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05:26 15 July 2016

OPINION: Brexit and the shadow of China

By Kent E. Calder
WASHINGTON, July 14, Kyodo

Britain's prospective departure from the European Union will clearly send shock waves across Europe and throughout the Atlantic Community. But what impact might it have in the Pacific? Are Japan and China too far away to meaningfully feel its reverberations?

To assess the impact of Brexit in Asia, it is important first to review the pre-existing structure of trans-Eurasian relationships. By far the largest Asian investor in Europe at the moment is Japan. Its region-wide operations are concentrated most intensely in Britain, which hosts over 1,300 firms, providing nearly 140,000 jobs to British workers. Japan's commercial gateway into Europe for a full century and more has been London, and the European headquarters of most major Japanese firms are located there. A few Japanese firms, such as Nissan, Toyota, and Hitachi, have manufacturing operations in Britain, but the UK is most important to the Japanese corporate world as a distribution and financial center.

China's stakes in Europe are very different, both economically and geographically. London is, of course, a key financial center for China, but with a different, more geopolitical dimension than for Japan. China's first off-shore renminbi issues were in London late last year, and London could be notably important as China's currency begins to internationalize. The sophisticated Euro-market infrastructure based there, rivalled only by New York, but more insulated from U.S. geopolitical pressures, is a natural attraction, as it was for the Soviets and other Communist nations, including China, half a century ago. London also has close and longstanding ties with the Hong Kong financial markets, and was an early supporter of China's AIIB initiative. China will enjoy even more leverage over the City of London following Brexit, as Britain's options on the European continent begin to narrow, and the attraction of China-related financial transactions may well continue to rise.

Apart from finance, China's economic interests in Europe relate strongly to technology, especially German, and in the expanding commercial opportunities, both in infrastructure development and the sale of manufactures, that flow from rapidly deepening overland interdependence across the continent. As I have stressed in previous writings, a "new continentalism" is rising across Eurasia. Growth poles in western China, such as Chengdu, are becoming ever more tightly linked with growth poles in central and eastern Europe, as overland transport costs fall, customs clearance procedures simplify, and digitalization of value chains radically simplifies logistics. Geographically, China's concerns -- apart from finance -- thus gravitate toward continental Europe, especially its central and eastern regions. Britain is in no sense a center of intense regional corporate activity for China in the way that it is for Japan, which benefits much less from the "new continentalism" than do the emerging western industrial centers of China.

Currency realignments, tariffs, and regulatory standards, especially for emissions and safety, are other potentially significant dimensions of Brexit. Uncertainties in these areas complicate life particularly for Japanese auto and consumer electronics producers -- among the nation's most competitive firms -- especially as protectionist pressures in the U.S., related to its forthcoming presidential election, make any Japanese reflationary efforts at home that have foreign-exchange implications politically delicate in Washington. The Chinese are less affected by these currency realignments and regulatory uncertainties than the Japanese, as they have little manufacturing investment in Europe, and their principal exports from China are not as directly competitive to those of Europe in any case.

Japan is thus more perversely affected than China by Brexit in economic terms. Indeed, due to tailwinds from the "new continentalism," coupled with the enhanced leverage Beijing would enjoy in a more fragmented Europe, China could actually benefit from Britain's departure from the European Union. What can Japan do to offset these potentially negative developments?

Regardless of what form Brexit ultimately takes, one thing is clear: Japan needs to be more proactive in its political-economic engagement with Europe -- particularly with Germany and the new Central and East European members of the European Union, where China has made major inroads of late. These countries, many former members of the Warsaw Pact, feel exposed to Russian pressure, and are looking anxiously for broader foreign support. With many ethnic compatriots residing in the United States, they have formidable influence in Washington also, so Japanese economic assistance to their homelands would have positive feedback implications for U.S.-Japan relations as well. As these eastern European countries are heavily dependent on Russian energy, Japanese support for either nuclear power development, as in the ongoing GE-Hitachi Lithuanian nuclear plant construction effort, or through energy-efficiency and solar-power assistance, can be one form of strategic support from Japan that is not directly provocative to neighboring Russia.

Apart from bilateral initiatives and public diplomacy between Japan and Europe directly, two major multilateral bodies need to be priority objects of Tokyo's attention. On the economic side, the G-7 summit of advanced industrial democracies, that convened this past May in Ise-shima, deserves particular attention. This is a grouping of democratic nations that includes Britain, France, Germany, and Italy, as well as the European Union, Japan, Canada and the United States. It is thus a forum where Japan can associate with both Britain and the continental Europeans, as well as the U.S., and reaffirm common views on issues like intellectual property protection, where major differences with China remain that could inhibit China's European advance.

A second multilateral body, NATO, will be an increasingly important forum for trans-Atlantic and intra-European communication in the wake of Brexit, since Britain will without doubt continue to be centrally involved there. Japan may not be a member, but NATO's longest-standing global partner shares many common interests with NATO that know no geographic boundaries, on topics ranging from cyber-security and strategic export controls to counter-terrorism. Japan needs to develop deeper informal NATO ties, parallel to its continuing involvement in the G-7. And the United States should encourage Tokyo, as a key Brexit counter-measure, in both these efforts.

(Kent E. Calder is director of the Reischauer Center for East Asian Studies at SAIS/Johns Hopkins University in Washington.)

==Kyodo

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