that
continued suppression of anti-Japanese sentiment and
dismissal of popular support for a strong stance against
Japan on this issue could bring national unrest greater
than that in the Tiananmen Square incident (Downs &
Saunders, 1998/99, p.139).
Much like the previous year, EI between China and
Japan had remained high into 1990, and very low between
Lexis-Nexis QNP article October 23rd, 1990.
Copyright © Developing Country Think Tank Institute
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James R. Masterson (2014).
Asia-Pacific Studies, 1 (1), 1-16
South Korea and China. Japan continued to rank as
China’s top trade partner, trading nearly $18 billion worth
of goods, 50 percent greater than China’s second largest
trading partner, the United States. This trade accounted
for 15.5 percent of China’s total trade and about 3.4
percent of Japan’s total trade in 1990. In comparison,
South Korea’s total trade with China was less than $670
million, slightly greater than China’s total trade with
Pakistan. In 1990, China ranked as Japan’s 5th largest
trading partner, just behind Australia, and did not rank
in South Korea’s top 20 trade partners. A similar pattern
emerges when examining South Korea and Japan’s trade
and financial interdependence with China. In 1990 Japan
had an economic trade interdependence level of 0.041
with China and a partner based level of 0.185. South
Korea’s corresponding levels were 0.004 and 0.010
respectively.
Japanese financial interdependence with China was
moderately high at the time of the Senkaku/Diaoyu Island
dispute; however, China was more reliant on Japanese
investments, specifically more advanced technologies in
the electronics industries, than Japan was reliant on China
as a source of international investment. In 1990 Japanese
foreign direct investments in China totaled more than $503
million in realized value and represented 14.4 percent of
all Chinese foreign direct investment, nearly a forty-two
percent increase of investment from the previous year.10
Japan was China’s second largest foreign investor after
the United States, while China was not even a top ten
destinations for Japanese investment. Japan was currently
investing in much of Southeast Asia, which made up
sixty percent of Japan’s Asian investment, while China
accounted for less than half of one percent of Japan’s
Asian investment.
While this level of Japanese FDI in China is only
slightly greater than one-tenth of one percent of China’s
GNP, it is the type of FDI that had a lasting impact
on the future growth of the Chinese economy. For
example, in 1987, nearly half of Japanese investments
in China were in the electronics industry rather than
investment in the often assumed low-skilled, lowtechnology textile sectors. The percentage of Japanese
investments in electronics dipped to just 10 percent
following the Tiananmen Square incident, but rebounded
to 33 percent in 1991 and remained the single largest
industry in which Japan invested with China for
the rest of the decade. Japanese investments in the
technology sector in China have increased the standard
of living for many Chinese citizens. For instance, in
1984 only 6 percent of the Chinese population owned
a color television set compared to 80 percent in 1991.
Chinese color television production surged from 4.3
million sets in 1985 to 12 million in 1991. Japanese
companies, however, kept advanced technologies, such
as high definition televisions, within Japan’s borders,
safeguarding its future technological advantage over
China (Harwit, 1996, pp.978-994).
8.3 Analysis
The trend presented above shows that China was indeed
more reliant on Japan for financial investment at the
time of the Senkaku/Diaoyu Island dispute than Japan
was on China for a source of investment opportunity.
Much of the barriers that deterred Japanese investment
in the 1980’s, for example, difficulties in sourcing
foreign supplies, adapting to local infrastructure, seeking
legal protection, and bargaining with bureaucrats at
all levels of government, continued to exist into the
early 1990’s, barriers that limited Japanese investment
(Harwit, 1996, pp.989-990). China, however, relied on
Japanese investments for job creation and technology.
Though Japan did not outsource the latest available
technologies, the “Japanese were a ready and apparently
willing source of production know-how” (Harwit, 1996,
pp.989-990). This knowledge and investment would
later help propel China to become the world’s top
importer-exporter of electronics equipment, accounting
for nearly twenty-five percent of Chinese international
trade.
