Trade to limit harm of East Asia island spats

China, Japan and South Korea are loath to let tensions over sea claims damage their sputtering economies, analysts say, but the emotional disputes could still slow long-term trade integration efforts.

Political and security tensions have flared this month due to the long-running territorial rivalries, which pit Japan against China in one and against South Korea in another.

So far, fallout has included demonstrators in China attacking Japanese cars, diplomats being summoned to hear formal protests, and exchanges of harsh words by officials.

Japan has cancelled a finance ministers' meeting with South Korea and hinted at reviewing a currency swap deal with the country as well as possibly freezing a plan to buy its government bonds.

"Unfortunately, things have reached a point where the (Japanese) people cannot simply accept that politics are politics and economics are economics," Finance Minister Jun Azumi said Friday.

Analysts, however, say that the stakes are too high to let deteriorating political relations harm business, especially when the world economy is still weak.

"Huffing and puffing among politicians are one thing and economic reality is another," said Kang Pan-Seok, a currency analyst at Woori Futures in Seoul. "Mutual cooperation is required at this time of global economic slowdown."

Japan and China, as well as Taiwan, claim a string of uninhabited islands in a potentially resource rich area of the East China Sea. Japan and South Korea, meanwhile, claim islands farther north in the Sea of Japan, or what Koreans call the East Sea.

Tensions spiked this month after Lee Myung-Bak became the first South Korean president to visit Dokdo -- or Takeshima to the Japanese -- which his country occupies with armed police.

Tit-for-tat landings and flag-raisings on the East China Sea islands, known as Diaoyu in China and Senkaku in Japan, by pro-China activists sailing from Hong Kong and Japanese from nearby, further inflamed the regional situation.

The disputes flare up periodically though have proven mostly a political irritant while trade has bloomed.

"We have witnessed similar incidents before but economic ties remained tight," Zhang Zhiwei, economist at Nomura International in Hong Kong, said in an email.

Takeshi Minami, economist at Norinchukin Research Institute in Tokyo, predicted at worst a "limited" economic impact from the Tokyo-Beijing dispute.

"Scaling back economic ties would bring too many disadvantages to both sides," he said.

China and Japan are Asia's biggest economies and globally rank number two and three, respectively, after the United States. South Korea, while smaller, is still the region's fourth-biggest economy and a major world player in shipbuilding, autos and electronics.

Robert Broadfoot, founder and managing director of Hong Kong-based Political and Economic Risk Consultancy, said Beijing, Tokyo and Seoul understand the economic risks that come with beating nationalist drums and won't allow things to explode.

"All three of these countries play chess with each other," Broadfoot said. "And they're thinking 10 moves ahead."

Signs of prudence are indeed visible. Japan, which recalled its ambassador to Seoul, has sent him back to the South Korean capital and Chinese state media have carried articles criticising the violent behaviour of some protestors.

"China for now seems to be trying to calm down the situation," said Stephanie Kleine-Ahlbrandt, Northeast Asia director for the International Crisis Group in Beijing.

"But tensions in the East China Sea are not going to really diminish, and the use of economic measures -- similar to those used in 2010 by Beijing following Japan's arrest of its fishermen near the Diaoyu-Senkaku islands -- cannot be ruled out," she said.

During that flare-up, Japanese industry sources said China temporarily cut off exports of strategic rare earth metals vital to a range of high-tech products, though Beijing denied halting shipments.

The problem, according to Political and Economic Risk Consultancy's Broadfoot, is longer term, in that the bickering could slow progress on economic cooperation and integration, including a proposed three-way free trade agreement, while other regions move forward.

"There's been a shift of emphasis on where the economic opportunities are to Southeast Asia this year," he said, citing as examples vitality in Indonesia and the opening up of Myanmar.

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