The League of the Overshadowed

It is easy to be small and ignored. But to be large and ignored, it helps to hide within the shadow of an even larger entity. In the realms of economics and geopolitics, there are three very large countries which, though not actually ignored, do not always receive the respect their size demands, as they inhabit the shadows thrown by the world’s colossi, the USA and China. These countries are Canada, Mexico, and Japan.

Japan has by far the third largest economy in the world, by far the second largest developed economy in the world, by far the second largest population among developed economies, and the tenth largest population globally.

Canada is the second largest country in the world, the fourth largest possessor of renewable freshwater, the fourth largest producer of renewable energy, the fourth largest exporter of oil, and the tenth largest economy.

And Mexico has the world’s eleventh largest population, thirteenth largest territory, and fifteenth largest economy. (Only five other nations are top-15 in all three categories: the US and the BRICs). Mexico has 2.5 times the population of the next largest Spanish nation (Colombia), plus a diaspora of 35-45 million in the US. It is also the twelfth largest oil producer in the world. The Greater Mexico Region (including Mexico, Texas, California, Venezuela, and US waters in the Gulf) produces more oil than Saudi Arabia or Russia. This region also has an economy larger than any country in the world, apart from the US or China.

The League of the Overshadowed

At the moment, however, trade between Canada, Mexico, and Japan is quite small. Neither Canada nor Mexico are even among Japan’s top fifteen trade partners. And while Mexico and Canada do trade with one another more often — Mexico recently overtook Britain to become Canada’s third biggest trade partner — trade with Mexico still counts for less than three percent of Canada’s total. Their trade with one another is overshadowed by that of the US. Indeed, California alone trades far more with Canada, Mexico, and Japan than those countries do with one another. There is no League of the Overshadowed… yet.

It may be worth noting, though, that US politics have to a certain extent put trade with Canada, Mexico, and Japan into question. President Trump’s first executive order was to withdraw from the Trans-Pacific Trade Partnership, in which Japan would have accounted for over 60 percent of the twelve member-states’ GDP apart from the US. Trump has also signalled his intention to renegotiate NAFTA, tighten the US-Mexico border, raise tariffs on Canadian farm and forestry products, and keep American fossil fuels cheap.

If these policies are followed through on, they could have the effect of driving US trade partners somewhat closer together. Obviously, Canada and Mexico have an interest in showing that they can trade with one another regardless of what Washington intends to say or do about NAFTA. Both also have an interest in exporting more fossil fuels to Asia, where prices remain more expensive than in the shale-rich US. On June 1, in fact, Canadian senator Paul Massicotte wrote an op-ed calling for Canada and Japan to sign a free trade agreement with one another as quickly as possible, given the failure of TPP and risks for NAFTA. Especially as both Canada and Japan have large majority governments right now, such a deal may happen.

An economic relationship between Canada, Mexico, and Japan could turn out to be far more significant, however, than being just a knee-jerk response to Trump’s America-First politics. As we will see, Canada, Mexico, and Japan are in fact complimentary nations, both economically and geographically. Already they have a propensity to trade with one another that is larger than their absolute trade levels suggest (see graph below). So long as Japan’s economic growth remains stagnant, Mexico remains poor, and Canada remains underpopulated, this propensity does not matter much. But if these conditions do not remain, we should expect trade between these three significant, overshadowed countries to grow by a very large amount.

canada propensity to trade

Complimentary Nations

Economists often talk about land, labour, and capital, considering them fundamental inputs of productivity. In the case of Canada, Mexico, and Japan, these inputs are epitomized: Canada has land but not labour, Mexico labour but not capital, and Japan capital but not land. Together, then, they could make a formidable team.

In Canadian politics and business, it has become common in recent years to say that by exporting natural resources to China, Canada can finally reduce the near-monopoly that the US has on buying Canadian exports. This view, however, is based on a false extrapolation of a trend that is now nearing its end: industrial growth in coastal Chinese cities. As China now seeks to rebalance its economy, by investing instead in its service sectors (which are less resource-intensive) and interior cities (which have a lower propensity to engage in trans-Pacific trade), its demand for Canadian resources is unlikely to continue to surge. Most of the resources it does buy will probably continue to come from within its own borders — China only imports 15 percent of the energy it consumes — or from its “One Belt, One Road” partners in Asia.

In Japan, on the other hand, the reverse is true. Japan has few resources of its own, and no Silk Roads to tap. Japan imports 90-plus percent of the energy it consumes, mainly from the Middle East. Its access to the Middle East, however, is imperilled, both from competition with other Asian countries (notably, China and India) as well as from Middle Eastern conflicts. Consider, for example, that Japan accounts for 30-40 percent of LNG imports globally, yet its primary supplier, Qatar, is now in an open feud with Saudi Arabia. Between competition and conflict, Japan could have to rely more on trans-Pacific trade to get resources. It would not be the first time: in the 1930s, eighty percent of the oil Japan consumed was imported from the US.

China-Japan comparisons.png

Even more important may be the impact of labour-saving machinery — robotics — upon Japanese trade. Because Japan has the oldest population in the world by far, it is planning to become a leader in robotics. Even, for example, as soon as the Tokyo Olympics in 2020, Japan is planning to showcase its robotic prowess. Yet robots are highly energy-intensive, and industrial robots resource-intensive. If Japan really does become the leader in robotics, it is likely to start importing lots of energy and other commodities from resource-rich countries like Canada. It may also be likely to start exporting its robotic technologies to countries like Canada, given Canada’s abundance of resources but lack of a large, cheap, human labour force.

Upstairs, Downstairs 

Today, if you exclude the US or Europe, Canada and Mexico have the largest combined economies of any pair of countries which are part of the same trade bloc (see graph 1 below). Yet if you include Europe, Canada and Mexico still rank quite a bit lower than a number of pairings of Europe’s largest economies (graph 2).

trade bloc pairing comparisons

In other ways, however, Canada and Mexico rank ahead of these European pairings. In population they do so (graph 3). In land they do so too (indeed, Mexico alone is larger than any four countries in the EU combined). And in terms of their indirect, second-degree trade (their combined trade with a third country), Canada and Mexico as a pair lead the world (graph 4), a result of their both trading hugely with the US.

canada-mexico indirect trade


While Canada’s propensity to trade with Mexico is greater than with any significant country apart from the US, it is still only around half as high as its propensity to trade with the US. The reason for this is simple: Canada and Mexico do not share a border with one another. They are not even very close in proximity to one another. More than 3000 kilometres separate Mexico City from any of the largest cities in Canada.

This separation is also reflected in Canada’s lack of a significant Spanish-speaking diaspora, particularly relative to that of the US. In spite of the fact that 21 percent of Canada’s population is foreign-born, compared to just 14 percent in the US, only 0.3 percent of Canada’s population is Mexican, compared to an estimated 11 percent of the population in the US. Even the state with the smallest share of its population being Mexican or Mexican-American—Maine—has a higher share, 0.4 percent, than Canada does.

But this may be likely to change, for two reasons. First, there is a political faction in the US which is wary of further Hispanic immigration, seeing it as a threat to the singular position held by the English language in America. Second, whereas the population of the US is relatively young, the population of Canada is Boomer-dominated, inching towards old age. This is especially true of the population of Canada’s French-speaking provinces, Quebec and (partially) New Brunswick. These provinces also, because of the far smaller language gap between French and Spanish than between Spanish and English, have a much higher propensity to attract Latin Americans than do other parts of Canada (see graph). Between demographics of this kind and US immigration politics, the next major wave of Latin American emigrants could be to Canada.

canada-quebec comparisons.png

The aging population of Canada’s Baby Boomers, and especially of Quebec’s Baby Boomers, also indicates another area in which Canada-Mexico economic ties—both direct and indirect—are likely to grow: tourism.  Already today, Mexico is the largest destination for Canadian travellers apart from the US, while the areas of the US that Canadians spend the most time in — Florida, the Southwest, and New York — are ones in which Mexican-Americans (or in Florida’s case, Hispanic-Americans in general) inhabit in large numbers. As Canadian Baby Boomers reach old age or retire, they are likely to spend more time in places like Mexico, in order to avoid much of the discomfort (even danger) of dark, icy Canadian winters. This will be most true of Quebec, given its older population, colder winters, and greater ability to learn Spanish.

Travel by Canadians .png

As the chart above implies, the US reconciliation with Cuba may also lead Canadians to spend more time in Mexico. During the past generation, the US rivalry with Cuba has given Canadians a near lock on the Cuban market. Canadians account for an estimated forty percent of all visitors to Cuba, and Cuba accounts for a disproportionately large destination (given Cuba’s relatively small size) for Canadian tourists. As the US allows its own population to go to Cuba, however, Canadian snowbirds will lose the advantage of having such a cheap, warm country all to itself. Many will re-route to other Latin American beaches.

An even more important pull factor for Canadian snowbirds will be “e-commuting”. The ability for young Canadians to spend time in a cheap, warm country in the winter is likely to increase dramatically as a result of the modern Internet. This is also likely to impact the Baby Boomers. If, for example, it becomes easier for a Boomer’s children and grandchildren to come visit them in Florida or Mexico for, say, a whole month over Christmas, rather than for just a week, then Boomers will be likelier to go in the first place.

And the relationship may not even remain one-way only: Mexicans may begin to visit Canada more often too. Today Mexicans do not go to Canada much, because they lack the disposable income to do so. If and as Mexicans become wealthier, however, they may look to Canada as a place to go in the summer; a place where the summer weather is not too hot, the major metropolises are not too crowded, and a cottage by a northern lake may be rented at an affordable rate. Climate change could, sadly, also play a role in this equation. Mexico — and the Southwestern US, in which tens of millions of Mexican-Americans live — is dangerously arid, whereas Canada is in possession of an abundance of renewable, surface-level freshwater.

