China, India and Japan: Who Will Pay the Largest Price?

Japan’s refusal to continue with the Regional Comprehensive Economic Partnership (RCEP) under the possibility that India will not be a participant brought serious doubt to the whole agreement. Both China and Japan are looking to break into the Indian market. Which country will pay the largest price for this opportunity?

The text of any full version of the RCEP has not been made available to the public. Nevertheless, the comments released by country leaders point that its main direction is to decrease tariffs between signatory countries.

Japan and China are the two different manufacturing leaders of Asia. Japan, with its manufacturing know-how built in the 20th century, is competing with the fairly recently leading manufacturing prowess of China. The two manufacturing leaders of the continent are also dissimilar because of the size of their labour forces (China’s 805M  to Japan’s 66M), exports per capita ($1,696 to $5,090), and innovation (GII rank 14th to 15th).

Although dissimilar on many grounds, businesses and governments of both countries are actively searching for new and bigger export opportunities. India, and its 860M working-age consumers, are a very attractive option to both China and Japan’s exporting businesses.

Current trilateral relations between China, Japan and India are focused on increasing trade, competition for trade access; and territorial disputes. Japan-India are a natural exception, as they don’t share a border. As for China-India and China-Japan, territorial disputes have been souring the relations between countries for many years.

Alliances based on mutual non-financial benefits have been established (China’s and India’s defence, Japan’s and India’s science and technology). The alliance between Japan and India is currently the most stable and has delivered positive change to the countries including joint infrastructure and business initiatives. India’s relations with Japan and China are inevitably different because of the presence, or a lack of territorial disputes.

India’s decision to pull out of the RCEP is mostly an internal issue.

However, there is more at play here. India’s foreign relations are better with Japan than with China, and both countries are looking for better export opportunities to India. Delaying any action on the RCEP then allows India not only to appease internal opposition but also to gain bargaining power over other diplomatic disputes. Amending the agreement to suit the needs of a country of a billion, then also becomes an easier task.

Trade, and the structures of the economies of the three countries, are a major influence on the relations between China, India, and Japan.

For Japan, India offers a suitable exports destination. Some of the top exports from Japan, in 2017, have been machines (36% of all exports), metals (8.3%) and chemical products (8.3%). India’s top import categories are similar to Japan’s top exports. Out of the top 5 imports, three of them correspond directly to the three aforementioned product categories.

For China, India is a nearly perfect market. Not only the cheaper Chinese goods segment would find a large consumer base in India (an opposition to this move has already formed in India). Improving trade ties would allow China to harness more power in any diplomatic disputes.

Closer trade ties brought on by the lowering of tariffs would likely bring a better perception of both countries, in case of increasing exports. It could be an advantage in any territorial dispute talks – concerning contested territories by China and India.

Indian economy and its consumers are not the last in the list of concerns for China and Japan. Both China and Japan have similar trade and economic goals in India. Yet, the benefits offered by the Indian economy to the East Asian countries are different.

India offers the completion of these goals for China: a growing market for low-cost producers and a market for high tech exports (a good boost to “Made in China 2025”).

For Japan, better trade conditions with India could deliver the very needed boost for manufacturing output, and a surge in economic activity and new businesses.

These benefits and goal completion would occur both because of the present conditions of the Indian economy, and its future trajectory. The future growth or the direction of development of India could change. Yet, the present conditions India offers to Japan and China are already very attractive.

India disagreeing to enter the RCEP puts the whole process on hold and diminishes the benefits offered by the deal to China and Japan. Both countries already have trade agreements with the ASEAN (the original initiator of this deal). India’s decline to enter the agreement then makes the RCEP a far less useful tool to Japan and China. Better trade conditions won’t make up for the fact that the most promising market for the two East Asian countries is out of the deal.

Japan and India have signed a comprehensive agreement in 2011. On the other side, the issue of a China-India FTA was most recently raised again in 2018. China would gain more from the RCEP with India in it. For Japan, the benefits would be smaller, as it already has signed a comprehensive agreement with India. The agreement has contributed to the abolishment of the majority of tariffs previously imposed by the two countries.

Increasing trade is often a precursor to warmer relations between nations. For China, better relations with India would allow them to exploit the South Asian nation’s geographic location for trade. The Hindustan peninsula offers wide access to routes to Africa and the Middle East.

Moreover, compared to China, India’s access to the Indian Ocean, and the Arab Sea, allows ships to bypass South East Asian nations and the Strait of Malacca when travelling west. With China’s infrastructure interests directed at western locations (Nepal railway project, Belt and Road), India’s location would fit in with current infrastructure plans of China.

India’s geographic location, and opportunities offered by it, are less beneficial to Japan. 79% of Japan’s exports go to other countries in Asia (mostly East Asia), or eastwards to USA. Hence, there’s a smaller incentive to develop a better relationship with the country due to its geographic location.

The main direction of India benefiting from the competition for the access to this market is by growing its negotiating power. Whether it is in territorial, or trade negotiations, India will be able to take a stronger stance. After all, the two manufacturing superpowers are likely to try to match the demands of a growing market. Also, to work hard for the benefits lower trade barriers would offer.

The clearest direct benefit of China and Japan competing, to India, is the financial support that will be granted to the country. There’s already precedent to this: China has given $31.65B of aid in the period of 2000 – 2014, according to AidData. Japan has been providing financial assistance to India since the mid-20th century.

Japan has provided assistance to India in areas which benefit Japan strategically, as argued in Japan’s development assistance to India. If the Japanese government will perceive India not being in the RCEP as a threat to the country’s strategic interests, then more assistance could be expected.

Japan and China have many different reasons to compete for the Indian market. The two manufacturing powerhouses would flourish in the Indian market with lower trade barriers. Secondary reasons for the push for India to sign the RCEP agreement stem from benefits for foreign relations India’s entry would bring. The country that needs India’s market for immediate growth, will pay the highest price to ensure India’s signing of the Regional Comprehensive Economic Partnership.