This case does not confirm the hypothesis. As EI was
high, interstate political relations deteriorated. High
levels of EI, specifically trade interdependence, did not
deter Japan from intensifying conflict with a relatively
weak China over the Senkaku/Diaoyu Islands. Territorial
sovereignty is one of the most sensitive issues that states
confront. In this instance, recognition of ownership of this
otherwise useless island brought with it expanded fishing
rights due to an increased exclusive economic zone and
potential reserves of oil and natural gas that lie beneath the
seabed. At the time of this event, China was a net exporter
of oil and would remain so until the middle of the decade.
Japan has long been a country entirely dependent of
foreign sources of oil, therefore, not only were economic
stakes high in this dispute, but so too was national security
as Japan has in the past gone to great lengths to reduce
dependence on foreign sources of oil (Copeland, 2003).
For the Japanese, the oil crisis of 1970s was just barely a
decade old and reminded them of the costs associated with
an unstable oil market.
9. TAIWAN STRAIT CRISIS 1995-1996
9.1 Overview of Event
The Taiwan Strait Crisis was set in motion for the issuance
of a travel visa by the United States to Taiwanese President
Li Teng-hui so that he could travel to and attend a reunion
10
Data comes from the website of the Ministry of Commerce of the
People’s Republic of China accessed 25 August, 2008 as found at:
http://www.fdi.gov.cn
9
Copyright © Developing Country Think Tank Institute
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
at Cornell University. In response to the United States’
official recognition of Taiwan, failed diplomacy between
the two powers that followed the leader’s visit to the US,
and increased steps towards Taiwanese independence by
Li, the PRC announced a series of military exercises off
China’s southeastern border that simulated an attack on
Taiwan (Ross, 2000, p.95). According to Ross (2000),
there were three goals for China’s show of force. The
first goal was to remind the United States that its 45year long pledge to use force to prevent Taiwanese
independence was still credible and “to coerce the
United States in to ending its indirect yet increasing
support for Taiwan’s independence by forcing the
Clinton administration into reassessing its relationship
with Taiwanese leadership and to revise its position on
Taiwan’s role in international politics” (Ross, 2000,
p.89). The second goal was to force Taiwan to abandon
its redefinition of the “one China” policy by making
clear war would be a result of independence. According
to Ross (2000, p.93), Li used his visit to New York as a
way to boost Taiwan’s status among other states in the
hopes that it would create a domino effect where other
states would begin recognizing Taiwan’s international
status. Specifically, Li asked Japan to invite him to the
upcoming APEC meeting to be held in Tokyo. Lastly, a
third goal of China’s coercive confrontation with Taiwan,
according to Ross (2000, pp.102-103), was to intimidate
voters who may have favored pro-independence
candidates in the (then) upcoming parliamentary and
presidential elections on the neighboring island. Li’s
party did not finish the elections as successfully as
was initially predicted and held on to the majority in
parliament by only two seats.
The Chinese military exercises and tests took place over
a series of months and included the involvement of naval
warships and warplanes, live firing, and missiles being
launched into the waters off the coast of Taiwan (Drift,
2003, pp.64-65). In September of 1995 Taiwan responded
with their own set of air, ground, and naval military
operations “simulating a response to an enemy attempt to
land on Taiwan” (Ross, 2000, p.101). The conflict climaxed
around the time of the first direct presidential election on the
small island, in March of 1996. In February the PLA placed
150,000 troops in Fujian Province along the southeastern
border for exercises and from March 8th to March 15th
fired missiles even closer to Taiwan than they had during
the previous year. In the last sequences of training events,
the PLA underwent amphibious assault landing exercises
just 18 miles from the Taiwan-controlled Matsu Island
involving nearly 400,000 troops (Funabashi, 1999, pp.351366).
The intense conflict between Taiwan and the PRC
did adversely affect trade between China and Japan by
driving up costs of freight insurance and, due to the
rerouting of flights, air transportation costs. Despite
Copyright © Developing Country Think Tank Institute
these increased commercial costs, Japanese leaders were
concerned primarily with traditional security interests.
