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Opinion

Japan, China, South Korea island disputes threaten global economy (+ video)

Island disputes between Japan, China, and South Korea are threatening financial stability in East Asia, and with it, the global economy. The next US administration should push publicly and persistently for a solution.

By Daniel McDowell / October 22, 2012

A Chinese marine surveillance ship cruises in waters about 23 km west of one of the disputed islands, called Senkaku in Japan and Diaoyu in China, in the East China Sea, in this handout photo by the Japan Coast Guard Oct. 20. Op-ed contributor Daniel McDowell writes: 'Nationalist fervor in China has led to a de facto boycott of Japanese goods, causing September sales of Japanese cars in China to plummet.'

Japan Coast Guard handout/Reuters

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Syracuse, N.Y.

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?

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Commentary: Harvard Kennedy School Professor Anthony Saich explores the future of US-Chinese relations.

At the heart of these disputes lie the region’s “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.

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