Association for Public Policy Analysis & Management

The territorial dispute over the Senkaku/Diaoyu Islands between China and Japan has been one of the most sensitive geopolitical tension in the East China Sea. The dispute became extremely intensified after the Japanese government announced its nationalization of the Islands on September 2012, which triggered massive protests in China and led to the fast-downward slopping trend of the bilateral relationship.

According to the theory of realism, an essential aim of a nation state’s foreign policy is to maximize its relative gain, so how to seek maximum interests from the dispute is a central task for the two countries. However, we need to notice that China and Japan have close economic ties which are important for the economic development for both countries, so there exists common interests for the two countries to solve the dispute in a peaceful way, which is related to the underpinning of the theory of liberalism. In this paper, I construct two game theory models to induct the potential outcomes of the dispute.

The paper consists of four sections: The first section introduces the historical background of the dispute and the rationale for the territorial claim of China and Japan, respectively. The second section makes assumptions and sets the payoffs for each of the four potential outcomes based on the economic condition of the two countries and the related analyses made by the media. Since each country can choose to either taking military action or seeking diplomatic negotiation, the four potential outcomes for each country are the following: obtain the ownership of the Islands through winning the war, obtain the half of the Islands through a successful diplomatic negotiation, leave the situation as status quo, and lose the war and ownership of the Islands. Using backward induction, the predicted outcome of this sequential game will be a military conflict between China and Japan, which is Pareto suboptimal. The next section extends the sequential game by adding doing nothing as the third strategy for the two countries and the United Nations as the third player. The addition of the United Nations is associated with the argument of neoliberalism which stresses the role of international organizations in addressing conflicts. Three additional assumptions are also made to set the payoffs for doing nothing and payoffs for the United Nations’ two choices – facilitating a negotiation or not. Based on this extended game, if the expected payoffs of the United Nations to facilitate negotiation is higher than doing nothing and China’s expected payoffs for negotiation is higher than taking military action or doing nothing, the predicted outcome will be a diplomatic negotiation between China and Japan. Although this result is not Pareto optimal either since it makes the Japanese worse off, it prevents a war that would cause huge losses for both countries. The last section further discusses how the three players’ strategies are related to the central arguments of the realism, liberalism and neoliberalism. The author will also put forward policy implications based on the two sequential games.