Small Islands, Big Problems

As many of you news readers may know, China and Japan have been involved in a territorial dispute over a small chain of islands in the East China Sea. They can’t agree on a name—Japan calls them the Senkaku Islands and China calls them the Dioyu Islands, but both countries view those islands as part of their territory. They are technically controlled by Japan now due to war treaties, but China has had claims on them in the past so both countries have a case to make for ownership. However, as the islands do not really have much of significance on them, they are viewed as an important symbol of dominance in the often tumultuous relationship between China and Japan. While war or other extreme actions have not been taken yet, the dispute has impacted businesses in the area which could easily impact the world’s economy.

One great example of this is the automotive industry in China. Guangzhou is the Chinese equivalent of Detroit—producing 12% of China’s cars while having just over 1% of China’s population.  Unlike Detroit, the car companies in Guangzhou are not headquartered there; they are often joint ventures between Chinese companies and large Japanese manufacturers (such as Nissan, Toyota, and Honda). The dispute over the islands has often caused violence in protests over Chinese consumers using Japanese products and vice versa. This has hurt demand even more then the increased disdain between the Chinese and Japanese due to the dispute would have. Combining both of these factors and the plummeting demands for goods is starting to severely harm the workers that produce them. Auto workers in China are worried about if they will be laid off and have already seen reduced hours and pay. This is starting to ripple through to other industries as well.

If China and Japan were to escalate this dispute over the islands, all of the industries that depend on these manufacturing powerhouses would be in peril. Furthermore, it would put the United States and the rest of the world in an awkward position over who to support: one of the largest, fastest growing economies or a key historical ally? Do you think that the island dispute will have an impact on the world economy? Also just for fun, who would you choose to side with if the dispute between Japan and China escalates? Leave your thoughts in the comments!