Chinese missile targets were less than fifty miles from the
Japanese island of Yonaguni, prompting concern in Tokyo
that a missile might accidentally land there (Garver, 1997,
p.136). Despite the proximity of Chinese targets, Japan
made no threats to reduce ODA or FDI, nor did Japan
place restrictions on trade between the two economies. As
reported by the Asahi Shimbun on April 4th, 1996, for the
Japanese the crisis “had demonstrated that the Chinese
leadership had not shown reluctance about using military
might to ensure its national unity…” The Japanese public
became increasingly wary of China’s intentions in the
region. For example, before the Taiwan Strait Crisis, a
1994 Yomiuri Shimbun polsl found that eighteen percent
of those Japanese surveyed felt that China was a military
threat. In a separate Yomiuri Shimbun poll in the March
1997, a year after the climax of tensions in the Strait, forty
percent of those Japanese surveyed viewed China as a
military threat. Yoshihide Soeya (1998, p.23) reports that
the Chinese military exercises and missile tests “exposed
the fundamental character of Chinese foreign policy at this
time of transition – assertive projection of its long-term
desires.” In a Far East Economic Review report, Japan’s
ruling party spokesman, LDP Secretary General Kato
Koichi expressed concern over the crisis by saying “China’s
missile testing in international waters in the Taiwan Strait
was behavior that cannot be tolerated.” China’s actions
drew the attention of the Japanese to Chinese capabilities
and led many Japanese to reconsider the reduction of U.S.
military presence in Japan (Ross, 1996). Despite these
strong protestations about China’s actions in the Strait,
Japan took no action. Hard-line LDP members demanded
that Japan freeze yen loans to China but in response to this,
the government only postponed talks with China about
these loans (Garver, 1997, pp.136-137).
The South Korean response to the events in the Strait
was predictably restrained. South Korea was poised
to take no sides. In a Las Vegas Sun article published
March 12 th, 1996, Foreign Minister Gong Ro-myung
called the missile tests “undesirable” for regional stability.
Acknowledging China’s “One China Policy,” thus making
the Taiwan Strait crisis an “internal” affair, was perhaps
the most consistent position South Korea could take
as its leaders looked for Beijing to recognize its own
reunification struggle. Chinese Premier Li Peng did just
that. Li told South Korean President Kim Young Sam that
China desired stability on the Korean peninsula and “that
Korean problems should be settled by Koreas. Pointedly,
Li then called for Chinese problems to be settled
exclusively by China” (Garver, 1997, pp.141-142).
9.2 Dyadic Interdependence Levels
Economic relations between China and Japan just prior to
the outbreak of the Taiwan Crisis were quite strong, and
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James R. Masterson (2014).
Asia-Pacific Studies, 1 (1), 1-16
ranked twelfth in the world for bi-lateral trade. Contrary
to foreign investment trends in the 1980s, in 1992
Japanese investors began to take an interest in China.
From March of 1992 to 1993, new Japanese investments in
China rose 87 percent, during a period of time where total
Japanese overseas investment fell by 18 percent (Ross,
1996, p.6). By 1995 large firms such as Matsushita, NEC,
and Toyota built large-scale manufacturing plants, thereby
transferring high-technology industries in China. China
also received its highest levels of ODA in 1993 through
1995, annually taking in $1.4 to $1.5 billion, which
accounted for 62 percent of its ODA in 1994 (Klein, 1998,
pp.138-139). In 1995 the two economies had reached
their highest levels of trade interdependence, 0.085, a
level that would not be reached again for four more years.
Bilateral trade increased 20 percent from 1994 to 1995,
but growth in trade slowed to just 4 percent between
1995 and 1996, a time when much of the Strait Crisis was
developing. Around this time, total Japanese trade with
China amounted to more than one-fifth of China’s world
trade.
Prior to the outbreak of the Taiwan Strait crisis,
relations between South Korea and China had rebounded
from the Tiananmen Square incident. China and South
Korea cooperated on a number of issues: normalization
of relations in 1992, requests for official Japanese
apology for past war crimes during WWII, and transfer
of military technology from South Korea to China,
despite official US resistance. These developments
partly explain South Korea’s hands-off approach to the
events in the Strait.
