Japan, an eye on defense overtones, handles Chinese trade cut gingerly

Talks are under way here to resolve the issue of China's abrupt and costly suspension of industrial plant imports from Japan. But they are far more than mere commercial negotiations. Within the Japanese government there is considerable feeling that this is a strategic problem on which national security could ultimately hinge.

China last month suddenly announced a halt to construction of the Baoshan steel mill near Shanghai, and four petrochemical projects in Nanking, Shantung, and near Peking. Economic planners simply felt the country couldn't afford such grandiose industrial developments at this time.

Japanese trading firms and plant engineering companies are extremely bitter, however, claiming they will suffer losses conservatively estimated at $1.5 billion dollars as a result.

Liu Xinghua, deputy general manager of the National Technical Import Corporation, arrived in Tokyo last month an expected one-month stay to explain China's reasons for suspension of the construction projects and discuss contractual matters arising out of the decision.

Chinese government leaders told Mr. Saburo Okita, special Japanese trade representative in Peking, in early February that the Japanese companies would be compensated according to international practice. At the same time, however, they dropped hints that the construction could continue with Japanese long-term, low-interest loans.

Total cancellation would certainly be costly for China. Trade sources here estimate that the amount of compensation involved is about equal to the country's total foreign exchange holdings at present.

Foreign Minister Masayoshi Ito has repeatedly said the issue should not be made into a political problem damaging Sino-Japanese friendship.

But in Japanese business circles there is already a growing sense of distrust and disillusionment with the Chinese for unilaterally scrapping the plant contracts (which contained no compensation clause, it should be noted) and then demanding more low-interest loans.

On the Chinese side, there has been criticism that Japanese economic cooperation merely means the advance of big business monopolies into China. And , countering demands for compensation, the Chinese point out that they have renounced war reparations exceeding $10 billion from Japan.

"If left as it is, mutual distrust could eventually damage our political relations," said one senior government source. "This cannot be allowed to happen because Japan's policy toward Asia is heavily dependent on close friendship with China."

This was why Mr. Okita was sent to Peking to alert the Chinese to the magnitude of the problem and work out a framework for negotiations. He, in turn , later warned the Japanese business community that the plant cancellation issue could not be handled only from the viewpoint of a commercial transaction, but with a view also to Japan's strategic security interests.

Former Foreign Minister Sunao Sonoda has explained the significance of Sino-Japanese friendship in more concrete terms. He once said that in order to prevent Sino-Soviet rapprochement. China had to be firmly integrated into the Western world's economic structure.

Japan would suffer immeasurable, nightmarish pressures from both north and west if China with its very large population and potential strength again joined hands with the Soviet Union, he argued.

Thus, the Japanese government is deeply committed to China's modernization program and has to take the rough with the smooth.

While the recriminations currently fly, however, ways are being examined to avoid future economic friction. The private Japan-China business association on economy and trade is proposing to station experts in Peking for one or two years as advisers to the government. They will help China deal with the problems of economic adjustment as well as undertake feasibility studies on proposed plant construction projects.

It is being suggested in some quarters here that the business community contributed to its own downfall either through greed or naivete.

Prof. I. Nakashima, from Tokyo University's foreign studies department, argues that good judgment was clouded by the "China fever" that seized Japanese political and business leaders in recent years.

The "four modernizations" program was politically based, as was the decision to cancel the plant constructions --Xiaoping, he argues.

"Japanese leaders visiting China one after another failed to heed the political implications. What happened could have been anticipated.

"Before we blame China, We must realize that we Japanese have been at fault. We were too optimistic, ignoring many warning signs. I'm amazed that leaders of government and business could have been so simpleminded."

Another warning against overambitious assessments of the Chinese market has also been sounded by the semigovernmental Japan External Trade Organization.

Despite all the talk about Chinese-foreign joint ventures, few have so far made it past the negotiation stage, the organization's monthly China newsletter points out in its February issue.

"Chronic shortages of capital, materials, and skilled manpower have forced the nation's central planners to cut back hard on all types of capital spending. It is almost certain that no new Chinese purchases of large-s cale plants will materialize for quite a few years."