Business, Politics and Culture in Japan, China and the USA

Conflicting territorial claims in the South China Sea have again come to ship-to-ship confrontation – this time between China and the Philippines.  The Philippine Navy was summoned to an atoll called Scarborough where it found Chinese fishing boats illegally harvesting protected corals and other sealife.  When the Philippine Navy tried to intervene Chinese military ships interceded.  Both China and the Philippines claim the atoll.  Take a look at this map of where Scarborough Shoal is and decide for yourself.  Does it look like it would belong to China?

This has interesting implications for China’s soft-power projection into SE Asia and South Asia.  While not scientific, the comments at the end of this story from the Times of India are telling.

At the height of the short-lived cherry blossoms Japanese have a tradition of throwing a cover over the ground underneath the cherry trees and partying seriously.  This is often a company or group activity on the weekend and involves a lot of drinking – sometimes to the point of alcohol poisoning and hospitalization.  Hanami, or blossom viewing doesn’t have to involve a bacchanal because plenty of people (including this writer)  just go to see and appreciate the beauty of the many cherry trees.  The idea of sitting on the ground all day, drinking and making a fool out of oneself among one’s colleagues and in view of thousands has little appeal to many.

There is a general consensus in Japan that the country is falling behind in the race to compete.  When , the new head of the Japan Bank for International Cooperation (JBIC) assumed control this week his first promise was to help Japanese companies mount a charge.  Hiroshi Okuda, 79, said “the politics and the economy of Japan are two or three laps behind the rest of the world.”  Okuda, formerly president of Toyota Motor Corporation didn’t go into specifics about the causes of Japan’s lagging performance but he did point out that given the yen’s rise in value that now was the time for Japanese firms to buy companies and access to natural resources overseas.  JBIC uses government loans and investment funds to provide financial assistance to Japanese firms to help them acquire concessions for natural resources and contracts to build infrastructure abroad.

As Yomiuri points out Okada will be the first businessperson to be appointed to the head of JBIC.  The post has traditionally gone to retired Finance Ministry bureaucrats.

TEPCO is dramatically raising electricity rates on April 1 and companies in the Tokyo area are outraged.  Japan’s electricity-hungry data centers will be among the hardest hit.  As the Japan Times points out 70 to 80 percent of Japan’s data centers are concentrated in Tepco’s service area.  Already data center providers from low-cost China have been promoting their services to Japan’s corporations but for obvious reasons many are reluctant to place any portion of their corporate data in China – no matter the low cost.  This is an opportunity for U.S. West Coast data centers.   American data center service providers can offer both lower costs and reasonable protection from industrial espionage.  As Terrie’s Take points out this hot market extends to data center equipment suppliers.

Earlier this month the Obama Administration teamed up with Japan and the European Union to file a case against China at the WTO over that country’s export controls on rare earth metals.  You’ve probably read about it but what you might not have read was China’s reaction.

Minister of Industry and Information Technology, Miao Wei told Xinhua that China had been preparing for the WTO filing for quite a while and would “actively respond” to the filing.  Wei told Xinhua that China’s rare earth export policy was not designed as trade protectionism but to protect resources and the environment.  Wei said that if exports were uncontrolled that China’s supply would be exhausted within 20 years.  He also said the state policy to consolidate the industry and better control it would be carried out.  The Ministry convened a meeting of the industry in March to discuss China’s response to the WTO.  Attendees reported that the Ministry told the industry that even if China loses the case the government will take “other measures” to thwart the rare earth importers.

While cutbacks in rare earth exports put foreign manufacturers in a bind Western governments main concern is that China’s export controls may force more Western companies to move manufacturing to China to gain access to the rare earths.  That is certainly the outcome China is hoping for.  If the West wants to thwart China’s plan it will have to utilize its own rare earth resources to a greater extent – and may need subsidies to get the extraction industry restarted.

A number of contacts in both the business sector and the diplomatic world have been commenting on what they see as an encroachment by the State Department on trade promotion responsibilities held by the Commerce Department.  The rumblings had been noticeable for some months but grew to a near roar when Secretary Clinton and the State Department held what was billed as the “Global Business Conference” in Washington on February 21-22.  Secretary Clinton outlined her vision for “Jobs Diplomacy” which included promoting U.S. businesses overseas, leveling the playing field for fair competition and attracting foreign investment into the U.S.  – all primary functions of Commerce’s International Trade Administration.

The Conference in question was billed by State as “two days of dialogue and brainstorming on the U.S. Government’s role in supporting American competitiveness and creating American jobs.”  After the conference concluded State reported that it “showcased the State Department’s renewed commitment to being the most responsive and effective force multiplier for U.S businesses abroad.”  The State Public Affairs machinery cranked out a ton of promotion around the Conference and got some pretty good mileage out of it in the business media.

Several attendees noted that while Commerce Secretary Bryson spoke at the conference that the Commerce role and presence was otherwise subdued.   The same attendees reported that the Agriculture Department’s Foreign Agricultural Service was completely absent from the event.  What’s behind this grab by State to venture beyond its mandate and into other agencies territory?   There are two theories; 1) it is part of the pre-election ramp-up on high-profiling job creation or 2) job creation and the National Export Initiative (NEI) have become so sexy that State wants a piece of the show – and the money.   I think #1 is a driver of #2 but there is no denying that when homeland security started drawing the money after 911 that State got in on that largesse to the extent possible.  NEI hasn’t been nearly as sexy as homeland security nor has it attracted nearly the money that the Bush Administration literally threw at anything that sounded anti-terroristy but in these days a few million dollars attracts a lot of attention.