Conclusion—The New Drivers of Trade 

Today, the main driver of trade is proximity. Countries which share borders with one another tend to trade a lot — though, of course, there are many exceptions to this — whereas far-away countries tend not to. However as (or, admittedly, if) globalization continues, proximity may no longer matter as much. Complimentarity may matter a lot more. We have seen here various ways in which Canada, Mexico, and Japan may be complimentary to one another. Canada has land but not labour, Mexico labour but not capital, Japan capital but not land. Canada has cold, dark winters but warm, water-rich summers, Mexico warm bright winters but hot, arid summers. All three countries have coasts on the North Pacific Ocean; none are part of the Asian (or Eurasian, or Afro-Eurasian) continent. And all three countries are very large, yet are overshadowed by neighbours that are far larger than they are. They may end up, if only informally, a formidable League.

North Korea in the Next Five Years

The Korean War, fought from 1950-1953, was a result of two earlier wars in the 1940s: the US-Japanese War, which ended with the destruction and occupation of Japan in 1945, and the Chinese Civil War, which ended in a Communist victory (and Nationalist retreat to Taiwan) in 1950. With the Communists and Americans as the only powers in East Asia following these wars, the Korean peninsula was split in two, each side taking a piece for itself.

When the US triumphed over the Soviet Union around 1990, many expected the North Koreans to fix their broken ties with South Korea.  That this did not occur was partly the result of inertia, partly the result of Kim Il Sung’s living until 1994, and partly the result of the 1997 East Asian financial crisis, which kept the South Koreans too poor to want to incur the cost of investing in North Korean infrastructure or labour.

It was also partly the result of a miscalculation on behalf of North Korea in 1987, twenty-four months before the Berlin Wall came down. Seeking to ruin the South’s first-ever Olympics in 1988, the North blew up a commercial airplane. It was by far the deadliest attack on the South since the armistice began in 1953. South Korea’s anger and mistrust of North Korea as a result of this deed persisted during the ’90s.

When the 21st century arrived the situation changed again.  The US, after having fought the bulk of its four major 20th century wars in East Asia—in the Philippines, WW2, Korea, and Vietnam—shifted its focus elsewhere in 2001. This shift was mainly a result of US wars in Afghanistan, Iraq, and Libya. To a lesser extent, it has also been a result of recent Russian interventions in Georgia, Ukraine, and Syria .

In East Asia, meanwhile, China’s GDP surged, while Japan’s continued to stagnate like it had in the ‘90s. Between Chinese growth,  Japanese stagnation, and US distraction, East Asia became again a two-power region: the United States and China now dominate the region. But this may now be ending. In the years ahead, East Asia is likelier to become either a one-power region, like it was in 1990s, or a three-power region (the US, China, and Japan). The two-power status quo could remain in place, but is hardly certain to do so.

In a one-power or three-power region, the powers involved may have less to gain from the continuation of poor relations between North and South Korea. There will be much less reason to split Korea in two, as it has been for 67 years now, when East Asia as a whole is not split between two major powers, as it is today.

The move towards a one-power East Asia, or towards a three-power East Asia, is plausible for three reasons:

First, the US has been drawing down from the Middle East. It had 150,000 soldiers fighting in Iraq and Afganistan in 2011, but now has fewer than 15,000.  Unless it decides to wholly reverse this process — Trump has announced the addition of 4,000 soldiers to Afghanistan, but that is a far cry from the Obama-era surge—the US will have the ability to focus on other regions, like East Asia, more than it could during the 2000’s.

Second, China’s GDP growth has slowed, from 10-15 percent growth during the 2000s to 3-7 percent (depending on whether you believe its official growth rate, 6.7%) last year. In order to keep up with 2.5 percent US growth, China must grow around 4 percent. China’s challenge in doing this is that its labour is now much costlier and older than it used to be, while its resource wealth, most notably its coal, has led to pollution.

China may struggle to keep up with US power. As it is, the US economy is an estimated 1.6 times larger than China’s. [The US-Canada-Britain-Australia alliance, meanwhile – which, unlike China itself, more or less speaks a single language – has a GDP 2.2 times larger than China’s]. The US GDP alone is larger than that of East Asia as a whole.

Third, the economy of Japan, which today is an estimated 37 percent as large as China’s and 18 percent larger than Germany’s, is likely to benefit from the crash in oil and other natural resource prices that began in mid-2015. Unlike China, Japan has few resources of its own, and so depends on imports to fuel its economy.

relative trade northeast asia

While Japan’s aging population continues to be a challenge — Japan’s largest age cohorts are 40-45 year olds and 65-70 year olds — it may be able to address the challenge via automation, immigration, and a labour force dominated by technically skilled 50-80 year olds. Japan is already planning to advance its robotic prowess in the near term, as it wants to showcase them at the 2020 Tokyo Olympics.

Japan’s robot drive is likely to have consequences not just for the Japanese economy, but also for the Japanese military. Japan has already begun to rebuild its military of late, first in response to China’s rise and then in response to Donald Trump’s rhetoric that US allies should “stop freeloading, and pull their own weight”.  Already today the Japan ranks 8th in military spending, despite devoting just one percent of its GDP to it. Should Japan double this, to reach the 2 percent of GDP that France and Britain spend, it would then become the third largest military spender in the world, and move far ahead of the next largest, Russia. (Were Japan to spend 5 percent of GDP on its military like Russia does, it would move far ahead of China).

Even if Japan does not re-emerge, East Asia might not remain a two-power region. Rather, China could fall behind the US sufficiently that, in effect, it will be a one-power region again, like it was in the 1990s. US power is rising not only due to its withdrawal from the Middle East, but also because its rivals, most notably Russia, are being hurt by the fall in resource prices. As in the ’90s — when oil prices were at all-time lows — cheap oil works in the US’s favour. And if US power in the region does rise, the North Koreans might be less willing to resist its demands.


There is an additional reason for improving relations between the North and South: it may benefit the South’s economy.  Unlike in the 1990s, South Korea is now a relatively wealthy country. Yet because of its rapid growth, it has become dependent on imports of natural resources and exports of manufactured goods. South Korea has been importing resources mainly from the Middle East, and exporting mainly to China.

The Middle East, however, remains unstable. Qatar, for example, the world’s largest LNG exporter, sells more to South Korea than to any other country. But Qatar is now in open conflict with Saudi Arabia. Uncertainty of this kind threatens South Korea’s GDP growth. In addition, as China tries to shift from coal to gas, and as Japan tries to shift from human labour to fuel-powered robots, South Korea may have to deal with rising competition from its own enormous neighbours when importing fossil fuels from the Middle East.

Similarly, South Korean exports have been limited by the slowing Chinese economy. China accounts for a quarter of all South Korean exports, more than the US and Japan combined. South Korea has also been hurt by its own success: its labour is no longer so cheap like it was in previous decades, when it was still a poor country.  For these reason, South Korea has already grown more slowly in the past two years that at any time since 1997 (excepting the global financial crisis in 2009).

These economic troubles are occuring at a bad time for the South. South Korea will host the the first-ever Winter Olympics in continental Asia this year. It wants the world’s perceptions of itself—namely, that it is a remarkable country, with remarkable companies like Samsung and remarkable economic prospects in general—to endure. It also does not want the North to cause trouble this time, as occured in 1987.

Trading with North Korea could help address both these concerns. North Korea has an extremely cheap, Korean-speaking labour force; a labour force that includes cousins, and in some cases even siblings, of the South’s. It represents a potential Korean-speaking market for South Korean exports, both of media and manufactured goods. It even, if ties improve enough, offers opportunities in tourism. And it offers access to natural resources. The North Koreans are rich in coal; the South Koreans are top coal importers. More importantly, the North offers a land route by which South Korea can access resource-rich Manchuria and Siberia.


It is possible, of course, that the Korean issue will be addressed by war rather than by trade. In the past year alone, the US has prepared for such a war. It is also possible that the North will not be addressed at all; that the tyrannical staus quo will endure. But for the reasons outlined above, I believe reconciliation is the most likely, and the status quo the least likely.

Dennis Rodman, who played on the the 1990s Chicago Bulls (Kim Jong Un’s favorite basketball team) has lately met with Un. Do not be suprised if Rodman’s Celebrity Apprentice co-star, Donald Trump, follows suit.

North Korea and the Olympics Curse

Countries, or even entire regions, sometimes change dramatically soon after hosting major sports events like the Olympics or World Cup. For the next five years, these events will all be held in countries surrounding North Korea. The 2018 Winter Olympics will be in Pyeongchang, South Korea, the 2018 World Cup in Russia, the 2020 Summer Olympics in Tokyo, and the 2022 Winter Olympics in Bejing. This could, maybe, foreshadow a coming political change.


The Olympics Curse 

In the relatively common phenomenon known as the “Olympics Curse”, countries or even entire regions change dramatically soon after hosting major sports events like the Olympics or World Cup. Sometimes this change is for the better, but often it is for the worse. It is, typically, the result of boom-bust economic cycles: countries bid for the tournaments during periods of growth but, by the time the tournaments finally take place, leaner years have set in. 


During the past decade the curse of the Olympics has been especially striking. It was felt most recently in the aftermath of the “BRICS” economic cycle, which had led to Olympics in Rio de Janeiro in 2016, Sochi in 2014, and Beijing in 2008, and to World Cups in Brazil in 2014, South Africa in 2010 and (for cricket) Mumbai in 2011. 

The BRICS boom first began to waver in 2008, the year of the Beijing Olympics, as the global financial crisis began and called China’s exports to the US and Europe into question. This forced the Chinese to rely instead on growing debt — and then on a new cult of personality, that of Xi Jinping —to keep their boom going. 

The slowing economic growth in Europe and China also took a toll on commodity prices, which in turn crushed the Russian, Brazilian, and South African economies. Russia responded to this economic threat by going to war with its neighbours, first in Georgia in 2008 (the day before the Beijing Olympics), then in Ukraine in 2014 (three days before the end of the Sochi Olympics).

