The new issue of "Foreign Affairs" has published an essay by me arguing that mutual economic interdependence between Japan and China is restraining the nationalist urges on both sides in the Senakus/Diaoyu fracas. Free link at http://fam.ag/12EvvmN

Not only does such interdependence raise the cost of a conflict on both sides, but it also makes it impossible for China to wield a prolonged boycott of Japanese goods without shooting itself in the foot.

The poster child for this interdependence is the June
11 announcement by China's Huawei Technologies that it will up the share of Japanese parts in its smartphones from 50% to 70% to help it challenge Samsung and Apple.
This is particularly interesting since Huawei was founded by a former PLA officer and many Western intelligence agencies believe that Huawei has close ties to the People's Liberation Army (PLA).

Japan's dependence on China as a market is well known.
Less well known is how much China needs Japan for many of the parts embedded its own exports. Boycotting Japanese products would hamstring the export-fueled growth that underpins Communist Party rule. For years, Japan has been China's single largest source of imports, and around 60 70% of these are the machinery and parts needed to make China's own products. A 2012 International Monetary Fund report calculated that for every percentage point growth in China's global exports, its imports from Japan rise by 1.2%. Take away those imports, and China's exports collapse. Moreover, Japanese parts are so essential to goods assembled by assorted multinationals in China, e.g. the Ipad and Ipod, that China cannot single out Japanese goods without damaging and alientating the entire network of multinationals that helps fuel China's march up the value chain.

As WWI taught us, economic self-interest does not always overcome nationalistic passion. But it does raise the cost of letting emotions dictate policy.

Foreign Affairs has kindly provided a link that will allow people to get around the "subscription wall" and read the entire essay. You can use this link yourself, as well as pass it on to anyone you choose, or, should you choose, embed the link to cite this piece in any of your writings or web postings. The link is http://fam.ag/12EvvmN

Richard Katz
The Oriental Economist Report