Reflecting State’s tendency to let policy rather than business opportunity drive the agenda breakout sessions on investing in Central Asia, Pakistan and Afghanistan urged U.S. companies to consider investing in these risky areas. It’s unlikely that had this been Commerce’s show that time and money would have been wasted trying to talk U.S. companies into investing money in war-torn and highly risky territories.  Word from the Conference is that these sessions were lightly attended by businesses.  But this just illustrates why the Foreign Commercial Service (part of the U.S. Foreign Service) was pulled out of State in 1982 and given to Commerce.  Commerce is business-focused and State is, well, diplomacy-focused.

How much money was spent by State in putting on this show?  Whatever the amount was, it should have been simply allocated to Commerce’s diplomats and export promotion programs.  That would be smart government.

Stan at China Hearsay has an interesting analysis of Clyde Prestowitz’ recent call for the U.S. to go for a tit for tat strategy with China, adopting a policy of reciprocity.  But Stan is only willing to go part of the way with Mr. Prestowitz, pointing out that in some cases reciprocity would be inconsistent with WTO rules.   The disadvantage that America’s principle of playing by the international rules and using the WTO mechanisms is that China has cynically used an unprincipled approach to take advantage of the slow process of the rules playing out.  Take the car industry as an example.  Knowing that its market was highly attractive to the world’s auto manufacturers China erected barriers to foreign imports and foreign investment – unless the foreigners established a joint venture with China’s state-owned auto companies and transferred technology to the Chinese side.  As Toyota, GM and VW trained their joint venture partner’s staff and transferred more and more technology to the Chinese the Chinese partners began to go their own way.  In addition to forcing the foreign auto companies to move their manufacturing to China and give away their technology, the Chinese worked through the joint ventures to require American, European and Japanese suppliers to follow their auto companies to China.  Sure, many of the WTO rules were broken in the process of siphoning off jobs and technology from America but China knew that by the time U.S. complaints made it through the WTO process the theft would be a fait accompli.  And that’s exactly what happened.

And the process is being repeated in strategic industry after strategic industry.  Clean energy, solar panels, aircraft, chemicals, etc etc.  China also has the smart advantage of an industrial policy. It is already too late to get reciprocal for many industries.  But Prestowitz’ strategy should be tried out vigorously.

Mayor Takashi Kawamurathe of Nagoya, Japan has impeccable timing, choosing to air his doubts that the Nanjing Massacre was really so bad while addressing a group of Nanjing leaders.  Nagoya and Nanjing are sister cities – well, at least they have been.

As 4/3 Rumors reports the Tokyo Exchange slapped Olympus with an unexpectedly light penalty of $129,800 for the concealment scandal and hiding of $1.7 billion in losses.  Olympus isn’t out of hot water yet however.  The Japanese police and Scotland Yard and FBI investigators are pressing ahead with criminal charges.  Former CEO Michael Woodford, the one who revealed the entire mess at Olympus, is suing for wrongful dismissal after the board fired him to cover up their actions.  Disgusted with the lack of support from Japanese institutional investors to reinstate him as Olympus CEO the whistleblower stated, “despite my having done the right thing, none of the major Japanese institutional shareholders have offered one word of support to me.”

Also this week a crack team of attorneys organized an effort to invite former shareholders to sue Olympus and the company’s auditing firms.  As ZetaBids.com reports the Lawyers for Shareholders’ Rights are not charging for their services and hope to change the cozy relationship between Japanese institutional investors and boards of directors.

Despite the damage that the scandal has done to Japan’s corporate governance image worldwide, the Government, the corporations and the institutional investors have not taken the Olympus debacle as an opportunity to reform a very dysfunctional system.

Chinese and Russian testing of Japan’s air defenses were at an all-time high in 2011. Japan scrambled its fighter jets 143 times in response to Chinese aircraft in the April-December period of 2011, nearly triple the level from a year earlier and surpassing the record high of 96 times in 2010.  Many of the Chinese approaches to Japanese territory were near the disputed Senkaku Islands, an archipelago in the East China Sea. Russia kept Japan even busier, with Russian approaches requiring 175 scrambles during the nine months.

The Chinese and Russian aircraft don’t have to enter Japanese territory to elicit a scramble response from Japan.  Japan sends up interceptors if foreign military craft fly within Japan’s Air Defense Identification Zone (ADIZ) or around the median line between Japan and China. Because the ADIZ is not the same as territorial airspace, foreign aircraft flying into the zone are not considered to be violating airspace. Until recently, Chinese fighter jets and fighter-bombers had usually avoided entering Japan’s ADIZ. But that changed soon after the Senkaku Islands incident in 2011 that triggered a major diplomatic row between the two countries.

Ironically, in October 2011 China’s Ministry of National Defense complained about Japanese surveillance (intercepts?) of China’s military aircraft which “undermines China’s national security interests”.  A Chinese spokesman actually called on Japan to stop scrambling fighters to intercept Chinese planes, warning that this was the cause of air and maritime safety problems, and had “severely disturbed military drills”.

The point about air safety is a valid point but aimed at the wrong party. Most defense experts agree that Chinese military pilots are less skilled than Japanese and American pilots and they fly erratically at times.
No one should forget about the incident in 2001 when a U.S. Navy EP-3 collided in midair with a Chinese fighter jet over the South China Sea, leading to the death of the Chinese pilot.