*"The New Battlefield": China and Japan reenact their old rivalry and battle for the Senkaku/Diaoyu Islands
Political tension between these two countries have escalated through this dispute. Both China and Japan are claiming Diaoyu Islands as their own, through evidence of past records of land ownership. History teaches us that the Japanese people originated from Chinese people. Early Japanese ancestors left China to look for new land, that is how they stumbled upon Japan. So logically, shouldn't China rightfully claim Diaoyu Islands? It's not as simple as that. At least now it isn't. On September 11th, the Japanese Government took the initiative and agreed to pay ¥2 billion ($26m) for the 3 remaining islands from their private owner. That must have certainly outraged Chinese Officials and locals.
*"Fight off the Japanese Demons": Protesters stormed the streets, demanding Diaoyu Islands ownership to the Chinese.
On September 16th, in a anti-Japanese protest, around 3000 protesters, draped with the Chinese flag while carrying portraits of Chairman Mao, stormed the streets of Shanghai and into the front door step of the Japanese Consulate. The shrieking chants of "Get the hell out of China!" (In Chinese of course) resonated and rung the surroundings, directed at the Japanese Officials. After the protest, they left in an orderly fashion. Elsewhere things have been less peaceful.
Both countries are arguing over the ownership of the islands. Here is what the two respective countries' arguments and counterarguments are currently standing:
China
Both countries are arguing over the ownership of the islands. Here is what the two respective countries' arguments and counterarguments are currently standing:
China
- Evidence of early records of discovery in maps and travelogues.
- The islands were a Chinese frontier off-shore defence from Japanese Pirates. Early depictions of Chinese and Japanese Maps indicate the territory as Chinese.
- While the Japanese took control of the islands during the First Sino-Japanese wars, it was formally ceded by Treaty of Shimonoseki, to which China claims the Japanese knew that the islands were not terra nullius (land belonging to no one).
- The Potsdam Declaration stated that "Japanese sovereignty shall be limited to the islands of Honshū, Hokkaidō, Kyūshū, Shikoku and such minor islands as we determine", and "we" referred to the victors of the Second World War who met at Potsdam, the USA, the UK and the Republic of China. Japan accepted the terms of the Declaration when it surrendered.
- China formally protested the 1971 US transfer of control to Japan
Japan
- The islands were uninhabited and there is no evidence of Chinese ownership and control prior to 1895.
- The islands were ceded to Japan by the Qing Dynasty of China in Article II of the May 1895 Treaty of Shimonoseki. And later, was not renounced by Japan under Article II of the San Francisco Peace Treaty.
- Though the islands were controlled by the United States as an occupying power between 1945 and 1972, Japan has since 1972 exercised administration over the islands.
- China and Taiwan's only started claiming ownership of the islands in 1971, following a May 1969 United Nations report that large oil reserves may exist under the seabed of the islands. Hence, the motive is selfish gain.
Boring politics is not what we want, so let us do some economic analysis. Why are China and Japan going to such great lengths to rightfully claim Diaoyu Islands? The main reason is resources; the Senkaku Islands is land, a factor of production. 'Land' in economics is not really the land itself, but it refers to the resources that the land has available. In comparison to the size of China and Japan, the total area the 5 islands boasts is absolutely tiny! So to spend so much effort to buy these islands, just goes to show how important natural resources are. Every country, in fact the whole world runs on energy produced by natural resources like crude oil and coal. Businesses are only able to operate because there is energy. So upon finding out that large oil reserves exist under the islands, it is no wonder a fight broke out between the 2 countries.
Oil is an essential natural resource that has a virtually perfectly inelastic demand, but is however severely limited in supply due to our enormous consumption. The scarcity of land and the outrageous demand for resources prompted land to be bought through financial means. So it is hardly surprising to see sovereignty of the Senkaku Islands handed over to the Japanese because they were willing and able to cough up the money before China did. It is opportunity costs all over again: Japan's short term leakage of funds could well be rewarded with long term gains to recover the sacrifice made.
The purchase of islands is very common nowadays; it is just like any investment you make! For example, a Philippines factory owner, and my mother's business partner, this year has bought two islands near the coast of Manila for $20 million HKD each. He is developing the islands into resorts, using tourism as the medium for financial returns for his investment. One thing that is quite weird, is that it is not expensive, while the Senkaku Islands are quite expensive. Coming from Hong Kong, a city with ruthlessly expensive housing prices, it is not overwhelmingly expensive for islands since one can only buy a regular sized apartment in Hong Kong for that money! The reason for expensive land in Hong Kong is due to the lack of land and strong demand. Any old island on the other hand, is relatively cheap because of the excess supply. The Senkaku Islands are quite special; it has a great location, oil reserves nearby, and other resources, hence the reason for its high cost. It just goes to show how important land is as a factor of production.
Price competition is the main form of competition for fixed assets like land, and the other supplements such as heritage, paper evidence of ownership etc. can represent the non-price factors for this case. But the non-price factors play such a small role in the current economic environment. Believe it or not, our world is quite poor. Economies continue to struggle by poor consumption, trade, and political problems. Having money is a great deal to all economies. On a micro scale, profit is what drives rational entrepreneurs and businesses forward, people work to receive money to satisfy their needs and wants, and gangsters who rob people will most likely demand money and possessions that are valued highly.
