Could the Diaoyu-Senkaku Islands dispute affect US manufacturing?
The US has expressed concern over the escalating tension around the Diaoyu (China’s name) –Senkaku (Japan’s name) islands. The most recent issues sprung from China’s assertion that these islands come under the Chinese air defense zone. This claim immediately drew responses from Japan, the US, Taiwan and South Korea. The US responded by flying B-52 bombers over the islands. China then deployed an obsolete and un-aircrafted aircraft carrier into the zone.
Does this heightened dispute risk disruption of commerce shipments between these countries, or does this issue potentially affect outsourcing or resourcing decisions for US manufacturing?
A little background on these islands:
These islands are a group of uninhabited islands located due east of China, slightly northeast of Taiwan and part of the string of Ryuku islands of Japan (see map).
The Japanese government formally claimed control of the islands in 1895. The Chinese have bitterly retorted that these islands have been part of China’s sovereignty for centuries. In August 1978, China and Japan signed a “Peace and Friendship Treaty” but the island dispute was put aside with no resolution. In effect both sides “agreed to disagree” on the ownership of the islands. Taiwan also claims these islands.
These islands are important for three reasons:
- There are significant mineral and oil deposits across this area. Both China and Japan would love to explore off-shore oil drilling.
- There is some military strategic value. China in particular sees these islands as critical to expanding its naval presence.
- The historic and cultural issues cannot be ignored, while both governments are concerned about the strategic value, the corresponding population’s view is that this is a matter of national pride.
It is doubtful that the current strife will escalate to anything that would harm the economic ties between the US and China. Conflicts and incidents over these islands have routinely occurred over the last couple of decades. The most serious one came in 2010 where a Chinese fishing boat rammed a Japanese coast guard vessel. The fisherman was taken into custody by Japan and a flurry of accusations and threats ensued. The issue subsided without a serious confrontation.
The US and China are bound by economic necessity and the US and Japan are bound by a treaty. China may be testing that bond to see how resolute the United States would be in getting involved in a skirmish over islands that don’t directly hold strategic importance to the US. The latest response by the US in flying B-52 bombers over the island is an attempt to show China that it still takes its US-Japan treaty seriously.
There have been a number of minor skirmishes in the last 5 years and none have directly affected commerce or manufacturing sourcing decisions. Companies such as Apple, General Electric and Whirlpool have all announced plans to bring back some manufacturing from China, but the reasons given were more economic and market driven. No US Company has ever cited potential international conflicts as a reason.
The Diaoyu-Senkaku islands have been a point of contention for centuries, it is doubtful that this issue will be resolved anytime soon and just as doubtful that international trade will be impacted now or in the future.