SINO-JAPANESE ECONOMIC RELATIONS ON THE EVE OF THE TANAKA-CHOU SUMMIT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040020-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 20, 2016
• Document Release Date: March 29, 2006
• Sequence Number: 20
• Publication Date: September 1, 1972
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Sino-Japanese Economic Relations
on the Eve of the Tanaka-Chou Summit
Secret
ER IM 72-137
September 1972
Copy N 2 96
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SECRET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1972
INTELLIGENCE MEMORANDUM
SING-JAPANESE ECONOMIC RELATIONS
ON THE EVE OF THE TANAKA-CHOU SUMMIT
A. Over the past decade, Sino-Japanese trade has increased sharply,
with Japan regaining its pre-World War II position as China's leading trading
partner. These gains reflect mainly the shift in China's trade away from
Communist countries, but in recent years Japan has been cutting sharply
into the share held by others as well. Political developments over the past
year, meanwhile, have given a furth?_r impetus to expanded Sino-Japanese
economic ties, and both countries are rapidly moving to formalize
commercial links.
B. In the wake of all this, many Japanese business and government
leaders expect large increases in trade flows between the two countries over
the next decade. Whether these expectations will be realized is far from
certain, since trade trends will depend largely on Chinese political decisions.
Peking will either have to let Japan take a much larger portion of the Chinese
import market - an unlikely event considering .; apan's already large share --
or change its policy against accepting credits to finance imports. The latter
may occur as China continues to move out of its isolation, but so far Peking
is staying with its policy of largely cash payn::.nt. in any case, Japan is
likely to maintain its strong position in the Chinese market during the
coming years, considering its geographic proximity and existing ties with
China. We do not expect, however, that the Sino-Japanese rapprochement
will significantly alter Taiwan's strong economic position.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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Historical Perspective
1. Japan and China, historically, have had close economic ties.
Resource-poor Japan has traditionally looked to China as a supplier of raw
materials while the mainland's bustling coastal regions served as a major
overseas market for Japanese exporters. This trade, already substantial
during the late 19th century, increased sharply following the Sino-Japanese
war of 1895. As a result of its victory, Japan was able to establish a vast
network of enterprises in China proper and gained an especially strong
foothold in Manchuria. By the 1920s, each country accounted for about
one-fourth of the other's global trade. Japan was China's main trading
partner and China was Japan's largest partner after the United States. Trade
naturally remained high as a consequence of Japan's occupation of the
mainland during the 1930s and early 1940s.
2. After World War II, Sino-Japanese economic ties were interrupted
by the Communist takeover of the mainland.. During the 1950s, Tokyo
was committed to a "two Chinas" policy, while Peking was dramatically
shifting its economic orientation away from the Pacific Basin and toward
other Communist countries, especially the Soviet Union. By 1955, Japan
accounted for a mere 3.5% of China's total foreign trade.
3. Following lie beginning of Peking's rift with Moscow in the late
1950s, the situation again changed markedly. Within a few years, China
sharply curtailed its trade links with Moscow and increasingly looked to
Japan as a source of intermediate and capital goods as well as an outlet
for its exports. Japan, for its part, seized the opportunity and moved rapidly
into the Chinese import market. During the early 1960s, it had regained
much of the ground lost during the previous decade.
4. At the same time, Japan expanded its historically close and
separate ties with Taiwan. Between 1895 and 1945, the island was a tightly
ruled colony of the Japanese Empire, serving as a major raw material supplier
to Japan and a highly protected market for Japanese manufactures. Almost
all of Taiwan's trade was geared to Japan, and nearly 10% of Japan's trade
was with Taiwan during the 1920s and 1930s. Since the early 1950s, Tokyo
has cooperated closely with the Chiang Kai-shek regime, and Japan-Taiwan
economic relations have remained close. Almost all of Taiwan's raw materials
exports continued to go to Japan, and the island vied with South Korea
and Hong Kong as Japan's largest export market after the United States.
In fact, except for a few years, Japan's trade with Taiwan has topped ,.hat
with China.
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Emerging Economic Ties
5. By 1965, Japan had regained its former position as China's chief
trading partner. Between 1960 and 1965, Japanese sales to the mainland
increased ten-fold and a similar gain occurred in Chinese sales to Japan.
Trade contacts expanded to include major Japanese busir''sses as well as
the small-scale firms which handled trade in earlier years. Nonetheless,
Peking continued to insist that trade be handled through approved Japanese
firms which, on the surface at least, subscribed to China's international
line. To accommodate Peking, most Japanese trading companies established
legally separate dummy firms, and Peking went along with the charade.