Brazil, meanwhile, entered what has been perhaps the worst recession in the country’s modern history; its president, Dilma Rousseff, ended up being impeached last summer (ten days after the Rio Olympics) in a political scandal that just won’t end

While India escaped the BRICS slowdown relatively unscathed (and also never hosted the Olympics), it too has undergone a political shift in recent years, with the defeat of the Congress Party and success of Hindu-nationalist figures like Narendra Modi and, recently, Modi’s chosen leader for Uttar Pradesh, Yogi Adityanath

Even the Olympics in Vancouver in 2010 and London in 2012 were, in effect, extensions of the BRICS boom. Both cities are hubs of activity and investment for persons originating from China (in Vancouver’s case) or emerging markets in general (in London’s). Both have also experienced some trouble of late. Vancouver is experiencing a housing affordability crisis partly as a result of capital flight from China, while London — where housing prices are not exactly affordable either— suffered a harsh defeat in its country’s Brexit vote last year. 


Before the BRICS sports spree began in 2008, there was Europe’s. Athens hosted in 2004, Turin in 2006. Berlin too played host in 2006, to the World Cup. It was the year before the 2007-2008 financial crisis, which led to a “lost decade” in Europe that has, among other things, wrecked Greece, weakened Italy, and brought Germany nearer than it would like to becoming again the most decisive but reviled country in the region. 

And then, of course, there was the Communist era in Europe: the 1980 Olympics in Moscow and 1984 Olympics in Sarajevo. Neither the Soviet Union or Yugoslavia would be around within a decade of their hosting the games.

South Korea

For South Korea, which will be hosting the first-ever Winter Olympics in continental Asia at the beginning of 2018, in a city less that is than 100 km from the DMZ, the hope is that the worst of the curse has already taken place in the past year. South Korea’s economy grew more slowly in 2015 and 2016 than in any year since 1998 (with the exception of 2009, the year of a global recession), and its president was impeached in the closing days of 2016. 

Yet if the effect of the Olympics truly is a consistent phenomenon, then there is no reason to expect that Korea won’t continue to change. Not only is South Korea hosting in the winter of 2018, but all of the major sports events in the near future are going to be held in countries that surround the Korean peninsula. The 2018 World Cup will be in Russia, the 2020 Summer Olympics in Tokyo, and the 2022 Winter Olympics in Beijing.

Even the host of the 2022 World Cup, Qatar, has Korean connections: South Korea is the number one destination for Qatar’s exports. 

North Korea 

For North Korea, the changes in the region that these upcoming sports tournaments may foreshadow are, if anything, only one more indication that the status quo on the peninsula is becoming less and less likely to hold. 

Whether through rapprochement, reunification, or regime change, it seems that the country and the region are headed for a significant change in political conditions.

It is possible that sports will play even a direct role in this change. Sports diplomacy, after all, has a long history in the region. The US and China played ping-pong in 1971, just months before Nixon’s infamous trip to Beijing; the ping-pong players were at the time among the first Americans to officially visit China since the end of the Korean War two decades earlier. 

More recently — just this past week, in fact — South Korea’s Chung Mong-gyu, the first Korean to hold a seat on FIFA’s council since 2001, announced that he and FIFA’s president Gianni Infantino both support the idea of a proposal for South Korea, North Korea, China, and Japan to co-host the football World Cup in 2030.

Even Dennis Rodman, who played on the 1990’s Chicago Bulls (Kim Jong Un’s favourite basketball team), used a sport trip to North Korea in 2014 as an opportunity to reach out to the isolated, tyrannical regime.

If war is to be averted, we can hope that Rodman’s Celebrity Apprentice co-star, Donald Trump, will now follow suit.

Oil and the Ouroboros

Today, at $45-50 a barrel, the price of crude oil has risen significantly from the $30 lows it reached around the start of 2016. Still, it remains quite far below the $80-110 range in which it resided during most of the past decade, prior to its crash in mid-2014. Gas and coal prices, meanwhile, have in most areas of the world fallen even more than those of oil has. China, because it is the world’s largest net importer of oil and of fossil fuels in general, has often been viewed as a country that is likely to benefit from these cheaper prices.

This view may be incorrect. Not only do China’s energy imports not equal a large share of its GDP, but the growth of China’s energy imports going forward may be slower than many predict. Moreover, there is an enormous discrepancy in the amount of fossil fuels produced by various regions and provinces within China. As such, the crash in energy prices may excacerbate, or at least influence, some of China’s preexisting geo-political divisions.

Energy Imports

China may be the world’s largest energy importer, but it is has also become its second largest energy producer, and as such only relies on energy imports for an estimated 15% of its total energy consumption, in contrast to 94% in Japan, 83% in South Korea, 33% in India, 40% in Thailand, and 43% in the Philippines. In 2014 imports of oil were equal in value to just around 2.4 % of China’s GDP, according to the Wall Street Journal, compared to 3.6% in Japan, 6.9% in Korea, 5.3% in India, 5.4% in Thailand, 4% in the Philippines, and 3.3% in Indonesia.

South Korea and Japan also imported more than two and four times more liquified natural gas, respectively – the prices of which tend to track oil prices more closely than conventional natural gas prices do – than China did. China’s LNG imports barely even surpassed India’s or Taiwan’s. China’s imports of natural gas in general, meanwhile, were less than half as large as Japan’s and only around 20% percent greater than South Korea’s.

China, furthermore, tends to import energy from the most commercially uncompetitive, politically fragile, or American-hated oil-exporting states, such as Iran, Russia, Iraq, Angola, and other African states like Congo and South Sudan. In contrast, Japan and South Korea get their crude from places that will, perhaps, be better at weathering today’s low prices, namely from Kuwait, Qatar, the UAE, and Saudi Arabia. (Granted, China gets an enormous amount of oil from Saudi Arabia too; however, Saudi oil does not count for nearly as large as share of China’s oil imports as it does for Japanese or South Korean oil imports). Similarly, China gets much of its natural gas from Turkmenistan, Uzbekistan, and Myanmar, whereas Japan imports gas from Australia and Qatar and South Korea imports gas from Qatar and Indonesia. China’s top source for imports of high-grade anthracite coal, and its third largest source for coal in general, is North Korea.

China has, in addition, invested capital all over the world in areas hurt by falling energy and other commodity prices, both in developed countries like Australia and developing economic regions like Africa. With energy prices cheap, it may get low returns on these expenditures.

Energy, History, and Politics

Another mistake the financial media makes is looking at China as if it were a country, rather than what it really is: both a country and a continent. Continents contain deeply-rooted divisions along regional, linguistic, and ethnic lines. China is no exception. China’s main division, roughly speaking, is between  areas south of the Yangtze River, which tend to be mountainous, sub-tropical, and dependent upon importing fossil fuels, and areas north of the Yangtze, which tend to be flat, more temperate, and rich in fossil fuels.

China’s Physical Topography                     China’s Population Density

Northern China, stretching over 1000 km from Beijing southward to Shanghai on the Yangtze, is the country’s political heartland. It is densely populated and home to most of China’s natively Mandarin-speaking, ethnically Han citizens. When compared to southern China, the north has historically been somewhat insulated from foreigners like the Europeans, Americans, and even Japanese. Beijing’s nearest port is roughly 5000 km away from Singapore and the Strait of Malacca; Hong Kong, in contrast, is only around 2500 km from Singapore and Malacca. Beijing is rougly 2600 km from Tokyo by ship, whereas Shanghai is 1900 km from Tokyo and Taipei (in Taiwan) is 2100 km from Tokyo.

Japan’s Ryukyu island chain and the Kuroshio ocean currents historically allowed for direct transport from Japan to Taiwan and the rest of China’s southeastern coast; the Japanese controlled Taiwan for more than three and a half decades before they first ventured into other areas of China in a serious way during the 1930s. Even today, Japan accounts for a larger share of goods exports to Taiwan than do either China or the US.

Southern China has often depended on foreign trade, since much of its population lives in areas that are sandwiched narrowly between Pacific harbours on one side and coastal subtropical mountain ranges on the other. In northern and central China, in contrast, most people live in interior areas rather than directly alongside the Pacific coast.

People in the northern interior often did not engage in as much foreign trade as those on the coast, as, in the past, transportation in the interior was often limited by the fact that northern China’s chief river, the Huang-he, is generally unnavigable and prone to flooding northern China’s flat river plains, destroying or damaging roads and bridges in the process. In southern or central China, by comparison, even people living far inland could engage with the coast by way of the commercially navigable Yangtze and Pearl Rivers, which meet the Pacific where cities like Shanghai, Guangzhou, and Hong Kong are located.

Northern China, however, was most directly exposed to the land-based Mongol and Manchu invaders who ruled over the Chinese for most of the past half-millenium or so, prior to the overthrow of the Manchu-led Qing Emperor in 1912. Today, of course, the north continues to retain China’s political capital, Beijing, and a disproportionally large majority of Chinese leaders were born in northern China — including Beijing-born Xi Jinping and Shandong-born Wang Qishan, a former mayor of Beijing). This is in spite of the fact that most of China’s leading political revolutionaries in the twentieth century, including Mao Zedong, Deng Xiaoping, Sun Yat Sen, Chang Kai-Shek, Zhu De, Ye Jianying, Hong Xiuquan, and the writer Lu Xun, hailed from southern or south-central China.

At present, out of China’s seven Standing Comittee top leaders, only seventh-ranked Zhang Gaoli was born in southern China; whereas five of the seven were born in northern China and one, Premier Li Keqiang, was born in central China. Zhang Gaoli may in fact be the first person born outside of northern or central China in thirty years to have made it to the Standing Committee. He is also the only person currently in the 25-member Politburo born outside of northern or central China. Meanwhile, among the 11-man Central Military Commission, seven were born in northern China, while two were born in north-central China and two in south-central China. By my count, out of the 205 active members of the Party Central Committee, fewer than 15 seem to have been born south of central China.