The second reason is trade improvements. Both Japan and China's trade are continuing to do quite well. In August this year, Japan recorded a current account surplus of 455 billion yen. China, as all of you might have guessed, recorded a current account surplus of $59.7 billion USD in the second quarter this year. Even though both countries are doing well, with their GDP's continuing to rise, they want to continue to improve for security reasons to survive unprecedented economic recession backlashes. The Senkaku Islands arre located in a very good spot; right between two economic superpowers. More ports are available, which can improve the capacity of imports and exports. For Japan's relatively weak currency, the reduction in price of exports would lead to a proportionately greater increase in the demand for the exports. This would further increase the net exports and current account surplus. Also, Japan is often prized for its innovation for technological goods. The modern society revolves around technology, so Japan would also benefit from the expanded trade area. On the other hand, the demand for Chinese made goods is significantly higher than Japanese made goods, hence the reason why China wants to continue expanding its trade.
A third reason is the food source. The waters of the East China Sea are rich fishing grounds. Both Chinese and Japanese cuisine highly prize seafood in their dishes. For example, the Japanese sushi and sashimi, and the Chinese steamed Garoupa and fish maw soup. With food becoming more expensive due to the high demand and depleting supply, Japan and China have to look elsewhere for food.
The final reason would be the expansion of the EEZ (Exclusive Economic Zone). Although the two nations have roughly the same coastline, Japan claims 4.5km2 of the EEZ, which is 5 times more than China. The EEZ is a seazone prescribed by the United Nations Convention on the Law of the Sea, over which a country as exclusive right over exploration and use of marine resources. Given the potential resource and territorial gain, it is no wonder Japan and China are both hysterical about ownership of the Senkaku Islands.
Japan and China have a rich history of conflicts, some long term ones, and some short term ones. With the current rocky relationship between these two countries, and the many benefits for the country who is able to obtain that ownership, it seems this is going to be another long one...
Oil is an essential natural resource that has a virtually perfectly inelastic demand, but is however severely limited in supply due to our enormous consumption. The scarcity of land and the outrageous demand for resources prompted land to be bought through financial means. So it is hardly surprising to see sovereignty of the Senkaku Islands handed over to the Japanese because they were willing and able to cough up the money before China did. It is opportunity costs all over again: Japan's short term leakage of funds could well be rewarded with long term gains to recover the sacrifice made.
The purchase of islands is very common nowadays; it is just like any investment you make! For example, a Philippines factory owner, and my mother's business partner, this year has bought two islands near the coast of Manila for $20 million HKD each. He is developing the islands into resorts, using tourism as the medium for financial returns for his investment. One thing that is quite weird, is that it is not expensive, while the Senkaku Islands are quite expensive. Coming from Hong Kong, a city with ruthlessly expensive housing prices, it is not overwhelmingly expensive for islands since one can only buy a regular sized apartment in Hong Kong for that money! The reason for expensive land in Hong Kong is due to the lack of land and strong demand. Any old island on the other hand, is relatively cheap because of the excess supply. The Senkaku Islands are quite special; it has a great location, oil reserves nearby, and other resources, hence the reason for its high cost. It just goes to show how important land is as a factor of production.
*"Islands on the Market": The buying and selling of private islands is commonplace in the modern society. Pictured above is the Real Madrid owned artificial island in the United Arab Emirates.
Price competition is the main form of competition for fixed assets like land, and the other supplements such as heritage, paper evidence of ownership etc. can represent the non-price factors for this case. But the non-price factors play such a small role in the current economic environment. Believe it or not, our world is quite poor. Economies continue to struggle by poor consumption, trade, and political problems. Having money is a great deal to all economies. On a micro scale, profit is what drives rational entrepreneurs and businesses forward, people work to receive money to satisfy their needs and wants, and gangsters who rob people will most likely demand money and possessions that are valued highly.
The second reason is trade improvements. Both Japan and China's trade are continuing to do quite well. In August this year, Japan recorded a current account surplus of 455 billion yen. China, as all of you might have guessed, recorded a current account surplus of $59.7 billion USD in the second quarter this year. Even though both countries are doing well, with their GDP's continuing to rise, they want to continue to improve for security reasons to survive unprecedented economic recession backlashes. The Senkaku Islands arre located in a very good spot; right between two economic superpowers. More ports are available, which can improve the capacity of imports and exports. For Japan's relatively weak currency, the reduction in price of exports would lead to a proportionately greater increase in the demand for the exports. This would further increase the net exports and current account surplus. Also, Japan is often prized for its innovation for technological goods. The modern society revolves around technology, so Japan would also benefit from the expanded trade area. On the other hand, the demand for Chinese made goods is significantly higher than Japanese made goods, hence the reason why China wants to continue expanding its trade.
A third reason is the food source. The waters of the East China Sea are rich fishing grounds. Both Chinese and Japanese cuisine highly prize seafood in their dishes. For example, the Japanese sushi and sashimi, and the Chinese steamed Garoupa and fish maw soup. With food becoming more expensive due to the high demand and depleting supply, Japan and China have to look elsewhere for food.
The final reason would be the expansion of the EEZ (Exclusive Economic Zone). Although the two nations have roughly the same coastline, Japan claims 4.5km2 of the EEZ, which is 5 times more than China. The EEZ is a seazone prescribed by the United Nations Convention on the Law of the Sea, over which a country as exclusive right over exploration and use of marine resources. Given the potential resource and territorial gain, it is no wonder Japan and China are both hysterical about ownership of the Senkaku Islands.
Japan and China have a rich history of conflicts, some long term ones, and some short term ones. With the current rocky relationship between these two countries, and the many benefits for the country who is able to obtain that ownership, it seems this is going to be another long one...