In addition to this "friendly firm" trade channel, Peking concluded a
quasi-official trade pact in 1962 with members of Japan's ruling Liberal
Democratic Party. This Memorandum Trade Agreement, which is
renegotiated each year, was especially important during the mid-1960s, when
it covered up to half of Sino-Japanese trade. It now covers only about
10% of the trade.
6. Working through these quasi-official channels, the countries
continued to expand their trade at a rapid pace. Between 1965 and 1971,
Japan doubled its share of the mainland's imports to 27% (see Figure 1).
In contrast to earlier years, however, these gains came largely at the expense
of non-Communist suppliers such as France, West Germcny, and the United
Kingdom. Japan's gains throughout the 1960s were particularly impressi,-'
given the fact that total Chinese imports hardly changed. Steel and chemical
fertilizers led the Japanese export drive: in 1971 they jointly accounted
for nearly two-thirds of Japan's exports to China of US $577 million (see
Figure 2). In addition, Japan became China's chief source of foreign
technology. Japanese sales included whole plants supplied during the early
1960s for producing s,!ch items as vacuum furnaces, vin lon micrometers.
and magnetic to es.
7. From the Japanese point of view, the Chinese market remains
relatively small, even though sales to it rose a rapid 15% annually during
1966-71. Japan's overall exports grew even faster -- 19% annuaiiy -- ind
thus the China share declined somewhat. In 1971, exports to China were
2.4% of Japan's total exports (see Figure 3). Nonetheless, with sales highly
concentrated in a few items, the China market is very important to several
Japanese industries. The prime example is the chemical fertilizer industry,
which sells more than 60% of its total exports to China. China also takes
almost 10% of Japanese steel exports, ranking second to the United States
as Japan's leading overseas market for steel.
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Figure 1
People's Republic of China: Direction of Trade*
Exports
Million US $
:Based on estimates of Chinese trade statistics.
:Based Chinese goods reexported by Hong Kong.
Imports
Mll:lon US $
3%
1%
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Japan: Trade with the People's Republic of China,
by Commodity*
Exports, to China
Million US $
Imports from China
Million US $
:20"a
6%
10%
8. While Japanese exports to China increased rapidly, purchases from
it increased only modestly (see Figure 4). By 1971, they amounted to
$322 million, compared with about $225 million in 1965 or a 6% annual
growth rate. This slow growth reflects mainly the fact that Japan is now
self-sufficient in rice, which was traditionally China's chief export item to
Japan. Partly offsetting the loss of this market, however, have been rapidly
growing Chinese exports -f other foodstuffs, especially fish products, fruits,
and vegetables. Raw silk exports have also increased sharply in rec::.nt years
as Japan phased out its own production; China is now Japan's largest raw
silk supplier after South Korea. Other key exports to the Japanese market
include soybeans, rosin, and raw materials such as salt. Although the Chinese
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People's Republic of China: Figure 3
Share of Japanese Trade*
Exports to China as a Percent of Total Japanese Exports
a --
o 1_ -J-_ L
1965 66 67 68 69 70 71
Imports from China as a Percent of Total Japanese Imports
4 r----- -
o L-.--- . 1- --- -1- - t _ _ 1 - - 1 - -~
1965 65 67 68 69 70 71
'Based on Japanese trade statistics.
914469 9.72
sell some manufactured goods such as textiles, these are generally
labor-intensive item, that are restricted by Tokyo's import controls.
9. As a result of there trade trends, China's trade deficit with Japan
has mushroomed in recent ,cars. In 1965, the deficit stood at $20 million,
aid by 1971 it had jumped to some $255 million. By and large, Peking
h:.is financed this imbalance by running surpluses with other major trading
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Figure 4
Japan: Trade with the People's Republic of China*
MIIIIon US $
o1' 1 I 1 _L_ - J
1960 61 62 63 64 65 66 67 68 69 70 71
'Based on Japanese trade statistics.
partners, especially Hong Kong and Singapore. In fact, China has rarely
run an overall trade deficit over the past decade and last year registered
a worldwide trade sur Ins of almost $200 million.
Recent Developments
10. Sino-Japanese economic ties have been given further impetus by
political developments over the past year. Following the mid-1971
announcement of President Nixon's visit to China, Tokyo felt free to open
its own dialogue with Peking, greatly stimulating Japanese economic interest
in China. Many Japanese see China as a huge untapped market, and they
fear that the recent US trade initiatives will undermine their own posi*ion
in the Chinese market.
It. In line with this thinking, Japanese business leaders responded
quickly to the changing political scene. By mid-1972, most major Japanese
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firms had nominally accepted Chou En-lai's "four principles," which
essentially call for limiting economic ties with Taiwan and South Korea.