Indeed, the southern half of China, stretching from islands in Taiwan, Hainan, Hong Kong, Xiamen, and Macau in the east to the plateaus of Yunnan, Sichuan, and Tibet in the west, seems to be politically peripheral. It is home to a majority of China’s 120 million or so non-Han citizens (most of whom are not Tibetan or Uyghur, though those two groups recieve almost all of the West’s attention), as well as home to China’s 200-400 million speakers of languages other than Mandarin, and to China’s tens of millions of speakers of dialects of Mandarin that are relatively dissimilar to the Beijing-based standardized version of Mandarin, and to most of China’s 50-100 million recent adopters of Christianity, and, finally, to most of China’s millions of family members of the enormous worldwide Chinese diaspora.

Southern China is closer to Southeast Asia, a region with an enormous, economically active Chinese population (many of whom speak southern Chinese languages like Cantonese), than is northern China. Southern China’s Fujian province, in particular, is both linguistically and economically close to Taiwan, and southern China’s Guangdong province—the largest province in China—to Hong Kong. A large share of China’s GDP comes from the coastal areas of China from around Shanghai south to Guangdong, particularly if you include Taiwan as part of the country. Guangdong alone accounts for an estimated 10% of mainland China’s GDP and over 25% of its exports. This creates, arguably, an unbalanced dynamic: China’s political periphery is also its main economic engine.

Fossil Fuels

As it happens, northern China produces almost all of China’s fossil fuels. Most Chinese energy is, in fact, produced in and around the province of Shanxi, 300 km or so west of Beijing, where a tremendous share of China’s (and, indeed, the world’s) coal is mined. Shanxi has also seen the biggest political shakeup of any province from Xi Jinping’s anti-corruption campaign thus far. When combined with the northern “Autonomous Regions” of Inner Mongolia and Xinjiang, as well as China’s north-easternmost province Heilongjiang, Shanxi produces a gigantic of China’s fossil fuels in general. Other northern areas, such as Shandong, Liaoning, and Tianjin, are also significant oil producers.

Southern and central China, in contrast, account for most of China’s imports of fossil fuels—especially if you include the economy of Taiwan as being part of southern China. Taiwan, in fact, may be more dependent on oil imports than any other significant economy in the world, according to data from the Wall Street Journal. Falling energy prices may weaken the historical political heartland of China relative to its periphery, in that case. Whether or not this will generate political instability going forward remains to be seen.

Looking Ahead

If (a big if) energy prices remain low for a sustained period, then the question of China’s future dependence on imported energy also becomes relevant, as does the question of the future dependence on imported energy of China’s most important neighbours. In that case, how dependent on energy imports will countries like China, Japan, and India be in a decade or two from now?

While it is impossible to know what the future will be like, it is not difficult to imagine that China will remain less dependent on energy imports than India and/or Japan during the years or decades ahead, as a result of India’s still-emerging economy and Japan’s still-roboticizing economy.

China is not likely to be a major adopter of energy-intensive robots, in per capita terms, because China has a far larger cheap labour force than any country in the world apart from India. Japan, in contrast, will likely help lead the robot revolution, as its labour force is expensive and aging rapidly. This could make Japan even more dependent on importing energy, as machines that are both highly mobile and capable of sophisticated computation require an enormous amount of energy to run — and indeed, one of their main advantages over human labour is that they can and frequently will be tasked to run 24-7, without even taking any time off for holidays or sick days.

China is not certain to increase its energy imports nearly as much as less-developed economies like India, meanwhile, as the Chinese inudstrial sector is facing challenges as a result of its past generation of energy-intensive growth. China faces rising labour costs in many of its cities; a pollution problem; a US that is concerned with Chinese industrial power; and countries throughout the world afraid of China’s world-leading carbon emissions.

In addition, China is located much further away from the Persian Gulf and Caspian Sea oil and gas fields than the Indians and other South Asians are, and so might have difficulty accessing them in a pinch.

China may also, for the first time, have to face industrial competition from resource-rich economies such as Australia, Norway, Canada, Texas, or even the Gulf Arab states,which may be able to use energy-intensive robots of various kinds to build up their manufacturing sectors in spite of their small, expensive domestic labour forces.

All this could make China’s industrial growth rate slip, which in turn might reduce China’s resource imports and thus prevent China from becoming the leading beneficiary of low energy and commodity prices.

Such a shift will be especially likely if the United States or European economies decide to enact tariffs on goods coming from places that generate power by using coal in inefficient ways, a prospect that has become increasingly likely as a result of America’s triple-alliance between environmentalists opposed to coal consumption, shale gas producers competing with coal miners, and energy companies trying to pioneer more expensive but cleaner ways of consuming coal and other fossil fuels. China may then have to focus on growing its service sectors instead of its energy-intensive industrial sectors.

China, Japan, and Siberia 

Japan, lastly, might benefit from Russia’s energy-related woes more than China will. This is not only because the Chinese have to a certain extent often looked to Russia as an ally against the West, but also because the areas of Russia that China is close to are mostly irrelevant to China: they are landlocked, Siberian, and for the most part located far from China’s population centres.

Pacific Russia, in contrast, which is located next to the Sea of Japan on the East Asian side of Russia’s Pacific mountain ranges, has a far more liveable climate than does most of the continental Siberian interior. It is home to several small or medium-sized port cities, such as Vladivostok and Petrapavlovsk-Kamchatsky, which are very, very far away from Moscow. This region accounts for much of the oil and nearly all of the Russian gas exports to Asia—especially energy-rich Sakhalin Island, which is just 40 km away from Japan and was half-owned and inhabited by the Japanese prior to the Second World War.

Russia may, in fact, be somewhat better prepared to fight another border war with China like it did in 1969—which might not be too different than the many other wars Russia has fought within or near its borders both prior to or since then—than it would be to face off against Japan again within the far-eastern, mountainous, archipelagic and peninsular Pacific Russian region, as it did in 1905 and then again during the 1930s and WW2. Of course this does not mean Japan will attack Russia — though it has certainly toyed with the idea of eventually making some bolder moves in the Southern Kuril Islands, which both countries claim as their own. Even the remote, unstated possibility of conflict, however, may help grant Japan leverage in any negotiations with Russia regarding commercial or political issues.


All of this is not to be bearish on China’s future. Energy-intensive industrial growth, after all, woud not necessarily mean an improved quality of life for Chinese citizens. Ideally Chinese standards of living will rise at a considerably faster pace than its energy usage. It does seem, though, that China’s economy may not turn out to be a major beneficiary of the fall in energy prices. The PRC’s neighbours on the other hand, such as Japan and Taiwan, which are less rich in fossil fuels or in labour, may benefit greatly. So too might the poorer countries that depend on energy imports, like India and the Philippines. Just as important, however, yet often overlooked, are China’s domestic geopolitics. Internal Chinese divisions—including along north-south and east-west lines—have been, and might remain, of paramount importance. Energy prices could impact them too.

Expect the Unexpected: 10 Reasons North Korea Could Soon Change Course

1. Russia’s economy is currently in disarray as a result of falling natural resource prices, slow economic growth in Europe, and its rivalry with the United States. Russia has been an ally of North Korea because it sees North Korea as a counterweight to the Chinese, Japanese, and US-backed South Koreans, the other powers in Northeast Asia. If Russia’s economy does not bounce back, North Korea will need to adapt to the weakening of one of its only friends in the world.

2. Russia has been looking to export commodities to South Korea, as Russia worries that Europe and Japan will reduce their imports of Russian oil and gas as a result of the Ukraine conflict, the American fracking boom, the end of Western sanctions on Iran, and the possibility of Japan turning its nuclear power plants back on. Though Russia is obviously not thrilled about South Korea’s close relationship with the United States, it might nevertheless be happy to see a more united Korea serve as a counterweight to China and Japan in the Pacific.

In addition, the most direct way for Russia and South Korea to trade with one another is via the 800 km of North Korean territory that separates Seoul from Vladivostok. This is particularly true of gas exports, which travel cheapest through overland pipelines rather than by undersea pipelines or LNG ships. It is also true of many other types of goods, however. Politics aside, it would often make more sense to cross North Korea rather than to load and unload ships in order to sail the 600 km of sea between Russia and eastern South Korean ports (which are themselves 150 km or so from Seoul).



3. The youngest generation of the North Korean leadership, embodied by 33-year old Kim Jong Un, was raised during the 1990s, after the Soviet Union had fallen, after China’s economic miracle had begun, and after the Internet and satellite television had become common. Kim Jong Un himself went to school in Switzerland, a stark contrast to his father Kim Jong Il who may have been educated in China during the Maoist era.

Today Kim must be looking at Bashar al-Assad with fear. Like Kim, Assad took over at a fairly young age from a father who had been a larger than life figure. Assad lasted for one decade before the Syrian Civil War got underway; Lil’ Kim is now in the middle of his fifth year in office. Meanwhile, the number of North Koreans living today who were alive during the reign of the first Kim, Il Sung, is quickly falling.

4. Unlike most other poor countries, North Korea’s population is not young. Its population pyramid has two main bulges: one between 40-50 years old, the other between 15-25 years old. A decade from now, then, much of the older bulge will have become too old for manual labour, while the number of young people entering the workforce for the first time will have begun to drop off. At this point, North Korea may be more inclined to move away from a labour-based economy, which in turn will require it to import capital from abroad, perhaps from the South Koreans.


This aging also raises Korea’s family reunification issue: North Korea’s 40-50 year old cohort are in many cases the children of families who were divided by the peninsula’s split in the Korean War. The coming decade will be the last chance for many of these sundered families to get back in touch before their elderly parents pass away — and before this generation becomes old itself.

