So, how wrong am I about the Asia/Pacific?

Hey, remember last week, when I was blogging about how China was threatening Japan with a rare earth ban because the Japanse government had a Chinese boat captain in custody?  And remember how I said that, "given the spate of flare-ups between Japan and China as of late, the last thing Tokyo will want to do is back down in the face of Chinese economic coercion"?

Ummm….. whoops:

Japanese prosecutors have released the captain of a Chinese fishing boat, two weeks after a collision in disputed waters sparked a dramatic deterioration in ties between Beijing and Tokyo….

Prosecutors on the southern Japanese island of Okinawa, where Zhan was detained, said they would monitor both governments’ response to their decision before deciding whether to indict him, but that course of action is looking increasingly unlikely.

They said the row caused by Zhan’s detention and the possible impact on Japan-China ties had been a factor in their decision….

Japanese officials had earlier warned that the swift deterioration in bilateral ties posed a threat to the economies of both countries.

China was Japan’s largest trading partner last year and Japan was China’s third largest. Bilateral trade reached $147bn (£93.6bn) in the first half of this year – a jump of 34.5% over the same time last year, Japanese figures show.

"A cooling of relations between Japan and China over the Senkaku problem would be bad for Japan’s economy, but it would also be a minus for China," Japan’s finance minister, Yoshihiko Noda, said.

"It’s desirable that both sides respond in a calm manner."

A few commentors to my last post took this opportunity to tell me to go suck a lemon the errors of my ways.  To which I must respond….  not so fast. 

I had four points to make in that post: 

 A)  Japan was unlikely to bow to economic pressure from China;

B)  China’s use of a rare earths export ban was not likely to have much leverage;

C)  China was overestimating its overall ability to translate economic power into political leverage; and

D)  Because of these actions, the rest of the Pacific Rim was going to start getting much closer to the United States. 

Now, let’s go through these in the context of this Associated Press story about the latest in this Sino-Japanese kerfuffle:  

Tension between China and Japan bumped back up a notch Monday when Tokyo asked Beijing to pay for damages to patrol boats hit by a Chinese fishing vessel in disputed waters, countering China’s demand for an apology over the incident.

The diplomatic back-and-forth shows that nationalistic sentiments stirred up by the incident — and the territorial dispute behind it — are not fading even after Tokyo released the ship’s captain Friday amid intense pressure from China.

Welcoming the skipper home as a hero, China stunned Japan over the weekend by demanding an apology and compensation over his arrest, a move that reflects Beijing’s growing self-confidence and its attempts to test the resolve of key neighbors like Japan, Washington’s closest ally in the region.

Criticized at home for caving in to Chinese pressure, Prime Minister Naoto Kan’s government responded by issuing its own demand for compensation and calling on Beijing to decide whether it wanted to repair frayed ties.

"At this point, the ball is now in China’s court," said Chief Cabinet Secretary Yoshito Sengoku….

Some experts saw China’s demand for an apology as overreaching — and bad publicity in a region where neighbors are already concerned about the nation’s expanding military and political clout. China is embroiled in several other territorial disputes.

"Beijing has scored an own-goal here. It really reflects badly on them," said Jeff Kingston, director of Asian studies at Temple University’s Tokyo campus. "All that smile diplomacy, reassuring regional neighbors that the rise of China is unthreatening, has just gone up in smoke."

More broadly, the dispute and others like it has created openings for greater U.S. engagement in Asia as China begins to vie with the U.S. for dominance in the region.

On Friday, President Barack Obama and Southeast Asian leaders sent China a firm message over territorial disputes, calling for freedom of navigation and peaceful resolution of disputes in seas that China claims as its own. Obama said the U.S. plans to "play a leadership role in Asia."

Hmmm…. well, Japan did hand over the captain, so it seems that I was pretty wrong on (A).  That said, this story also suggests I’m a little right on (A) and very right on (C) and (D).  China overreached — again — in demanding compensation and an apology (though looking past this latest episode, there are some indications that China recognizes its overreaching vis-a-vis the USA).  This caused Japan to dig in its heels.  And, finally, all of this is pushing the region closer to the United States.   

[What about the rare earth lever?–ed.]  Damien Ma knows more about this than I do:

Given the expansive universe of Japanese high-tech sectors, Japan depends on China for the bulk of its RE supplies. Now, China produces roughly 95% of global RE supplies, but has only about 1/3 of the world’s total reserves. Having such immense control over a particular resource naturally leads to suspicion, especially among buyers, that China could wield "supplier leverage" to manipulate prices and supplies, much like how a cartel would behave….

China’s supply dominance was driven by market dynamics in the first place. Other RE mines closed production, in part because of environmental issues, while China continued to produce at a low price. Now that price is rising in China, it might be more cost-effective to start mine development elsewhere. If China really is trying to be the "OPEC" of rare earth elements, then global markets would react to cartel-like behavior, probably by accelerating development, eventually undermining Chinese monopoly on supply. Problem is, development takes time, so for now, it’s tough to get off Chinese supply.

At worst, I was slightly wrong on (B) in the short term — and this doesn’t get into Japan’s stockpiling of rare eaarths.  Furthermore, I am going to be much less wrong about this over time.  China’s market power over rare earths is clearly temporary.  Regardless of whether they were trying to use their monopsony power to extract concessions from Japan, the perception of China’s economic statecraft is going to encourage a lot of countries to subsidize their domestic supply. 

So, to sum up:  I was more right than wrong.  I hereby dare my thoughtful and cantankerous readers to go suck two lemons demonstrate the error
of my interpretation yet again in the comments section.