China and Japan Slowly Learn to Cooperate in the Age of Trump

(Bloomberg) -- Japanese Finance Minister Taro Aso will travel to Beijing later this week for a meeting with Chinese counterpart Liu Kun that is likely to demonstrate the improving relationship between the world’s second- and third-largest economies.

Aso, 77, who also serves as Japan’s deputy prime minister, is expected to discuss with Liu the resurrection and expansion of a currency-swap arrangement at the talks.

While any such agreement is of limited practical importance in itself, the revamped deal would nonetheless be significant as it would reflect the latest warming of relations between Asia’s two economic powerhouses. China is pushing to mend strained relations with its neighbors as it grapples with ramped-up pressure from the U.S. on trade and security.

"The unilateral trade protectionism of the U.S. hurts a lot of nations," said Liu Jiangyong, a professor of international relations at Tsinghua University in Beijing who specializes in Japan studies. "These countries need to enhance their cooperation, including cooperation between China and Japan, to ease the harm."

But deeper cooperation between Beijing and Tokyo on trade or a firm demonstration of unity against U.S. tariffs is unlikely, given historical grievances, different trade bloc visions and a lack of appetite to be seen as teaming up against the U.S.

Patching Up Differences

The two nations previously had a $3 billion currency swap line that was allowed to lapse in 2013 amid heightened tensions over a group of uninhabited islets, a demonstration of how quickly relations between the Northeast Asian neighbors can fray. Negotiators will discuss a new arrangement of 3 trillion yen, according to a Japanese government official who asked not to be named because the contents of the talks are not public. Kyodo News reported earlier that the two countries would discuss a swap of that amount.

The currency swap deal would follow other modest progress in patching up the bilateral relationship. During his May visit to Japan, Chinese Premier Li and Japanese Prime Minister Shinzo Abe announced a communications mechanism to avoid maritime and air collisions.

Structural Limits

But the obstacles to deeper cooperation are formidable. Historical grievances and unresolved territorial disputes still cloud relations between the two countries. China’s sustained economic rise and military modernization also leave Japan feeling nervous.

"It’s certainly possible to have short-run upswings, where things go more smoothly. It’s just hard to see how the underlying structural dynamics change in a way that would produce a more durable shift toward economic integration," said Tobias Harris, vice president at Teneo Intelligence in Washington. "I don’t think there’s the underlying level of trust that you would need to make that possible."

There is no shortage of disagreement in the economic realm. Earlier this year, Japan sided with the U.S. and European Union in a dispute at the World Trade Organization over China’s intellectual property regulations.

"Japan has to raise some issues that are going to be tough for China to hear," said Shinichi Seki, deputy senior economist at the Japan Research Institute in Tokyo, pointing to restrictions on foreign investment and subsidies to state-owned enterprises as two topics that need to be addressed.

Beijing and Tokyo also differ on their preferred framework for bolstering regional trade. While Japan favors the Trans-Pacific Partnership, in which it has taken a leading role since Trump pulled the U.S. out of the pact, China favors the Regional Comprehensive Economic Partnership, in which it is a major player.

--With assistance from Xiaoqing Pi and Emi Urabe.

To contact the reporter on this story: Connor Cislo in Tokyo at ccislo@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Paul Jackson, Henry Hoenig

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