5. Back when China was run by committee, consensus, compromise, etc.,
it liked being compared to North Korea because it could say, in effect, “we may not have a liberal democratic political system, but at least we’re nothing like the government in North Korea”. Today, though, as China has been moving back in the direction of a more traditional persona-led dicatorship embodied by Xi Jinping, the last thing that the Chinese leadership wants is for Xi to be compared with Kim Jong Un.

Xi has yet to visit North Korea, even though Xi has been perhaps the most well-travelled leader in Chinese history, and the first ever to visit South Korea before North Korea. Kim Jong Un, in turn, has not yet travelled the 800 km from Pyongyang to Beijing. (In fact, Kim Jong Un has never officially left North Korea since taking over as its leader in 2012). This may soon change, however: Kim Jong Un may finally visit Beijing in the next few months.

6.  Japan could be coming back in a big way: Shinzo Abe’s revivalism – including the end of formal military pacifism and the symbolic 2020 Tokyo Olympics may just be the start. The Japanese economy is far less exposed to the Chinese economic slowdown than are those of South Korea and Taiwan. Japan might benefit more from Russia’s troubles than China will, given that China has often allied itself with Russia. Japan is also more dependent on energy imports than China, and so may be more likely to benefit from the fall in energy prices than China will.

Japan may benefit more than any other country from the coming era of robots, given its uniquely aged workforce and technological expertise — and given that robots might make China’s enormous human workforce less of an economic advantage over other countries than it is today. Whether Japan addresses its aging workforce dilemma by importing more energy to power robots or by continuing to outsource more of its industrial activity to countries like Thailand and Taiwan, however, it will have to become more active in the region, and thus potentially more aggressive in the region, in order to ensure its access to foreign markets.

If Japan’s reemergence causes the Chinese to want to create a rift in the US-Japan alliance, Korea is the best place for China to try to do so. The US loves its alliance with Korea, while Japan does not. The Japanese and Koreans have quite a tortured relationship, a legacy of Japan’s historical domination of the peninsula. The US would be thrilled by a more unified Korea, whereas the Japanese might be wary of one even in spite of their current rivalry with the North.

Consider the context for the Korean War (1950-1953): Japanese power had just been decimated in World War Two, so China helped to divide the Korean peninsula because it feared the American-allied unified Korea that had emerged at Beijing’s doorstep following the invasion of the North by America and the South. China did not have to consider using Korea to create a rift between the US and Japan, since Japan was not a player at the time. A somewhat similar situation occurred in 1990, when American power surged again as the Soviet Union fell and as Japan’s economy suddenly began its “lost decades” of slowing growth.

If Japanese power grows, however, China may want a more unified Korea as a buffer against the Japanese and as a prime way of splitting the American-Japanese alliance. Alternatively, if China and Japan can finally mend fences with one another politically, it may cause the United States (and/or Russia) to want a more unified Korea to serve as a counterweight to both China and Japan.

7. More so than during the 1990s,
when Russia and China were weaker than they are now and 9-11 had not yet occurred, the US has a lot to worry about today other than North Korea’s military programs. North Korea’s first nuclear tests were in 2005, possibly in order to win back American attention that had shifted to the Greater Middle East. Now, though, with the US still worried about the Muslim world and also concerned with Russia and China, there may be diminishing returns to this strategy of gaining aid and prestige by nuclear saber-rattling.

The move by North Korea in 2010 to kill 46 South Korean navy soldiers in the Cheonan ship attack, which was by far the most casualties the South’s military has experienced in decades, suggests that the North Korean leadership may be aware of these diminishing returns. More recently, so does the announcement by North Korea this past winter that it has successfully developed a hydrogen bomb.

8. South Korea’s economy is slowing because of China’s economic slowdown and because South Korea has now basically become a “developed” economy (its per capita income is estimated to be $28,000, in nominal terms). While South Korea does not want to pay the financial burden of resuscitating theNorth Korean economy, it could nevertheless see some opportunities for itself in engaging the North in trade.

North Korea, for example, has one of the world’s largest reserves of high-quality anthracite coal, while South Korea is one of the world’s leading importers of coal and of fossil fuels in general. And of course, North Korea has a cheap, Korean labour pool (and potential consumer base), at a time when South Korea’s workforce is no longer cheap or youthful by global standards.

relative trade northeast asia.png
Trade figures, adjusted for overall GDP size

9. Coal prices have plunged of late in China and in most of the rest of the world. This could put a lot of pressure on the North Korean economy, which has become the third largest supplier of coal to China in recent years. China accounts for more than 90 percent of all North Korean international trade. According to Reuters, “last year, North Korean coal deliveries to China surged 26.9 percent, making North Korea China’s biggest supplier behind Australia and Indonesia. Coal deliveries from Australia plunged 25 percent, indicating the increase in [Korean] imports may have been to help support this”.

10. With China and the wider Northeast Asian economy struggling after years of rapid expansion, ending North Korea’s isolation could be a good last-ditch attempt to stimulate regional growth. China, for instance, could try to use its position as the North Korea whisperer in order to gain economic favours from the United States. China also has an incentive to engage North Korea — and to have South Korea engage North Korea — because the last thing the Chinese want to deal with right now is a refugee crisis emerging on their border with North Korea in the unlikely but not impossible event of a state collapse occuring there. A few million Koreans already live in China near the North Korean border.

korea north.png

Finally, North Korea could benefit the regional economy by serving as a land route between China and South Korea. Seoul is just 500-600 km from significant Chinese cities like Shenyang and Dalian by way of the North, and 1150 km from Beijing. In the longer-term, the North Korean trade route could become even more commercially important if fixed links are built across the Yellow Sea between North Korea and China, across the Gulf of Bohai between the Chinese provinces of Liaoning and Shandong, or across the Korea Strait from Japan to the Korean peninsula.


So, could the era of extreme North Korean isolation from the world be reaching its final days? Certainly, from the US point of view, North Korea is something of a last man standing these days: of the six countries that the Bush government named as the “axis of evil” – Iraq, Iran, Syria, Libya, Cuba, and North Korea – Kim is now the only leader not to have been either toppled (Iraq and Libya), besieged (Syria), or moving towards warmer relations with the US (Cuba and Iran). Given the changes occurring all around it in Asia and the world, North Korea’s position no longer seems like an easily sustainable one. Reunification with the South or not, it still makes sense to guess that North Korea under Kim Jong Un will end up being very different from that of his father.

East Asian Trade – Image of the Day

From Finally Passing Gas: 10 Winners and Losers of the Panama Canal Expansion:

trade asia

A typical assumption has been that China and Japan will be the primary beneficiaries of the canal. China, after all, leads the world in importing commodities and exporting bulk goods, and Japan has accounted for 40% of the world’s LNG imports – far more than any other country – in recent years.

Yet while China and Japan lead the pack in terms of the value of their absolute trade, they lag far behind both South Korea and Taiwan in the more relevant category of relative trade; that is, the value of their trade relative to the overall size of their economies. As can be seen in the chart above, the economies of China and Japan are generally not as trade-oriented as those of South Korea and Taiwan. As such, they might not benefit as much from the canal, which is intended to ease trade — in particular LNG trade, which the pre-expansion canal could not facilitate.

Of course, none of this means that South Korea and Taiwan are risk-free investments. They are not. Both, for example, have significantly more exposure to China’s economy, which has been struggling of late, than Japan does. All else being held equal, though, South Korea and Taiwan appear likely to be two of the greatest beneficiaries of the new canal.



Image of the Day – December 2, 2015 – Motor Vehicle Production

Motor Vehicle Production

The non-per capita vehicle production stats came from wikipedia:

Note: there are countries which have higher per capita motor vehicle production than some of the countries on this list. Belgium, for example, which is not shown on this list, has a much higher per capita motor vehicle production than many of the countries that are shown on this list. The countries on this list were simply the ones with the highest overall motor vehicle production as of 2013, according to the source above.





The 10 Largest “Relative” Trade Networks

If you follow the financial news media, you will frequently hear of countries’ largest trade partners being either the United States, the European Union, or China. As a result, it can often seem like the US, EU, and China are at the centre of massive global networks of international trade. In a certain sense, of course, they are: the combined external merchandise trade of the US, EU, and China is equal to an estimated 11 trillion dollars a year. And yet, relative to the enormous size of their GDPs, the US, EU, and to a lesser degree China do not actually trade very much compared to most other countries.

North America and Europe are in fact relatively insular in their international commercial relations. The US and the EU, for instance, trade an amount of goods estimated at around 25 percent of their GDPs; by comparison, Germany trades an amount equal to an estimated 70 percent of its GDP, South Korea trades an amount equal to roughly 80 percent of its GDP, and the Netherlands trades an amount equal to roughly 150 percent of its GDP. Even China, which is generally viewed as a highly trade-dependent economy, trades an amount that is equal to only an estimated 45 percent of its GDP, which is lower than most of the countries in the world.

In other words, the economies of the US, EU, and China only seem so trade-oriented because their massive economic size makes them the largest trade partners of a large majority of the world’s countries.  This confusion stems from the fact that the media tends to view the size of international trade values in absolute terms only, rather than by looking at the size of those trade values relative to some other relevant factor, such as the size of the GDP’s of the countries involved in the trade. By looking only at absolute trade values, the huge economies of the US, EU, and China end up getting almost all of the public attention, even though their “relative” trade with most other countries actually tends to be relatively insignificant.

In this article, therefore, we have tried to quantify the international trade networks of the world’s major economies in relative terms; specifically, by dividing the absolute value of their trade by the size of their trade partners’ respective GDP sizes. We already did this with Ukraine and Canada in previous articles, and found some interesting results in both cases. In this article, we will try to make similar graphs for the trade networks of China, the United States, Germany, Japan, Britain, Brazil, Russia, India, Australia, and Turkey.

Before we begin, however, it is important to note that measuring trade values is not always a simple process. There are a number of reasons why the following graphs should be viewed with a grain of salt. For example, the data they were made with may be inaccurate in some cases (the absolute trade values in  data was taken from the MIT’s Observatory of Economic Complexity; the GDP data was taken from the World Bank). It also only includes trade in goods, ignoring trade in services, international investment flows, illegal smuggling, or tourism.