The normalization of relations between South
Korea and China in 1992 served to accelerate trade and
investment between the two former enemies. Chinese
trade with South Korea in 1992 accounted for only
three percent of China and South Korea’s total trade
for the year, however, just three years later bilateral
trade between the two states more than doubled as a
proportion of total trade and bilateral trade experienced
higher levels of growth than during any other four
year time period. China also became an important
destination for South Korean investments. South Korean
investments accounted for 2.7 percent of all of China’s
FDI in 1995. The normalization of relations between
Beijing and Seoul helped to ease tensions between the
former adversaries, especially regarding the future of
the Korean Peninsula and China’s longstanding support
of Pyongyang, and the way was paved for South Korean
development assistance. Assistance to China from South
Korea rapidly increased following the normalization of
relations between the two states. For instance, assistance
amounts grew from US $152,544 in 1992 to $4,047,367
in 1995, representing an average increase of nearly 640
percent. Although the absolute amounts of assistance
are quite low in terms of GNP or financial flows in
general, they represented a growth in the proportion of
all of South Korea’s development assistance from 1.3
percent to 30.6 percent over that time frame, effectively
illustrating China’s growing importance relative to other
states for which South Korea also provides development
assistance.
As economic relations grew between South Korea and
China, so too did political relations. In 1995, during Jiang
Zemin’s historic visit with South Korean president Kim
Young Sam, the two government leaders issued a joint
statement calling out Japan for not recognizing that “the
Pacific War was an act of aggression.” This visit marks
the first time that a Chinese leader set foot on Korean soil,
as no Chinese head of state had visited South Korea up
until that time (Koh, 1996, pp.53-60).
9.3 Analysis
This case study supports the hypothesis that high
levels of EI improve interstate political relations. The
Taiwan Strait crisis shows that during a period of high
EI between Japan and China, Japanese leaders were
unwilling to place economic sanctions on China as
protest to its direct show of force in Taiwan. Chinese
actions raised significant alarm in Japan about Chinese
capabilities and future intentions that would lead to a
deterioration of relations between the two states in the
years that followed. Despite Japan’s lack of political
tools to confront China with an adequate response to the
firing of Chinese missiles off the coast of Taiwan, the rate
of trade between China and Japan did decrease. China’s
relative power had increased since the beginning of the
decade compared to Japan, but not South Korea. But
these increases over Japan clearly did not translate into
an absolute advantage, as Japan still had vastly superior
weaponry and trained troops. As a result, economic
considerations remained the top concern of the Japanese
and the Japanese did very little to protest events in the
Strait, continuing to defer to China so as to not risk its
economic interests there. Clearly forces existed within
Japan that pushed for tougher Japanese actions against the
PRC, but its leaders refrained in response to the Taiwan
Strait crisis. However, when Japan’s security interests
were challenged directly, when the Chinese tested
nuclear weapons in 1995 and 1996, Japanese leaders did
take action and used their economic leverage to punish
China. Japanese development aid and loan packages
to China were curtailed in response to this security
threat, actions that further deteriorated relations between
the two states.
Compared to Japan, South Korea was less punitive
to China regarding both the Taiwan Strait crisis and
nuclear testing. While the absolute value of development
assistance to China from South Korea did decrease from
1996 to 1997, so did South Korea’s entire level of support.
In fact, the proportion of aid that China received from
South Korea in 1997 slightly increased from 1996. China
11
Copyright © Developing Country Think Tank Institute
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
received 27.8 percent of South Korea’s development
aid in 1996 and 29.3 percent in 1997, figures that do not
reflect any intentional reduction as a sign of punishment
for Chinese actions in the Strait.
Relations between the PRC and ROK continued
to advance despite events in the Strait and the nuclear
testing. Two reasons exist for this. First, as mentioned
above, from the South Korean perspective, the Taiwan
Strait crisis was an internal matter under the “One
China” policy that it acknowledges. South Korea has a
particular interest in acknowledging this policy as it looks
to China to support its own unification efforts. Second,
while South Korea did find the repeated nuclear testing
“regrettable,” the Chinese nuclear arsenal does not pose
the same level of threat to South Korea as it does to Japan.
The historical events prior to the outbreak of the Second
Great War make Japan an obvious target of China’s
nuclear deterrence strategy.
run media claimed the Koguryo Kingdom was a
regional administration that received its authority
from Chinese dynasties. The Koguryo Kingdom ruins
are spread on both the present day states of North
Korea and the People’s Republic of China, and both
states filed for the ancient dynasty to be listed with
UNESCO’s World Heritage list. Seeking to avoid conflict
between the two petitioners, UNESCO granted both
applications.
