Time to make a sea change in policies

Heated tensions between China and Japan over disputed islands in recent weeks threaten to ruin one of the world's most dynamic regional economic regions. Peripheral territorial claims by Taiwan and South Korea are adding to the mêlée. This could mar the thriving transnational movement of goods and capital and threaten the prosperity of all these nations.

Trade among Northeast Asian countries and the investment of China, Japan, South Korea and Taiwan - the four parties slugging it out for the Senkaku/Diaoyu/Tiaoyutai islands in the East China Sea and the Takeshima/Dokdo islands in the Sea of Japan - amounts to billions of dollars. The Chinese State-owned newspaper People's Daily has warned Japan that it may face "another lost decade" - a reference to Japan's two decades of zombie economic growth since the 1990s. Open calls in China to "play the economic card" and hurt Japan are vitiating the atmosphere. China's export restrictions on rare earth minerals to Japan in 2010 were linked to political animosities over control of the islands. That episode revealed how tenuous the $345-billion worth of annual bilateral trade between China and Japan can become when politics overtakes economics.

Japan is economically more dependent on China, and this disadvantage places the onus on the former to be more accommodative. However, Japan happens to be China's biggest source of incoming foreign capital. A pullout of Japanese investments will be disastrous for the Chinese, who are struggling to cope with lowered economic growth prospects in a power-transfer year, when a new dispensation takes over from President Hu Jintao and Prime Minister Wen Jiabao. It is a classic lose-lose situation.

Realising that the unbridled hyper-nationalistic fervour in both nations is getting out of hand, Japan's influential business lobby, the Keidanren, is pressing the government in Tokyo to "get economic relations back on track" with Beijing. But with elections due in 2013, where nationalist candidates are tipped to score well, Japan has no firewall against unexpected anti-China vigilantism by patriotically motivated citizens.

The Chinese Communist Party is also facing a Frankenstein moment, as its citizens' venting their spleen against Japan has far exceeded the State-sanctioned anti-Japanese nationalism, which serves domestic political goals. Having nurtured the narrative of Japan as enemy and historical wrongdoer, China is now scrambling to also cool down the climate.

The wild cards in this face-off are activists in Taiwan and Hong Kong, who have provoked the Japanese navy in attempts to snatch back islands "stolen" from China. The fracas has unleashed a historical 'Greater China' nationalism which is not confined to mainland China.

For concerned observers from outside the region, the fact that South Korea is engaged in its own island dispute with Japan is leaving no strategic lever to address the problem. If all pro-western States like Japan, South Korea and Taiwan were on the same side against China, there would have been a rough parity with which China could have been compelled to compromise. But its absence means that straightforward solutions are elusive.

The Northeast Asian dilemma mirrors what is occurring in Southeast Asia, where China is engaged in a long battle of nerves with Vietnam and the Philippines over islands in the South China Sea. Here, too, the US has urged the Association of Southeast Asian Nations (Asean) to forge a united front to ward off China. But it has wound up in internal contortions. The last Asean summit ended with the Philippines accusing Cambodia of acting under Chinese influence and Cambodia alleging that the Philippines was playing "dirty politics".

How long will politics impede the obvious trend in Northeast and Southeast Asia towards further economic integration and freer exchange of goods and capital? The deep, psychologically embedded grievances and grudges in these regions over pre-World War 2 crimes cannot be wiped out. But they can certainly be kept on the back burner through conscious decisions of policymakers and the business communities in all the countries involved.

External 'resident powers' in the region like the US must also reflect on how their words and deeds, whether intentional or not, may be adding fuel to the fire. China perceives that the US is emboldening its allies to become adamant, a charge that Washington should take cognisance of, even as it pursues its power games in East Asia. Responsible behaviour is easier preached than obtained when the masses are enraged and vandals are rampaging. But economic sense should ultimately prevail.

Sreeram Chaulia is a professor and dean at the Jindal School of International Affairs

The views expressed by the author are personal