What are the biggest short-term threats to the global economy?
The two most obvious answers are the ongoing European debt crisis
and the looming austerity of the fiscal cliff in the United States.
But what if I told you that in the running for honorable mention is
the sticky situation in East Asia surrounding territorial disputes
over several small islands?
At the heart of these disputes lie the regions big three
economies: China, Japan, and South Korea. Beijing and Tokyo are at
odds over who has rights to the Senkaku Islands (or in China, the
Diaoyu) and, more important, the potential oil deposits in the
surrounding waters. Meanwhile, Japan has a similar dispute with
South Korea over the Takeshima Islands (or in South Korea, the
Dokdo), also with energy deposits.
While these territories have been disputed for decades, tensions
have recently heightened in the region as all sides intensify
ownership claims and leaders use the disputes for leverage in
domestic politics. This raises concerns about strategic and
economic stability in the region going forward.
Fears about instability in East Asia are not new. In the early
1990s, as the cold war entered the history books, some international
relations experts feared that East Asia was poised to become like
Europe of the early 20th century a multipolar region with a
threatening rising power (in this case China, rather than Germany)
and weak regional institutions.
However, by the end of that decade, hopes for regional stability
and cooperation were on the rise. Much of the progress came on the
financial front. After the 1997 financial crisis rocked the entire
region, a consensus emerged among the big three countries and a
group of 10 smaller ones in Southeast Asia that East Asia needed a
financial safety net.
In 2000, a system of emergency credit lines between central banks
was born and has since developed into a regional foreign exchange
pool with $240 billion in resources. Trade between nations in the
region increased substantially.
More recently, in the immediate aftermath of the global financial
crisis in 2008, China, Japan, and South Korea increased existing
central bank credit lines with each other. Just last year, China and
Japan agreed to begin conducting trade in their own local currencies
in order to increase commerce between their two economies.
The island disputes are threatening to undermine all this. Three
recent events highlight how the territorial spats are now spilling
over into the economic sphere.
First, nationalist fervor in China has led to a de facto boycott
of Japanese goods, causing September sales of Japanese cars in China
to plummet. Japans major automakers say they will draw down
production in China. …