As reported in a July 15th, 2004 article in the Korea
Times, when the Kingdom was removed from a Chinese
government website that previously listed it as one of
the three kingdoms that united to form modern-day
Korea, China’s top diplomat in Seoul was called in to
hear Korean protests about the move. In response to
the Chinese government’s decision to remove Koguryo
Kingdom from the website, Korean leaders created a
working-level state committee on the history of Koguryo.
The conflict climaxed when China removed all Korean
history prior to the 1948 creation of the Republic of Korea
from the website. According to a Yonhap News Agency
report on August 27th, 2004, agreement was reached in
August. China agreed not to change references to the
Kingdom as part of Korea’s history, and both sides agreed
to leave this issue for academic, rather than political,
debate.
This conflict represents an issue of national pride
and history for the Koreans and sensitive, long-term
strategic sovereign territorial concerns for China.
Korean perception of China’s importance was damaged.
Prior to the conflict, in April of 2004 a Dong Ilbo poll
showed that 84 percent of the Korean public in the south
expressed that providing serious consideration to China
was important. In January of 2005, however, only 40
percent of Koreans had favorable views of China (Snyder,
2009, p.94).
10. TERRITORIAL DISPUTE II –
KOGURYO KINGDOM 2005
10.1 Overview of Event
South Korea and China are not without a territorial
dispute between them, a dispute that is, however, much
less salient than the Senkaku/Diaoyu Island controversy.
This Sino-Korean dispute centers on a historical
study commissioned by China’s government that was
conducted by the Chinese Academy of Social Sciences
to examine the history of Northeast Asia. The issue was
whether or not the ancient Manchuria-centered Koguryo
Kingdom should be listed as a precursor to Korean
and Chinese states (Snyder, 2009, p.92). While the
significance of this conflict is not obvious, considerable
long-term strategic issues have the potential to arise
post-unification of the Korean peninsula. China’s
interest in this dispute lies in pushing for a settlement
that will not allow a unified Korea to claim large areas
of land that extend into Manchuria. One of China’s
provinces, Jilin, has a considerable number of ethnic
Koreans. China feared that nationalist fervor in the
Yanbian Korean Ethnic autonomous region in Jilin could
spark unrest and attempt to unite with a unified Korea.
For Koreans in the south, Snyder (2009, p.92) points out
that the Koguryo Kingdom is an issue of pride for many
Koreans as children are taught that Koguryo is one of
three kingdoms that united to form Korea. Additionally,
this issue provides valuable insight for Koreans
regarding how China would likely handle its growing
role as a leader in East Asia.
According to a Korea Times article in the summer of
2004, during a time of “China fever” in South Korea,
the issue of the ancient Koguryo Kingdom became a
full-scale confrontation when Chinese government-
Copyright © Developing Country Think Tank Institute
10.2 Dyadic Interdependence Levels
South Korean total trade with China began to increase
exponentially in 1992, after the normalization of relations.
Figure 23 on the next page displays the relationship
between PRC-ROK bilateral trade and this trade as a
proportion of South Korea’s world trade. In 1993 PRC
trades made up just over 5 percent of South Korea’s trade
and by 2004 it made up over 20 percent. By the end of
2004, China accounted for 25 percent of the entirety of
South Korea’s growth in trade. China also became South
Korea’s top trading partner.
From China’s perspective, trade with the ROK
amounted to little more than 3 percent of China’s world
trade in 1992, and it increased to 7.8 percent by 2004. At
the time of normalization of relations between Seoul and
Beijing, South Korea was China’s sixth largest trading
partner and by 2004 became its fourth largest, surpassing
Germany and Russia.
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Friction between the two governments, however, did not
last long after the historic dispute. South Korea continued
to support policies favorable to China at the expense of
the United States. For instance, South Korean officials
refused to follow the U.S. lead in policies that were
unfavorable to Beijing and were also reluctant to allow
U.S. forces in South Korea to be deployed elsewhere in
East Asia for fear of possibly becoming involved in a
conflict with China over Taiwan should the U.S. intervene
(Sutter, 2008).
