In many respects, China can draw considerable confidence from the current status of Sino-Japanese relations. For an historically troubled relationship and one that has considerable potential for heightened tension and conflict, the two sides have developed foreign policies and a bilateral relationship that suggests a long-term ability to manage and constrain the inevitable competition that will develop between two great powers in close proximity that are simultaneously developing expanded economic, political and military roles in East Asia- their common strategic backyard. A crucial component of contemporary Sino-Japanese relations that helps reassure Chinese leaders of the prospects for long-term stability and contributes to Chinese ability to prepare for instability is bilateral economic cooperation. Sino-Japanese economic relations can provide the capital and technology required to modernize China's economy and defense capabilities. Equally important, over the long-term it can provide powerful economic and social incentives for leaders in both countries to maintain cooperation and to find peaceful solutions to bilateral conflicts. To the extent that interest groups develop in Japan that benefit from Japanese participation in Chinese economic development, they can encourage politicians to consider compromise solutions to conflicts of interests. This dynamic is apparent in U.S.-China relations, in which U.S. business interests have been instrumental in the annual efforts by the White House to maintain China's Most Favored Nation (MFN) trading status. Economic cooperation can create a foundation for cooperative relations which can exist amid developing political conflict. Recent trends in Sino-Japanese economic relations are encouraging. Japan is China's largest trading partner. In 1995, total merchandise trade increased to nearly U.S. $58 billion, a nearly 25 percent increase over 1994; China's imports from Japan grew by over 17 percent to nearly U.S. $22 billion. Chinese exports to Japan play an important role in Beijing's efforts to accumulate hard currency. Exports grew by 30 percent to nearly U.S. $36 billion, yielding China a U.S. $14 billion trade surplus with Japan. [19] Although this trade surplus may create friction with Japan, it is a manageable amount, especially insofar as Japan continues to run an overall trade surplus. China is also an important export market for Japanese manufactured goods. In 1994, China was Japan's fifth largest export market, significantly contributing to Japanese employment and stable economic growth. [20] In the future, the Chinese consumer market should become increasingly important for Japan, as Chinese economic development spreads beyond coastal cities and major industrial centers, stimulating increased Chinese demand for high-end imported consumer goods. Especially important for the economic and political relationship is the trend for Japanese investment in China. Through the 1980s and early 1990s, Japanese investors showed little interest in China. Through 1989, Japan had provided only 8 percent of the direct foreign investment in China and only 1 percent of Japan's total direct foreign investment and 6 percent of its direct foreign investment in Asia. [22] The dearth of investment aroused suspicions in China over Japanese attitudes toward China, particularly insofar as the minimal investment led to little technology transfer. This trend began a fundamental turnaround in 1992. Between March 1992 and March 1993, new Japanese investment in China increased by 87 percent over the previous year and three times that of 1989-90, while total Japanese overseas investment dropped by 18 percent. By 1993, Japan had become the fourth largest investor in China, surpassing Germany. [22] Sino-Japanese investment relations took another positive turn in 1995. In the first 6 months of 1995, actual Japanese capital input into China increased nearly 48 percent over the same period in 1994. More importantly, in 1995 large Japanese firms, including Matsushita, NEC and Toyota, began investing in large-scale Chinese manufacturing projects involving high-technology industries. [23] Japanese capital is now beginning to make a significant contribution to Chinese economic development. Moreover, this trend has important implications for the Sino-Japanese political relationship, creating a significant Japanese economic interest in stable political relations. Finally, Japan's important loan program to China also contributes to Chinese economic development. Between 1979 and 1995, Japan's three yen loan packages for China amounted to approximately 1.6 trillion yen. The annual interest rate for the loans has been a mere 2.3 percent and China has 30 years to repay the loans, with an additional 10 years of "deferment." In preliminary negotiations for the fourth loan package covering 1996-98, Tokyo agreed to loan Beijing an additional 580 billion yen to help in the construction of 40 projects, including such important infrastructure projects as airports and water supply systems. [24] In the aftermath of the February 1996 earth-quake in Yunnan province Japan also offered China U.S.$300,000 in emergency aid. [25] Complementing the positive developments in trade relations have been constructive developments in political relations. In the aftermath of the June 1989 Tiananmen incident, Japan was the advanced industrial country least inclined to allow ideological considerations to interfere with bilateral ties. There was never any question that Japan would continue to grant yen loans to China and that trade relations would continue uninterrupted. Since then, bilateral summitry has been a common development in relations, including frequent trips back and forth by each country's prime minister and a historic visit to Beijing by the Japanese emperor. The dialogue in these meetings has been free of the friction that so often characterizes meetings between U.S. and Chinese diplomats, despite the existence of various Sino-Japanese conflicts of interest. The absence of ideological conflict has allowed Japan to engage Chinese leaders in a regular security dialogue. Since the two sides agreed to hold the security meetings in 1993, they have held three such meetings, the most recent in January 1996. Prior to the 1996 meeting, separate meetings had been held between foreign ministry and defense department officials. In 1996, Tokyo and Beijing held a joint session of diplomatic and defense officials, including Chinese General Xiong Guankai. Annual, low-profile meetings such as these offer regular opportunities for each side to express concerns about the other's defense and foreign policies, including trends in their respective defense budgets. [26] Bilateral dialogues can also be conducive to dealing with specific issues. After tensions developed in January 1996, in early March the Japanese and Chinese foreign ministers agreed to open bilateral talks over economic development of the waters surrounding the disputed Diaoyutai/Senkaku islands. [27] More China's Japan Policy: 1990s Introduction Japan, Multipolarity, and the 21st Century Consolidating Cooperation New Directions in Sino-Japanese Relations Managing a Changing Relationship Conclusion and Endnotes Back to Table of Contents China's Japan Policy: 1990s Back to SSI List of Issues Back to MagWeb Magazine List © Copyright 1995 by US Army War College. This article appears in MagWeb (Magazine Web) on the Internet World Wide Web. Other military history articles and gaming articles are available at http://www.magweb.com