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Chinese police officer patrols past a paramilitary policeman stand guard outside the Japanese Embassy in Beijing (Andy Wong)
Chinese police officer patrols past a paramilitary policeman stand guard outside the Japanese Embassy in Beijing (Andy Wong)

China-Japan trade war looms Add to ...

A simmering dispute between China and Japan - until now a war only of words and gestures - is threatening to take on serious economic consequences as rumours spread about a Chinese ban on exports of a key resource to Japan.

The Asian giants - ancient rivals as well as the world's second- and third-largest economies - have been butting heads since a Sept. 7 incident when Japan detained the captain of a Chinese fishing trawler after his ship collided with two Japanese coast guard vessels near a chain of disputed islands between Okinawa and Taiwan. Infuriated, China has since escalated its diplomatic response on a near-daily basis, demanding that the captain be immediately returned and that he not face charges in a Japanese court.

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Concern rippled through markets Thursday after The New York Times reported that China had slapped a ban on the export to Japan of rare earth minerals - elements crucial to the production of everything from solar panels and guided missiles to iPhones and Toyota's hybrid Prius automobile.

The Chinese government later denied the report, but an executive at one Japanese company that produces high-tech factory equipment told The Globe and Mail that Toyota Inc., one of its main customers, had contacted his firm several days ago out of concern that supplies of rare earth minerals from China were being restricted.

In fact, China, which controls some 95 per cent of the world's supply of these minerals, had begun to restrict its exports to all countries as far back as July, after nearing an annual quota. But the panic over what China might do to retaliate against its neighbour - following a suggestion in a newspaper affiliated with the ruling Communist Party that China should seek and strike "the Achilles heel of Japan" - illustrated just how high the stakes are in this seemingly trivial dispute over an uninhabited atoll.

Beijing has already started trying to inflict economic pain on its neighbour, advising state-run tourist agencies not to advertise Japan as a destination. However, broader bilateral trade - worth a whopping $147-billion (U.S.) through the first six months of this year - has otherwise not been affected so far.

China has severed high-level contacts between the two governments and refused a Japanese suggestion that Chinese Premier Wen Jiabao and Japanese Prime Minister Naoto Kan meet in New York on the sidelines of the United Nations General Assembly to resolve the quarrel, insisting that the fishing captain, 41-year-old Zhan Qixiong, first be released.

"The Diaoyu Islands are sacred Chinese territory and if Japan clings obstinately to its mistake, China will take further actions. The Japanese side shall bear all the consequences that arise," Mr. Wen said on his arrival in New York, using the Chinese name for the disputed atoll, which Japan calls Senkaku. The islands are also claimed by Taiwan.

The Japanese government, which last week returned the ship and the rest of the 14-member crew to China, has thus far refused to release Mr. Zhan, insisting it has the right to try him under domestic laws for "obstructing officers on duty." A Japanese court recently extended his pretrial detention until Sept. 29.

Anti-Japanese sentiment is already high in China, resulting in small, closely supervised street demonstrations in Beijing and other cities. Now, Japanese public opinion also seems to be hardening about the case.

"Due to the nature of the incident, it makes perfect sense for Japan, a country of laws, to stick to its guns in calmly dealing with the issue in accordance with domestic law," the Asahi Shimbun newspaper wrote in an editorial published Thursday.

In the eyes of many observers, the quarrel is less about the fate of Mr. Zhan than it is an effort by China to assert itself as the new power in East Asia by forcing declining Japan to back down in a very public spat.

"If [the Japanese]don't back down, I have no idea what [China's leadership]is going to do. I think it's a really dangerous situation," said Gordon Chang, a U.S.-based critic of the Chinese government. He said the standoff is more dangerous because China's military has gained substantial new influence in Beijing under President Hu Jintao.

On Thursday, U.S. Secretary of State Hillary Clinton waded into the dispute, urging the two sides to resolve the dispute through dialogue. The United States is a close military and political ally of Japan.

The islands at the centre of the current argument were awarded to Japan by the United States following the Second World War. The dispute over their ownership became far more heated following a 1969 geological survey that indicated that the waters around the islands could be home to as much as seven trillion cubic feet of natural gas and upward of 100 billion barrels of oil.

Follow on Twitter: @markmackinnon

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