Calls for economic sanctions by limiting foreign
investment in China were made in South Korea in
response to Chinese claims over the history of the
Koguryo Kingdom. In response to these calls, Mo Jongryn, political economist at Yonsei University argued in an
August 21st, 2004 Korea Times article that “it’s not going
to work. [South Korea] is more dependent on China
than they are on [South Korea]. The threat of economic
sanctions is not credible.” EI between China and South
Korea limited South Korea’s response to this incident.
Figure 2
Dyddic Trade Between PRC and ROK
Note. Source: IMF Direction of Trade Statistics
Financial flows into China have also shown a similar
growth pattern. In 1994, South Korean FDI into China
was valued around US $720 million, accounting for 2.1
percent of all new FDI in China for that year. By 2004
this figure increased to US $6.2 billion, accounting
for more than 10% of all new FDI into China. While
South Korea is not a significant source of foreign
loans to China (less than one quarter of one percent of
foreign loans in China come from South Korea) South
Korean levels of development assistance have increased
dramatically since 1992. At that time, China received
1.3 percent of the entirety of South Korean development
assistance, compared to 2004 when it received 26% .
The absolute value of this development assistance is
quite low, especially relative to China’s GNP. In 2004
China received US $2.8 million in aid (less than two
one-hundred-thousandths of a percent of China’s GNP in
2004), but importance lies in South Korea’s recognition
that China is a meaningful state to its national interest
that merits the third largest share of developmental aid
South Korea has to offer for peace-time countries.11
CONCLUSION
Four important conclusions can be drawn from the above
analysis. They address not only how and when EI affects
political relations between states, but also why it is that
EI has different effects for two states with seemingly very
similar characteristics to one another. First, the findings
show that high levels of EI can improve political relations
during events that do not have broad security implications.
Second, when security concerns are paramount in the
crisis, the effects of EI are likely to be limited by the
need for national leaders to react strongly to the posed
threat, consolidating national support for policy. Third,
the findings show the different effects that trade and
financial interdependence have on political relations.
High levels of trade interdependence appear to “tie” states
together, but do not offer states the ability to quickly
alter this relationship without draconian measures (such
as immediate trade embargoes and high tariff barriers,
actions which are likely to violate international trade
agreements). High levels of financial interdependence,
however, allow states to use this financial connection as
leverage when that partner creates political tension. And
lastly, the results show that the reason there the effects that
EI has on political relations act differently for Japan than it
does for South Korea results from differences in how the
states perceive the event. If the state perceives the event
as a security threat, then high levels of EI are not likely to
have an effect on interstate political relations. What Japan
perceives as a security concern may not be perceived by
South Korea as such.
As was shown in the Tiananmen Square crackdown,
levels of EI between China and South Korea were not
sufficiently high enough to keep China from experiencing
10.3 Analysis
This case study supports the hypothesis that when EI is
high, interstate political relations improve. The Koguryo
Kingdom dispute occurred at a time when there had been
an upsurge in anti-American sentiment in South Korea
(Chung, 2003). Despite this seemingly ideal opportunity
for Beijing to increase relations with Seoul at the expense
of the United States, political conflict over the ancient
kingdom was escalated when the Chinese removed preWWII Korean history from its Foreign Minister’s website.
11
South Korean support for the wars in Iraq and Afghanistan were
listed as development assistance. In 2004 Iraq received US $40
million and Afghanistan received $21 million of South Korea’s total
$112.15 million given to states.
13
Copyright © Developing Country Think Tank Institute
Economic Interdependence and Its Limitations: A Case Study of Recent SinoJapanese and Sino-Korean Economic and Political Relations
deteriorating relations with the South after the Tiananmen
Square incident. In contrast, high levels of EI between
China and Japan helped to minimize political fallout in
Japan as a result of this event. Japanese leaders were
very eager to normalize relations with China so that Japan
could resume financial transactions. Japan went to great
lengths domestically to limit criticism of China and was
the first G-7 state to resume financial interactions with the
PRC.
South Korea on the other hand experienced a retraction
in political relations following the Tiananmen Square
incident at a time when its economic and financial
relations were just getting started. The set back lasted
little more than 3 years. In 1992 South Korea and the
People’s Republic of China normalized relations.
