Specifically, WTO dispute settlement solves Sino-Japanese conflict

The confidence effect of joining the WTO, which signaled China's commitment to the same global rules and principles that other countries were bound by, was the reason why trade between Japan and China, as well as Japanese investment into China, grew at a record pace throughout the 2000s even while political relations waxed and waned, deteriorating seriously at times over this period (Armstrong 2012). Bilateral state visits were suspended over the 2001–2006 period between Japan and China. During that time, political relations deteriorated significantly with episodes such as large-scale protests in China against Japan in 2005, including an attempted public boycott of Japanese goods. Yet trade both ways between Japan and China, and investment from Japan into China, grew at a record pace. The growth in interdependence, and the constraints it put on the politics, was no more evident than in 2006 when Prime Minister Abe—long known as hawkish towards China—made China his first state visit to ‘break the ice’ in bilateral relations. It also resulted in the six prime ministers who followed Abe, avoiding visits to the Yasukuni Shrine, the main factor in the poor relations during the prime ministership of Koizumi from 2001 to 2006. The recent visit by Abe to Yasukuni in 2013 in his second time as prime minister, when he appeared to have much more political capital, has reversed that course politically, but the China–Japan economic relations have not been derailed. The Sino–Japan relationship is the most striking example of economics dominating politics because of the scale and depth of economic relations and the unresolved history and political mistrust between the two countries. And it importantly explains why thus far the territorial dispute over the Senkaku/Diaoyu Islands has not derailed the economic relationship. History is littered with examples of how bad politics have dominated economic relations. One such contemporary example is the India–Pakistan relationship. Despite having a single market—with the free flow of goods, capital and people, and having the many similar institutions—prior to partition, the political divide between the two countries since has meant that Pakistan accounts for less than 1 per cent of India's trade, and India accounts for less than 5 per cent of Pakistan's trade, with estimates suggesting that trade could be as much as 10 times higher (Khan 2009). Unlike Japan and China, India and Pakistan do not have normalised economic relations. Pakistan has not granted India most favoured nation (MFN) status despite both countries being members of the WTO. This is the result of the primacy of politics between South Asia's two largest economies. And neither India nor Pakistan has committed to openness to the global economy to the extent that their East Asian neighbours have. 3. Strengths of the Global Trading System Many countries, such as Russia recently, remain keen to join the WTO. This is despite some literature that suggests that WTO membership is largely insignificant because members do not trade more or have more liberal trade policies than non-members (Rose 2004). This literature misses the fact that there is a difference between old members, especially the original signatories of the GATT, and members who joined the GATT after the conclusion of the Uruguay Round. The gains from joining the GATT/WTO largely depend on what liberalisation a country agrees to undertake during the process of its accession to the organisation (Subramanian & Wei 2007). The strict accession requirements that the United States and the European Union (EU) imposed on China in the bilateral negotiations leading up to entry in 2001 were unprecedented. They were largely because of the impact that China was already having, and was predicted to have, on the international trading system. China's rapid rise and the adjustments that had to be made were causing friction for China, its trading partners and the international economic community. More stringent rules had to be put in place in order for other WTO members to be confident that China's accession would not impact the global trading system adversely (Garnaut & Huang 2000). It is precisely because of such unprecedented concessions that the signaling effect of membership to investors and trading partners was so strong. The accession commitments were a blueprint for China's institutional change and reforms for at least a decade from 2001 (Chow 2003). Japanese investors and traders, for example, could be confident of constraints on China retreating from the global market. 3.1 Dispute Settlement A major role of the GATT/WTO is in dispute resolution and the confidence that members, including developing countries, have in fair and equal treatment. That trade disputes can be settled in a universally (among members) accepted legal setting means that retaliation and escalation do not occur outside of the WTO rules, nor do these spill over into sensitive political problems. The dispute settlement function of the WTO is active and robust. While the number of WTO panels established to resolve disputes seems to have decreased in the wake of the global financial crisis (GFC), it has rebounded strongly since 2010 (see Figure 2). The number of disputes brought against trading partners by developing countries has grown, and the number of disputes that have been resolved or upheld demonstrates the relevance and importance of the mechanism. The relative number of disputes initiated by developing nations has increased (see Figure 3) as has their relative importance in the disputes resolution space. The establishment of the Advisory Centre on WTO Law in 2001 further demonstrates the ability of the WTO to adapt in order to remain relevant to developing countries (Bown & McCulloch 2010). The WTO's legitimacy depends on its relevance to developing as well as developed country members. The recent ruling against China on its restrictions on rare earth metals exports, 2 and China's acceptance of that ruling, 3 provide considerable confidence in the disputes settlement process under the WTO. Whether China's purpose in restraining exports was for consolidation of the domestic industry and environmental reasons, the manner in which that policy was executed and the anxiety it caused the international community—especially Japan, which relied heavily on Chinese rare earth supplies—meant that the way in which the ruling was handled is an important sign of faith in the WTO. The United States, Japan, EU and China resolved the dispute peacefully in the appropriate forum without resorting to embargos, a trade war or any form of conflict. This is but one example of confidence in the WTO and its dispute settlement mechanism preventing a trade dispute from escalating into more serious conflict.