Arguably, the data can also be misleading in some instances, because it over-emphasizes trade hubs like Singapore, Hong Kong, Belgium, and the Netherlands (and, as a result, perhaps under-emphasizes the trade of countries that are closely commercially integrated with these trade hubs, such as Germany or China). It also treats Hong Kong as an independent economy rather than as part of China, which it probably should not do. Finally, since the Observatory of Economic Complexity only gives data for countries’ top 20 absolute trade partners, in most cases these graphs will still ignore some small countries. For example, the Bahamas probably has a huge relative trade relationship with the US, but it was still too small in absolute terms to be included.

All that being said, I think these graphs might be interesting and instructive. So, here they are:

China – Exports: $2.1 trillion, Imports:$1.4 trillion

China's Absolute Export PartnersIn the graph above we see China’s “absolute” export patterns – in other words, the type of trade patterns we would normally hear about in the media. The US buys an estimated 19 percent of China’s exports, Hong Kong buys an estimated 11 percent of China’s exports, Japan buys 8 percent, and so on. In the graph below, however, we see China’s “relative” export patterns, which tell a very different story:

China's relative exportsAs you can see, in relative terms (i.e. relative to GDP size), Hong Kong buys way more of China’s exports than any other economy does. (And of course, as we said earlier, Hong Kong should actually probably be considered part of China). Singapore and Malaysia, both of which are partially Chinese-inhabited, are next after Hong Kong, followed by Thailand, Taiwan, and South Korea. The US, meanwhile, which had a strong lead in China’s “absolute trade” export patterns, scores very low in this relative trade graph.

China relative and absolute importsHere we see China’s import patterns, both relative and absolute.  The US, though it supplies China with an estimated 8 percent of its overall imports, scores at the very bottom of China’s relative imports list, far behind every other country apart from France. Hong Kong again scores number one in terms of relative trade, but its dominance on relative imports is not nearly as high as it was with exports (this is because most of China’s imports from Hong Kong’s are of services, rather than goods, and the data here does not include services). Taiwan, conversely, is much higher on this imports graph than on the exports graph above. Angola, which was not even on the exports list, scores extremely high in terms of relative imports, because of the oil it supplies China with. Other resource suppliers like Chile, Saudi Arabia, Iran, and Australia also have higher scores on this relative imports list.

USA – Exports: $1.3 trillion, Imports: $1.8 trillion

us relative and absolute exportsHere we see that Mexico is higher than Canada in relative terms, even though Canada is higher in absolute terms. We see that Hong Kong is very high in relative terms, more than 7 times higher than China is (though perhaps most of the US’s exports to Hong Kong are really going to China anyway), as is Singapore. Latin American countries like Chile and Colombia score high in relative terms, as do Belgium, the Netherlands (though both may be trade hubs for US exports to other European countries), and Switzerland. US allies South Korea and Taiwan also score high in relative terms. Major economies like Britain, Germany, France, Japan, China, India, and Italy all score very low in relative terms.

us relative and absolute importsFor US imports, Mexico actually scores almost twice as high as Canada in relative terms (and this does not even include massive narcotics imports from Mexico). Ireland and Vietnam both score very high (higher even than Canada), followed by Colombia, Thailand, South Korea, Taiwan, and China. China scores much higher here than it did in terms of US exports. Nigeria also scores highly, since it sells oil to the US. For the US’s absolute imports, four countries dominate: China, Mexico, Canada, and Japan.

Germany – Exports: 1.32 trillion, Imports: $1.09 trillion

Germany relative and absolute exportsIt is interesting to note that France, which buys more of Germany’s exports than any other country does in absolute terms, scores far lower in relative terms than most of the countries in Central and Eastern Europe. Given that most Eastern European countries are still developing, the fact that their relative imports from Germany are so high could be especially significant. Also notable is how tiny the relative exports of Germany to countries like China, the US, and Japan are. Germany is in general the most export-dependent of any economy we will look at in this article.

Germany relative and absolute importsIn terms of Germany’s relative imports, the Czech Republic and Hungary are again at the top of the list, this time joined by Slovakia. Britain scores lower on this list than it did in the exports list. Norway, which sells oil and gas to Germany, scores much higher. Russia, which also sells oil and gas to Germany, does not score higher, however (though it may be that much of this oil flows through the Netherlands, and is counted as a German import from the Netherlands instead of from Russia). The US scores extremely low.

Japan – Exports: $794 billion, Imports: $793 billion

japan relative and avsolute exportsjapan relative and absolute imports

Britain – Exports: $434 billion, Imports: $615 billion

Britain relative and absolute exportsbritain relative and absolute imports

India – exports: $275 billion, imports: $ 448 billion

india relative and absolute exportsIndia relative and absolute imports

Brazil – exports $247 billion, imports $223 billion

brazil relative and absolute exportsbrazil relative and absolute imports

Russia – exports $470 billion, imports $324 billion

russia relative and absolute exportsrussia relative and absolute imports

Apart from the countries we have looked at so far, France and Italy are the two largest economies in the world in terms of nominal GDP, according to the World Bank. However, since we have already looked at two European countries (namely, Germany and Britain), I made graphs for Australia and Turkey instead. Australia and Turkey are listed as the world’s 12th and 17th largest economies in terms of nominal GDP.

Australia – exports: $249 billion, imports: $240 billion

Australia relative and absolute exports Australia relative and absolute imports

Turkey – exports: $161 billion, imports: $205 billion

Turkey relative and absolute exports Turkey relative and absolute imports

The Physics of Japanese Economics

With the downward revision of Japan’s GDP growth figures last month, the Japanese economy is technically back in recession, projected to shrink by a slight amount during the year as a whole. Even though most analysts had previously forecast Japan’s economy to expand at a rate of 2 percent in 2014, nobody was too surprised by the news that is contracting instead. The recession is the country’s fifth since 1997, and its third since the global credit crisis of 2008. While some might see a silver lining in this – namely, that Japan’s economic growth going forward could not possibly get any slower than it has already been – many economists do in fact view the country’s problems as likely to grow more rather than less acute during the years ahead.

Unlike in recent decades, Japan must now grapple with an empowered China, with slowing economic growth among key trading partners like South Korea, Taiwan, coastal Chinese provinces, and Europe, with net government debt that has risen from 80 to 145 percent of GDP over the past decade, and with a Baby Boom generation that has reached between 65 and 70 years old on average (about a decade older than those of Europe or America). These trends arguably provide the backdrop to Japan’s current slowdown, even as the catalyst for the recession has been viewed as a rise in the country’s consumption tax, from five percent to eight percent, which came into effect earlier in the year.

What might be more surprising than the recession itself is that investors in Japan’s stock market seem basically unperturbed by the news of it. The Nikkei 225 index is actually higher now than it was before the recession become public knowledge; it continues to trade at around a seven-year high, virtually double the price it averaged between 2008 and 2013. Admittedly, this is a far cry from the Nikkei’s all-time highs in 1992, when it was worth well over double what it is today. In fact it does not even match the highs of 2000, 1997, 1994, and several other years going back all the way, astoundingly, to 1986. That’s right: Japanese stocks were worth more 29 years ago than they are today. Still, a seven-year high amidst the onset of an economic recession is something that is difficult to ignore.

Of course, the rise in the Nikkei may simply reflect the fact that investors have become so accustomed to seeing Japan’s economy shrink that they built in the risk of a recession to the price of Japanese stocks ahead of time, which meant that those prices did not require much revising when the recession actually arrived. The Nikkei’s rise may also reflect the fact that investors have faith in prime minister Shinzo Abe, who has loudly promised to stimulate the Japanese economy and revive Japanese prestige, and who is already using the recession as an excuse to call a snap election intended to extend his party’s leadership by an additional two years, from 2016 (when parliamentary elections would have otherwise been held) to 2018. [update: the elections have now happened. Abe’s party won a two-thirds majority, though with the lowest voter turnout since WW2].

Or it may be that investors have so little faith in Europe, China, and commodity-exporting economies like Brazil or Australia, and see US equities as being too expensive now that the S&P 500 has again reached all-time highs in recent days, that they have been forced into Japan’s stock market almost by default. Finally, and most intriguingly, the Nikkei’s performance may reflect the possibility that the potential of Japan to achieve a renewed, meaningful pace of economic growth is actually more promising than most Japanese themselves recognize.

With Japan’s stock market and GDP indicators pointing, almost paradoxically, in far-opposing directions, Japan’s economy now resembles Schrodinger’s infamous Cat: its true health is in a state of uncertainty, the resolution of which seems to depend on the specific approach at which it is observed. Of course, unlike the Cat itself, Japan’s economy is a paradox that we know can probably be resolved. All we need to do is take a look underneath the lid, so to speak, at the underlying fundamentals of the country’s medium-term (say, within the next decade or two) economic prospects. What are those underlying fundamentals? It turns out that the originator of the Cat query, Albert Einstein, might be of some use here as well:

General Economic Relativity 

One of the most fundamental theories of conventional economic forecasting is the idea that, in general, countries that are relatively poor will grow at a faster pace than those that are relatively rich. This is, of course, why a country like India disappointed investors when it grew at 6.5% in 2011 and 5% in 2013, whereas even 2% growth in the European Union or 3% growth in the United States would be a widely celebrated event.

In the case of Japan, the extremely high income levels the country had two decades ago might have limited its economy’s ability to grow. According to the IMF, in 1995 Japan’s per capita income was 1.5 times higher than that of the next wealthiest large developed economy (the United States), 2 times higher than that of the next wealthiest large economy in the western Pacific (Australia), and 3.3 times higher than that of the next wealthiest economy in Northeast Asia (Taiwan). As a result of being so wealthly at the time, Japan’s room to expand its economy further may have been somewhat constrained.