Once EI levels rose between South Korea and China,
issues that did not present a security concern did not
cause high levels of political conflict. This is evident in
the Koguryo Kingdom dispute. Though tensions were
increased by Chinese government leaders’ removal of all
pre-WWII Korean history from the PRC’s Ministry of
Foreign Affairs website, South Korean leaders rebuked
calls from within to use its economic leverage against
China. In the end, the leaders of the two states agreed that
the debate should take place academically, not politically.
Additionally, the Chinese pledged not to change current
school texts to reflect this new debate, a pledge that
maintains historical Korean ties to the ancient kingdom.
Chinese financial interdependence with Japan was
shown to restrain Chinese response during the Senkaku/
Diaoyu Island dispute in 1990 at a time when Chinese
leaders were “practically begging” Japan for loans.
Chinese leaders enforced strict media blackouts of the
event on the mainland and limited speech critical of the
Japanese government in the National People’s Congress.
The second finding shows that when an event is a
security concern to one of the states, the effects of EI on
the resulting interstate political relations are limited. From
the Taiwan Strait Crisis, results show that despite high
levels of EI between China and Japan, political relations
between the two rapidly deteriorated. The deterioration
was not particularly due to the PLA exercises in the Strait,
however, since this was aimed at intimidating Taiwan and
not Japan; but rather deterioration occurred as a result
of the nuclear tests that concurred with the Strait Crisis.
These nuclear tests posed a significant level of threat to
the Japanese due to their past historical aggression with
China as well as their lack of a nuclear deterrent of their
own that could have countered the Chinese strategic
nuclear arsenal. Additionally, the Senkaku Islands are
seen as a long term economic interest crucial to Japan’s
national security because Japan is highly dependent on
foreign sources of energy. Therefore, securing its rights to
any potential oil reserves that may lie beneath the Senkaku
Island is, logically, a national security issue. At the
Copyright © Developing Country Think Tank Institute
time, the Chinese were net exporters of oil and as such,
China was not highly dependent on foreign sources of
energy. Thus, the dispute was not one of national security
concerns for Chinese leaders. This led to restraint among
the Chinese, especially due to financial interdependence
concerns, specifically, China’s need to secure much
needed loans from Japan. The Japanese, viewing this
issue as a national security concern, were not limited by
financially interdependent factors, and ratchets up the
dispute by officially recognizing the lighthouse erected on
the island.
Third, the analysis above shows that when states
reach higher levels of financial interdependence they may
use this leverage against the partner state in response to
conflict. Japan promised and made good on its threat to
restrict loan concessions to China in response to nuclear
testing by the PRC. Additionally, the Japanese used its
financial leverage, reluctantly, in the face of Western
pressure following the Tiananmen Square event.
Lastly, light is shown on the puzzle offered at the
beginning of the paper. That is, how it is that increasing
levels of EI with China, and relatively high levels
compared to all other Chinese’s neighbors, produce
different effects on interstate political relations for
Japan and South Korea. The analysis above shows this
difference is primarily due to whether or not the state
perceives the event as a security threat. Perceptions
of relative power capabilities can limit the positive
contributions to cooperation that EI creates. Events such
as the Senkaku/Diaoyu Island dispute and Chinese nuclear
testing were perceived to be a threat to Japanese security
interests, but not to South Korean security interests.
Two states, therefore with nearly identical levels of EI
with China can experience different effects on interstate
political relations by EI depending on the security concern
created by the event.
In closing, a few caveats are called for. First, the
above analysis does not represent a sample of events from
which larger generalizations can be drawn. The purpose,
rather, is to illustrate the limits of EI on political conflict.
A second caveat is that the results do not prove that
high levels of EI improve interstate political relations
per se. Rather they show a general trend between the
players, that is, as EI increases, interstate political
relations improve. Deteriorations in interstate political
relations that did not occur because EI was high cannot
be examined (because it did not occur). It was therefore
necessary in this analysis to look at events that initially
occurred and then examine how EI affected the resulting
interstate political relations by the other states. This fact
is precisely why the two events that China instigated
against actors besides Japan and South Korea were
chosen: Tiananmen Square and Taiwan Strait Crisis.
This permitted analysis of Japanese and South Korean
reactions’ and the Chinese responses.
14
James R. Masterson (2014).
Asia-Pacific Studies, 1 (1), 1-16
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