Protests against the Japanese purchase of the Senkaku / Diaoyu Islands took place in various Chinese cities recently, including Beijing, Shenzhen, Luoyang and Xi’an amongst others. Japanese branded products, including numerous cars (and even a camera belonging to a protestor) were attacked and destroyed by the angry crowds.
Panasonic and Toyota as well as Nissan reported damage to commercial properties (a factory and car dealerships respectively).
Canon has also closed some facilities whilst Japanese clothing chain Uniqlo chose to shut several locations, and covered signs at others. Protestors have also targeted Chinese owned Japanese branded products - images of which cannot be encouraging for prospective customers. Meanwhile, some Chinese protestors are calling for consumer boycotts of Japanese branded products.
Consumer boycotts can be damaging and reflect a level of political risk inherent in doing business in foreign markets – they are by no means limited to China. This aspect of political risk is troublesome, but with the growing importance of China’s market, “political risk with Chinese characteristics” must be accepted as part of the business environment. Readers may remember previous rounds of anti-Japaneseprotests in the mid-2010s, as well as the targeting of Carrefour and MacDonald’s branches in 2008 in response to instability in Tibet and the Olympic torch protests. In a globalized world strong brands and their logos are often taken to represent a country as much as its embassies or flag. If a large brand is operating successfully in a foreign market, they may effectively be on the front-lines of disagreements over which they have no control.
Consumer boycotts can take various forms and be over various issues. In Europe and the U.S., they often occur over perceived immoral or unjust actions by companies, including safety concerns, actions in developing countries, poor environmental records, and the mistreatment of workers. Examples of these could be the boycotts against Nestle in the late 1990s and the more famous protests against Nike over its labor practices.
Japanese companies can expect a certain chill whilst doing business in China over the coming months, even if Beijing doesn’t take any public formal economic action against Japan. The Chinese media has been suggesting that formal action may be in the cards, and with China accounting for nearly 20% of Japan’s exports, there is a lot at stake. However, such measures can be troublesome under World Trade Organization (WTO) obligations and tend to damage a country’s reputation. The punishment of Japan through rare-earth export restrictions in 2010 is an example of the more extreme national level action, but the backlash against China was damaging. Other than private consumer led boycotts and formal national policy boycotts, however, China has a powerful third option.
Unofficial boycotts are possible in China because of the power of State Owned Enterprises (SOEs) and the wider public sector in the economy. Without announcing formal measures which are difficult given WTO rules, there has been a documented effect on trade and sales from nations as well as corporations which have displeased China. This can be in the form of web restrictions such as that currently affecting the free Bloomberg website in mainland China (after Bloomberg published a damaging expose on Xi Jinping’s extended family wealth) or in unpublished policies at state companies (there have been reports that sales of Bloomberg Terminals have plummeted in China).
In fact, two academics at the University of Goettingen in Germany published a discussion paper looking at the effect on trade when a foreign country angers Beijing by arranging official meetings with the Dalai Lama. Fuchs and Klann, the paper’s authors, find a definite pattern whereby a country’s exports to China will fall by 8.1% or 16.9% (depending on method of measurement) and will remain depressed for two years after such an event. The paper finds that heavy machinery and transport equipment are the sectors most consistently hit by such “unofficial” boycotts. Needless to say, these sectors in China involve many state owned players (transport and infrastructure development).
Yet despite China’s growing clout in international economics, the boycott/consumer action sword can cut both ways. Whilst Japan is the current target of action in the mainland and Hong Kong, companies from all nations are being made more aware of the particularities of political risk in China – and will also remember the recent experiences of Carrefour and MacDonald’s. Investment decisions are affected by risk, and a company’s costs are increased if insurance premiums rise. Even shutting down facilities for a week or two is damaging to a corporation.
Foreign firms do provide employment in China and also pay taxes, as well as deliver products which Chinese consumers usually seem keen to own. What’s more, Japanese consumers buy Chinese made products too; a tit-for-tat boycott war will harm both sides, and many companies (not just Japanese ones) considering investment in China may now be looking at other options. It is now well known that strong economic relationships before WWI didn’t stop the march to war, but they can’t have hurt. Let’s hope that cooler heads will prevail.
A tide of angry protests has swept the country for more than a week since September 11 after Japan announced that it had purchased the Senkaku (Diaoyu Dao) Islands in the East China Sea from their private owners. Beijing, which claims sovereignty over the islands, has warned that the move might have unpleasant consequences for bilateral trade. Analysts point out that the aftermath of a potential trade war could be even more disastrous than the damage caused by a direct armed standoff.
Wednesday saw no more anti-Japanese protests in Beijing or other Chinese cities. The government’s address followed Tuesday’s incident that nearly injured the U.S. ambassador to China. But the sharp escalation of tension over the Senkakus raised fresh concerns about a looming Sino-Japanese trade war. The Chinese Ministry of Commerce has acknowledged that the situation is unfavorable and that Japan is fully to blame for it. Some Chinese media have called for a ban on Japanese imports. Calls are also being heard to stop exporting rare earth metals to Japan. Yakov Berger, a senior analyst at the Institute of Far-Eastern Studies of the Russian Academy of Sciences, believes that neither of the sides will gain anything from a possible trade war.
"If a trade war breaks out, Japan will be the hardest hit due to its greater dependence on China, as follows from the export statistics. All the more so that the Japanese economy has been showing almost no growth over the past decade, and it is still recovering from the damage caused by the tsunami. But China has pretty much to lose either. Japan has invested huge sums into the Chinese economy and built assembly plants that produce all sorts of goods for Chinese and other markets and employ Chinese workers, mostly unskilled and low-educated people. The plants’ shutdown will force all those people to return to their villages where there are no jobs for them."
Many Japanese companies, including Panasonic and Canon, suspended production at their Chinese affiliates when the protests erupted.
Some analysts have dismissed the prospect of all-out trade war as unlikely. Alexander Salitsky, a prominent Russian economist and Orientalist, is one of them.
"In the 21st century, it’s companies and markets that decide everything. Naturally, large capital will intervene to put an end to any actions that exceed the limits of reason. The times of boycotts of British or other goods are gone. A trade war is a thing that can be regulated pretty well, including through mass media. Production is too closely intertwined to allow for any serious standoff."
China has experience of settling territorial disputes with its other neighbors, Russia included. But the dispute over the Senkakus has escalated to the point where emotions might prevail over economic expediency. Recollections of the Japanese occupation of the 1930s-1940s are still fresh in the minds of the Chinese and the government is doing its best to nurture them. Schools and mass media keep calling on children and adults not to forget those disgraceful episodes in Chinese history. A film about the 1937 Nanking massacre starring Hollywood actor Christian Bale has hit Chinese screens recently, becoming one of China’s most expensive films ever made.
Japanese investments in China have already started to decrease as the Chinese economy is slowing down. So far, the fall has been insignificant – just 1.2% in August, Bloomberg reports. But the worsening relations may send investment plummeting.
Polina Chernitsa
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