Today could scarcely be any more different. If the idea that relatively poor countries are in general likely to grow relatively quickly (i.e., the theory of general economic relativity) is to be believed, Japan is now in a much more favourable position where its growth potential is concerned. The country has become much poorer than other developed economies in terms of its per capita income, especially in comparison to regional counterparts like Australia, New Zealand, and Singapore, which have grown rapidly since the mid-1990’s. Japan’s lead over developing East Asian economies is also not nearly as large as it used to be (see charts below), as a result of the emergence of China and the strong rebound of other East Asian economies following their financial crises in 1997 and 2008. Arguably, this comparatively low level of nominal wealth bodes well for the Japanese economy going forward, relative to how it has performed during the past two decades.



Special Economic Relativity 

Another fundamental principle of economics is that of “comparative advantage”, the idea that economies will tend to construct themselves in ways that reflect their greatest advantages (or smallest disadvantages) in relation to other economies. This begs the question: what makes Japan special, relative to other countries? More to the point: is what makes Japan special likely to help its economy grow at a decent pace during the years ahead?

One of the main qualities that makes Japan special is its “economic mass”. This does not only refer to its economic size — Japan’s economy is the third largest in the world, 1.7 times larger than fourth-place Germany and just 1.6 times smaller than second-place China, according to the World Bank — but, just as important, refers also to Japan’s internal unity and compactness. Unlike in other major economies like the US or China, Japan’s population is not spread out over a vast territory, but is instead crammed into an area that is only about the size of Montana. Japan’s economic activity is even more highly concentrated: the Greater Tokyo Area alone accounts for an estimated 40 percent of Japanese GDP, and the island of Honshu (in which Tokyo is located) for upwards of 80 percent of Japanese GDP.

Japan is also socially cohesive. Its income inequality is relatively low (unlike the US, China, or Brazil, where income inequality is extremely high), and its unemployment rate is the lowest of any developed nation apart from Switzerland. Japan also possesses no major ethnic, linguistic, or religious divisions. An estimated 98 percent of Japan’s population is ethn0-linguistically Japanese, and, religiously, less than 2 percent is Christian. By comparison, Japan’s neighbour China is home to an estimated 23 million Muslims (mainly living in the country’s northwest), more than 100 million non-Muslim ethnic minorities (mainly in the southwest), 250-300 million native speakers of a variety of non-Mandarin Chinese languages (mainly in the southeast), and perhaps as many as 100 million evangelical Protestants.

Even Japan’s developed-economy competitors cannot compare to it in terms of internal unity. In the German economies, there has been a slowly (re)emerging commercial divide between eastern Germany, Austria, and Bavaria on the one hand and western Germany on the other, reflecting the fact that Eastern Europe has been growing quickly while Western Europe has been lodged in a seven-year economic funk. Within both France and Italy, meanwhile, northern regions have been growing while southern regions have been virtually in depression. And in Britain and Spain, secessionist movements like those of the Scots and Catalans have been growing in prominence of late.

Even in the United States there has been a growing divide between the Northeast and the South/West, a result of the fact that Texas alone has accounted for more than one-fifth of US economic growth since 2007, and that globalization and demographic shifts have had the effect of integrating states like Texas, California, and Florida more closely with Latin America than ever before, and states like California, Oregon, and Washington more closely to the rest of the Pacific world than ever before. (In Canada a similar trend has been occurring). All of these developed countries remain internally cohesive, of course; just not as potentially cohesive as Japan. Indeed, many of the above trends may be likely to continue in in the years ahead, which could make Japan’s internal unity even more distinctive.

Japan’s unique combination of economic size and internal unity may become increasingly significant during the years ahead, as it may allow the Japanese to throw their weight around in a world economy that, cliches of globalization notwithstanding, is in many ways still becoming rapidly smaller and smaller. The continuation of the Internet Revolution will probably be the most significant near-term driver of such globalization, but further leaps in conventional transport — by air, sea, or land — cannot be ruled out either. If rapid globalization does continue, and if large, internally cohesive economies like Japan are among its beneficiaries, economics may increasingly resemble Einstein’s actual theory of special relativity, with an economy’s mass beginning to directly correlate with its economic momentum.

Commercial Entanglement

Another characteristic that makes Japan special is its relative level of isolation from the rest of the global economy. According to the World Bank, the value of Japan’s international trade of goods and services is equal to just 30 percent of its GDP, a lower share than any other large developed economy apart from the US, and much lower than Japan’s most notable neighbours, China (50%), South Korea (103%), and Australia (41%). Indeed, many East Asian economies, such as Thailand, Vietnam, Malaysia, and Singapore, are among the most trade-dependent economies in the entire world. Japan, by comparison, is not only not dependent on trade in general, but is also not dependent on either imports or exports in particular.

What this means is that Japan might be able to manage a regional or global economic slowdown more easily than most other economies can. During the past few decades this ability has not mattered much, since global growth, and particularly East Asian growth, has been so formidable. Going forward, however, Japan may find itself able to manage persistently slower growth in places like China and Europe more easily than most other countries around the world will be able to.

A slowdown in China, for instance, would hurt Japanese neighbours like South Korea, Taiwan, and Australia, countries in which 30-40 percent of exports go to China and exports in general are equal to 20-60 percent of GDP, far more than it would hurt Japan, which sends just 23 percent of its exports to China (including Hong Kong) and where exports in general are equal to just 15 percent of GDP. This ability to withstand external sluggishness could be a major advantage for Japan. It has certainly been helpful for the US, where a low dependence on exports is currently shielding the American economy from simultaneous recessions in most of Europe and Japan.

Crucially, even as Japan’s trade patterns might shield its economy from the full brunt of external crises, Japan also has the potential to benefit from becoming a more vigorous trading nation in the future. In the past, Japan’s ability to access global markets has been limited by its lack of proximity to the Atlantic world, where most of the globe’s economic and consumer activity is located. As a result, Japan is likely to benefit from the expansion of the Panama Canal, which is finally set to be completed in 2016, with significant consequences for inter-oceanic shipping. (In fact, arguably the most important consequence of the canal expansion is that it will allow 80% of LNG tankers to use it — currently none do — which will benefit Japan specifically, since Japan accounts for nearly 40% of the world’s LNG imports, and since, on the opposite side of the canal, Texas, Lousisiana, and Latin America may account for much of the world’s LNG export growth in the years ahead). Similarly, Japan could benefit from the continued growth of the East Asian and Indian consumer markets, as well as from more efficient cargo shipping worldwide, by air or by sea.

Finally, Japan might benefit from being able to use the Trans-Siberian railway to directly access European markets. This may finally occur because: a) the Russians increasingly need Japan as an ally because of their growing concerns with both China and the West; b) Russia’s rail network is becoming less crowded as a result of falling commodity prices and falling European demand for coal (since coal accounts for one-third of Russian rail freight, and commodities in general account for two-thirds of Russian rail freight); and c) because technology may make it cheaper and faster to maintain and operate railways and to load and unload cargo containers, which on the Japan-Russia-Europe route you expensively have to do twice: once at the seaports on Russia’s Pacific coast, and a second time in Eastern Europe because Russia’s and Europe’s rail networks use different gauges.

In addition to its foreign trade, Japan’s global investment position looks to be relatively strong. Japan has the highest NIIP in the world (NIIP = Net International Investment Position; basically, this is the amount of money a country’s government, businesses, and people are owed after you take into account the amount of money they owe to other countries). Though trustworthy, up-to-date NIIP statistics are notoriously difficult to come by (which is why people often focus instead on public and private debt-to-GDP ratios, which can be misleading because they only take into account a country’s foreign liabilities, while ignoring its foreign assets), as recently as 2010 Japan’s NIIP was estimated to be the same as those of China and Germany – which are the world’s next two largest creditor economies – combined. Indeed, while in America the media tends to obsess over Chinese ownership of US government debt, Japan owns just 3 percent of US debt less than mainland China does, and only 13 percent less than mainland China plus Hong Kong. Japan may have lots of assets with which it can potentially revive itself, in other words.

Energy Matters 

Does the inertia of a body depend upon its energy content? In economics, the answer to this famous question of Einstein’s appears to be yes. Developed countries in which energy imports account for a high share of GDP, such as Japan, Spain, Italy, Greece, and Portugal, have suffered some of the worst growth rates in recent years, when oil and gas prices have been very high. Developed economies that are major energy exporters, on the other hand, like Canada, Australia, and Norway, or that are relatively energy neutral, like the US, Sweden, or Denmark, have generally performed much better.

Developed Economies Energy and oil imports

With oil prices having reached a five-year low, falling by well over 50 percent since just the beginning of October, countries like Japan may now be better positioned for success than they have generally been in the recent years. In fact, it is not only lower energy prices that will have a positive impact on the Japanese economy, but lower prices for other commodities as well, which to varying extents are often correlated with energy prices. Japan, to be sure, is the world’s largest importer of tin, the second largest importer of iron ore, aluminum, copper, nickel, and silver, the largest food importer among developed economies, and by far the largest spender on coffee imports apart from the US.

Of course, a developed, energy-efficient economy like Japan is not going to benefit nearly as much from falling energy prices as an energy-intensive, import-dependent emerging market like India, Pakistan, Thailand, the Philippines, or, on the wealthier side of the emerging market spectrum, South Korea or Taiwan (see graph). Even China, which only imports an estimated 13 percent of its energy (compared to 94 percent for Japan), will probably benefit much more from falling energy prices than Japan will, since the Chinese use about 5 times as much energy per dollar of GDP than the Japanese, are enormously dependent on importing commodities in general, and may be able to reduce some of their domestic pollution by replacing coal production with oil and gas imports.


