Japan’s trade engagement with China – is Myanmar a case study?

Japan’s trade engagement with China – is Myanmar a case study?

With all the focus on trade wars and trade tariff responses, it has been interesting to see the increased activity in China/Japan diplomacy. This has been particularly true for 2018, punctuated by Japan's prime minister on June 5, in Tokyo, stating that Japan is ready for cooperation with China’s Belt and Road Initiative (BRI). More recently, Japan and China have pledged to establish a Chinese/Japanese Public-Private Sector Committee on how to improve infrastructure in third-party countries. A more cynical person may be led to believe that Japan’s approach is to play the international engagement game within the same game plan used by China, i.e., create a distraction while slipping under the radar with the real intent.

This piece provides some context that is particularly relevant for Myanmar, as reports indicate a $4 billion foreign direct investment by China during the last financial year. Further, both China and Japan have direct interests in special economic zones within the union.

Japan — not new to the infrastructure investment game

Japan has had a long and interesting history in infrastructure investment in Myanmar, learning some important and tough lessons along the way. Just as China now has difficulty dealing with soft diplomacy, so too did Japan, as its initial investment strategies favored Japanese agencies and employment. In a sense this now gives an outbound-looking Japan an advantage in approaching the new drive for building infrastructure within Asia. Furthermore, the concept of economic corridors is not new to the region. During the 1980s, the Asia Development Bank, of which Japan is a key signatory, commenced the Greater Mekong Subregion development plan. It could be argued that Japan was ahead of China’s thinking when it came to the idea of driving regional prosperity by achieving greater access to markets via infrastructure.

Japan’s version of the BRI

This could explain why Japan was ambivalent to the 2013 announcement by Chinese President Xi Jinping introducing the BRI. While cautious of the BRI, the Japanese have worked increasingly on their own initiatives to counter China’s increasing influence in the region. One of Japan’s first responses was to launch the Partnership for Quality Infrastructure (PQI) in 2015. The initiative was aimed at specifically addressing the concerns that third countries were expressing with regards to the BRI, namely transparency, sustainability, and community engagement with projects.

As interest in the PQI increased, Japan has managed to effectively engage with other nations to create other economic corridor funding arrangements. Examples of this include the Asia-Africa Growth Corridor in 2017, a collaborative effort between India and Japan to boost trade between Asia and Africa. The initiative is seen as a countermeasure to China’s Pakistan economic corridor (Gwadar port), as well as offering alternatives to African countries. In some quarters, this is referred to as the “Freedom Corridor,” as it claims to reduce risks associated with debt diplomacy, as well as allow greater local community participation. In some quarters, it is argued that Japan can help the region, as its approach is more integrated and coordinated than the currently perceived disjointed nature of the BRI.

Japan has its own investment funds

While financing has been an issue for Japan, it has created the Japan Bank for International Cooperation and the Japan International Cooperation Agency. Both agencies have committed approximately $2.3 billion to fund infrastructure with a further $16.5 billion committed to loan programs and financial guarantees in 2018. Clearly these funds do not match those of China, but it has been able to put pressure on China by offering alternative development programs.

More recently we saw Japan announce the Indo-Pacific Fund, a collaborative effort with the United States and Australia. This fund, to develop and offer complementary infrastructure within the Indo-Pacific region, will work within the US’s current regulatory framework — the US Build Act — which will develop finance capabilities of the US government through the Overseas Private Investment Corporation. These initiatives are said to advance private sector-led investments that are sustainable, transparent, and help countries sidestep the debt trap. This initiative has not identified specific projects yet, but it has helped Japan leverage its position with China.

Soft diplomacy

On the soft diplomacy level, Japan upped the ante in the first half of 2018 as it stepped up efforts to engage the central economic corridors. Japanese Prime Minister Shinzo Abe has now visited the Baltics and three East European countries — a first for Japan. It also played a central role of getting the Trans Pacific Partnership (TPP) agreed despite the US withdrawing from it. These efforts have enabled Japan to create leverage with China.

One example of the Japanese leverage is the investment into Sri Lankan ports, such as Colombo and Trincomalee on the east coast. Trincomalee is regarded as the best natural deepwater port and not surprisingly was used by the British as a naval and air base. It should be noted that Sri Lanka is playing an increasingly important strategic role in the maritime Silk Road due to the proximity of the main maritime trade route between Europe and the Asia. Another example is Japan partnering with India to invest in Chabahar port in Iran. This port is located a mere 75 kilometers (46.6 miles) from Gwadar port.

There are already signs that these activities have allowed host countries to secure beneficial agreements with China. As written in an earlier piece, Myanmar secured a favorable agreement with regards to Kyauk Phyu port. But there is also the case of the Philippines, in which the northern railway lines connecting with Thailand have been awarded to the Japanese, while the southern lines have been awarded to China.

Taking a bet each way, amid a rising China

Japan has played an interesting game with China. Some might say it has taken an interesting gamble. With these pieces now on the board, China and Japan have committed to sharing the burden with regards to collaborating along the BRI’s Eastern Economic Corridor. This will test China’s claims that the BRI is open to all and that China cannot be expected to carry the full financial load. It will also test the critics of the BRI who now have a template that uses collaborative financing instruments to make the BRI more universally acceptable than China-centric. In any event, Japan has played the game well by taking a bet each way.

Andre Wheeler is director of Wheeler Management Consulting, Australia. Contact him at: andre@wheelermanagement.com.au.