Consequently, these firms are now in a better position to deal with China.
At the same time, a steady stream of hinh-level Japanese business delegations
have visited China to discuss expanding trade links. The momentum built
up in these talks no doubt accounts for the fact that Sino-Japanese
transactions concluded at last spring's Canton Trade Fair amounted to a
record $200 million. Bilateral trade rose 17% during the first half of 1972
over the same period of last year after adjusting for the international
currency realignment.
12. Tokyo's i.ew political leaders are encouraging expanded economic
ties with Peking. Within a month of coming to power, the Tanaka
government approved the first Japanese Export-Import Bank credit for
China since 1964 for the purchase of a synthetic vinylon fiber plant.T
In addition, Tokyo has initiated negotiations or a
commercial air agreement with Peking aimed at making the mainland more
accessible to Japanese businessmen. Beyond this, Japan has made clear its
interest in negotiating a treaty of commerce and navigation as well as a
formal comprehensive trade agreement to replace the present quasi-official
Memorandum Trade Agreement.
13. All this aciivity has heightened Japanese enthusiasm about future
trade relations with China. The Japanese feel that they are in a good position
to strengthen their hold on the mainland's import market, and Japanese
firms are especially optimistic about boosting sales of steel, agricultural and
heavy electrical machinery, power generating equipment, and oil drilling
equipment. At the same time, they expect exports of such items as ball
bearings, chemical fertilizers, and internal combustion engines to -row fairly
quickiy as China continues its industrialization process. Japa? ;.;e traders
also see China as a potentially important source of needed raw materials
such as non-ferrous metals and crude petroleum.
14. Peking, for its part, has clearly indicated its interest in expanding
trade and other economic relations with Japan. In recent months, several
trade delegations have been sent from China to tour Japanese shipping,
petrochemical, and textile facilities, and additional visits are now being
planned. Beyond this, Peking has indicated an interest in signing long-term
trade agreements covering such items as steel and has suggested a greater
willingness to accept trade credits from Japan.
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Some Implications
15. Encouraged by recent developments, Japanese trade experts are
projecting a roughly 15% annual growth in sales to China during the decode
with the total reaching $2.4 billion in 1980. Whether these expectations
will be realized .s far fr3m certain because the trade expansion will depend
in large part on political decisions in Peking. For Japan to achieve this
growth rate, either total Chi.-.se imports will have to increase much more
rapidly than in the past or Japan's share of the import market will have
to become even greater than at present. Peking is reluctant, however, to
become once again very heavily dependent on a single supply source, as
it did in the I 950s. Also working against Japan's expanding its market share
will be increasing competition from US suppliers. In the past, the Japanese
were able to sell plants based on US technology, but, with trade channels
now opening up, US suppliers will be dealing with the Chinese themselves.
16. Japan will have a better chance of achieving its expectations if
overall Chinese imports considerably accelerate. But this would require a
change in Peking's policies of economic self-sufficiency and balanced trade.
There is no sign of any significant change in either policy at this juncture.
We also presently foresee no surge in China's overseas sales which vould
allow it to purchase much more goods abroad. In fact, the Japanese are
having a difficult time identifying Chinese products which might be available
in appreciably larger quantities. Traditional agricultural exports, which make
:.p the bulk of overseas sales, are likely to increase, but not at a dramatic
pace. Chinese exports of minerals are also not expected to increase much,
because of rising domestic needs.
17. The only likely way Japan will be able to maintain its rapid sales
to China in the next few years is by a change in Peking's policy against
the use of extensive foreign credits. Tokyo is now willing and able to provide
these funds, but Peking is still hesitant to become indebted to anyone except
for some short-term commercial credits which normally accompany most
foreign trade transactions. This attitude may change as China continues to
emerge from its years of isolation. Even without radical shifts in Chinese
policies, Japan's continued position as Peking's 1 ,ding trading partner
appears assured. More formal economic ties resulting from signing a
long-term trade agreement and a treaty of commerce and navi;ation should
help to firm up Japanese access to the China market.
18. Taiwan meanwhile is unlikely to suffer much as a result of
improving Sino-Japanese economic relations. Taiwan-Japan trade has
continued to increase sharply despite Tokyo's rapprochement with Peking,
which has not seriously pressed the Japanese to sever economic ties wi
Taiwan. F
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In any event, the Japanese will seek a low economic
profile with respect to Taiwan.
Taipei undoubtedly will undertake a scathing propaganda attack
against Tokyo, after it recognizes Peking, but this is unlikely to disrupt
economic relations seriously. Taiwan officials have taken a highly pragmatic
view of the China recognition question, understanding that the country's
economic prospects are favoraule.*
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