But in this way too Japan stands to gain, relative to most other developed economies. This is because most of the main buyers of Japanese exports are energy-intensive emerging Asian economies, many of which are among the greatest beneficiaries of falling energy prices. Indeed, more than 40 percent of Japanese exports go just to China, South Korea, Thailand, or Taiwan, whereas no energy-exporting country receives more than 2.5 percent of Japan’s exports. In contrast, the US sends 25 percent of its exports to Mexico or Canada, both of which are substantial oil exporters. The Europeans, meanwhile, trade mainly among themselves, and include enormous energy exporters like Norway and Russia.

Japan is also in a unique position where alternative energy sources are concerned. It has far and away the most nuclear energy potential in the world, since it has the world’s third highest nuclear energy-generating capacity (virtually double that of fourth-place Russia), but has not been running any of its nuclear plants since the Fukushima incident in 2011 soured public support for them. Japan could, and might, turn many of them back on in a fairly short period of time.

Japan also has the fourth highest hydroelectric energy generation among developed countries (double that of fifth-place Spain), the third highest biomass/waste energy generation among developed countries (more than 50% higher than fourth-place Britain), the third highest geothermal energy production among developed countries, and the third highest solar energy generation of any country in the world (50% higher than fourth-place US). In addition, because of the growing possibility of using industrial machines to run manufacturing plants overnight, Japan may no longer be forced to waste much of the energy produced by hydroelectric, nuclear, geothermal, and wind, which unlike oil or gas cannot be shut off at night.

Finally, Japan may be able to get more commodities from Pacific Russia. First, as mentioned above, Russia is increasingly in need of allies outside of China or the West, and Japan is the obvious choice in this regard (South Korea is also an obvious choice, but South Korea is very closely embedded into the economies of both China and the West, and it is also much smaller than Japan). Second, as technology may continue to make resource-extraction much less dependent on labour, the commodity-producing potential of the Russian Far East could perhaps finally be realized in spite of the region’s tiny population of just around five million (less than one million of whom live in the gigantic territory to the north and east of Lake Baykal). Sakhalin island and the Kamchatka peninsula, both of which are relatively inhabited, rich in natural resources, and particularly accessible to Japanese influence, could be two interesting places to watch in this regard.


Demographic Entropy

Analysts who are bearish on Japan ultimately tend to focus on one factor above all others: Japan’s aging population. This is certainly not an unreasonable concern; Japan’s population is the oldest in the entire world, with a large Baby Boom generation that is on the cusp of old age, a large Echo Boom population that is on the cusp of middle age, and a population of seniors (above 65 years old) that accounts for 26 percent of Japan’s total population, compared to only 14 percent in the US, 17-18 percent in Britain, France, and Spain, and 20 percent in Germany. This is, really, the main reason the Nikkei 225 index has been trading at prices that are just 13.9 times its earnings and just 1.3 times its “book value”, compared to a 19 price-to-earnings ratio and 2.8 price-to-book ratio for the S&P 500 in the US, or 15-19 price-to-earnings ratios and 1.8-2.1 price-to-book ratios in France, Britain, and Germany, where populations are more youthful.

While it would be unwise to ignore Japanese demographics, or try to spin them somehow as being an economic advantage rather than a disadvantage, it may nevertheless be useful to play devil’s advocate here for a bit, and explore the possible reasons why Japan’s aging population may not end up being even close to as bad for its economy as it is generally expected to be.

Reason 1: Japan’s retiring population means that it alone among countries in the developed world may not be negatively affect by the one-two punch of outsourcing and automation, which could rapidly lead to unemployment and income inequality crises in other countries. This could further increase Japan’s internal unity compared to other nations, giving it even more of an edge in terms of its economic “mass”.

Reason 2: Japan’s economy is not a closed system: it can decrease its demographic entropy by way of immigration. While it has become common for journalists to point out the fact that Japanese culture is not accustomed to dealing with immigration, the truth is that Japan has historically been able to adapt its mode of behaviour in very short periods of time, so it would not really be such a surprise if the Japanese were to begin bringing in lots of immigrants in the future, breaking with tradition. Certainly Japan’s high standard of living and proximity to Asia means that it can probably attract immigrants if it wants to. Japan has not needed immigrants in the past, but if and when it does, it may turn out that it doesn’t have such an affliction to them after all.

In fact, one way of looking at the fact that foreign-born individuals only account for an estimated 1.9 percent of Japan’s population (compared to 12 percent for Germany, France, and Britain, 14 percent for the US, 21 percent for Canada, and 28 percent for Australia) is that Japan still has a lot of room to increase the share of its total population that immigrants account for. Japan could actually bring in millions of immigrants and still have them account, for example, for less than one-fifth of its population, whereas a country like Germany or even the US would perhaps start feeling uncomfortable with immigration if immigrants were to make up more than a quarter or a half of their total populations.

Reason 3: Another way to look at Japan’s population of seniors is as the first wave in an enormous global demographic shift, with the aging populations of the developed world (particularly Europe and Canada) and the former Soviet Union only about a decade behind the Japanese, and with China not too far behind them. What this means is that many of the age-related issues that Japanese populations have already been dealing with for a while may now be coming to much of the rest of the world. This might actually help the Japanese economy, if it finds some of the goods and services it has been focusing on — among them robotics, health care, pharmaceuticals, and age-related consumer products — in demand from other countries.

In other words, Japan may be able to export some of its expertise and products to aging Western, Russian, Korean, and Chinese populations who are dealing with their own increases in age-related illnesses. In fact, because of the pollution in China, the coming decade may see an enormous increase in certain types of environment-related illnesses in China, even though China’s population is still somewhat younger than most Western populations. Many wealthier Chinese may even go to Japan to receive health care. The aging of China and the West is obviously not the happiest of prospects to contemplate, but it may nevertheless be something the Japanese economy is relatively well-positioned to benefit from.

Reason 4: Even if Japan’s aging population is a long-term problem, it may not be such a burden for its economy during the next decade or so. Japan’s Boomer population is only around 65-70 today, and is still extraordinarily healthy for its age. Because of the Internet, Japanese seniors  may also be able to keep their productivity and consumption up more than people of the same age have historically been able to do. Japan’s Echo Boomers, meanwhile, are still just around 40-45 years old. Because Japanese have so few children (13 percent of Japan’s population is below the age of 15, compared to 19 percent for the US, Britain, France, and Australia), they have more time and money to spend on other things, whether work-related or leisure, which can be economically stimulative. Spending time and money on children may be great for an economy over the long term, but in the short term it can arguably hold an economy back.

Alternate Dimensions 

Economists have historically tended to view wealth as being derived from a combination of three “inputs”: capital, labour, and land. Japan is very well endowed in the capital and labour departments, but it has been held back to a certain extent by its scarcity of land. Excluding mountainous regions, which constitute an estimated 75 percent of Japanese territory, Japan is only about the size of Michigan. Even including its mountains, Japan’s population density is 1.5 times higher than Germany’s and ten times higher than in the US. Among significant economies, only India, South Korea, and the Netherlands are more densely populated than Japan (and none of them by much).

Japan has paid a steep price for its density: according to the Economist, between 1980 and 2000 Japanese property prices were consistently the highest in the world, both in real terms and in relation to average income levels. Japan’s lower property prices today are simply a reflection of its slow pace of population and economic growth; if the economy of Japan is to rebound, it will need to find a way to make due without much physical space. Indeed, even today, following two decades of deflation, Tokyo is the fifth most expensive city in the developed world and the eighth most expensive city in the entire world to buy an apartment in.

Can technology finally allow Japan to overcome its lack of space? To a certain degree the answer may be yes. Japan’s vast multitude of mountain valleys, for instance, are no longer nearly as isolated as they were even just five years ago. Today, with the modern Internet, their inhabitants can access national markets and social networks, and can increasingly bargain collectively for goods and services. Over the next decade they may become even less isolated, as technology is likely to sharply reduce traffic on the country’s crowded road network (which will also free up plenty of room in Japan’s large cities), gasoline prices may remain lower than they have been in recent years, and elderly and retired Japanese may travel less frequently than Japanese populations have done in the past.

Japan’s mountain regions may also be aided by technologies like the Aeroscraft, an airship the length of a football field that is currently being developed in the US as a response to the difficulties its military has faced in mountainous landlocked Afghanistan. The Aeroscraft could allow non-bulk goods to be shipped efficiently in mountain valleys where there is not enough cheap land available for significant airports, and where the need to take-off and land in each individual valley makes ordinary airplanes (which have extremely high take-off costs) highly inefficient. While it is impossible to know for sure, it seems possible that Aersocraft airships will be ready for regular use within five to ten years. In addition to helping Japan’s mountainous territories better participate in the Japanese economy, they could potentially also help Japan access markets in nearby economies like South Korea and northern China more quickly than can be done by ship.

Another way to overcome a lack of conventional space is to construct high-rise apartment buildings. Japanese cities have already done this, of course, yet they have been somewhat limited in their efforts to do so by the high cost of construction. Going forward, however, such costs may decline. As Japanese workers retire en masse, for example, and as many white-collar jobs in Japan begin to be automated or outsourced while more work can be done from home offices because of the Internet, Japan is likely to see a large number of its commercial high-rises transformed into residential buildings. While this transformation is not inexpensive, it can be done at a tiny fraction of the price of building a high-rise from scratch.

In addition, if commodity prices remain low, and if China’s enormous construction frenzy finally ends, Japan will find it much cheaper to import building materials. It might even be able to import some skilled Chinese engineers, or Chinese-built apartment modules. Indeed, modular construction might might significantly reduce both the costs and the required labour and time of high-rise construction. This could be a huge help for a country as incredibly compact and mountainous as Japan.

In Search of a Unified Theory 

How will Japan’s real estate, demographic, commodity, commercial, sociopolitical, and income factors combine in the years ahead? It is not clear. What is clear, though, is that ignoring Japanese stocks remains something that cannot be done lightly. Japan’s economy continues to have Potential. With the Nikkei still relatively cheap on a price-to-earnings and price-to-book basis, then, it is not surprising that the recession has not led to a market drop. The cat may yet be alive.