That doesn’t sound much to get excited about, until you consider how well the Chinese and Japanese economies fit together.

Think of it this way: With China’s boundless supply of low-cost labor and Japan’s superb education system – and an ability to work together that’s clearly founded on considerable commonality of thinking – these two countries, as a pair, will be world-beaters.

In fact, they’ll be world leaders.

The Past has Passed

The summit – while modest – marked an important policy change from the mutual hostility during the premiership of Junichiro Koizumi, whose tilt to the United States and suspicion of Chinese motivations was symptomized by his love of Elvis Presley and visits to the Yasukuni Shrine, controversial because it includes convicted World War II criminals. Nevertheless, while Japan and China have many historical reasons to hate one another, so did France and Germany after World War II, and those countries have now been partners for more than 50 years in the European Union. Thus, a close economic partnership between Japan and China is by no means unthinkable.

Economically, China and Japan have much to offer each other. Both have shortages of raw materials and strong manufacturing sectors. However, the relative shortage of labor in Japan’s aging society, its superb education system and the surplus of labor in China all combine to make them natural partners. Already, Japan is China’s second-largest trading partner, taking 10% of its exports and supplying 15% of its imports. Conversely, China in 2007 surpassed the United States as Japan’s largest trading partner, taking 14% of its exports and supplying 21% of its imports.

Between them, China and Japan have a population of 1.4 billion people, more than twice that of the European Union or the North American Free Trade Association. Their combined gross domestic product (GDP) of $8.4 trillion at market exchange rates in 2007 was about half that of the EU or NAFTA, but was combined with growth of 7% in 2007, a current account surplus of $560 billion (compared with deficits in the EU and the United States) and foreign exchange reserves of $2.4 trillion.

Thus, even a loose bilateral trade association between China and Japan would be a powerful economic force. Free trade and free movement of labor between the two countries would enable them to deepen their economic relationship still further, making the Japan-China trade axis the most important in the world – even more so than any bilateral U.S. relationship. Longer-term, an EU-style economic union – perhaps including such neighbors as Korea, Taiwan and Vietnam – could become the world’s leading economic power, surpassing even the United States and the EU itself.

As a U.S. geo-strategist, one worries somewhat about this. The United States has traditionally been able to count on Japan as a counterweight, both economically, and to a limited extent, militarily against a resurgent and aggressive China. That no longer seems to be so certain; an immensely powerful alliance between Japan and China might develop into the United States’ military equal, and would certainly be animated by a world view very different from that of the United States or, indeed, the EU countries.

As an investor, one rejoices in it and seeks to find sources of future profit from the two countries’ deepening relationship. One such source of profits are major Japanese companies such as Toshiba Corp. (PINK: TOSBF). This major manufacturer of computers, medical electronic equipment and telecommunications systems has developed a highly integrated manufacturing capability in China, enabling it to synergize its technical innovation with China’s highly skilled, low-cost workforce. Toshiba’s shares are trading at about 22 times earnings, reasonable for a high-tech company.

Another might be a Chinese automotive manufacturer such as Brilliance China Automotive Holdings (ADR: BCAHY), already a strong automobile and bus manufacturer in the Chinese domestic market, which has a joint venture with Bayerische Motoren Werke AG, better-known as BMW, and potentially can benefit from its lower labor costs to attack the Japanese market. As relations between China and Japan improve, and tariff and non-tariff barriers in Japan are reduced, companies such as Brilliance may be major beneficiaries. Brilliance China trades at a pricey 48 times earnings, as it has only recently returned to profitability in the highly competitive Chinese automotive market, but its long term prospects appear excellent.

There are two categories of beneficiaries from a trading relationship between China and Japan that’s closer and more-barrier free.

The first group consists chiefly of Japanese high-tech companies that are able to take advantage of China’s lower labor costs and more-profitably attack the world markets.

The second group consists of low-cost, China-based manufacturing companies that can sell to Japan as a particularly juicy nearby market with similar cultural and taste characteristics – unlike the unfamiliar west.

Both types of companies are likely to be big long-term winners from this trend.

[Editor’s Note: For additional China profit plays, check out this special offer by Money Morning that includes a free copy of investing guru Jim Rogers’ new bestseller, "A Bull in China." The book details Rogers’ investment outlook for China plus his opinion on dozens of China-based public companies.]

Source: Two Ways to Profit as China and Japan Quietly Forge the Most Powerful Trading Alliance in the World

In Tuesday’s Pennsylvania Democratic Presidential Primary, Sen. Hillary Rodham Clinton achieved the absolute bare minimum she needed to prolong her battle against Barack Obama. And she still had a slight hope of somehow squeaking through to land the party nomination.

But that’s not the “real” story here.

In view of the irresponsible and damaging economic promises that are emerging from both contenders, the already-wheezing U.S. economy may be about to cry for mercy from the relentless and prolonged assault. And the longer the Democratic Primary War continues, the greater the fallout for the U.S. market.

We all understand the dynamics of U.S. presidential politics. In the primaries, contenders make promises designed to appeal to the most-committed, core supporters of their party. Republicans promise tax cuts so massive that they would immediately put the Federal budget into terminal collapse; they promise extra military programs; and they talk about a new batch of moral initiatives designed to make U.S. teenagers straighten up – once and for all.

Democrats, on the other hand, promise an impenetrable wall against foreigners taking away high-paying union jobs; plus social programs designed to rescue anybody suffering financial or emotional difficulties; and a spectacular new environmental assault against multinational corporations that will return the entire planet to room temperature.

Only the most simple-minded voters take these pledges seriously. The problem is that once the candidate is elected, some percentage of their campaign “promises” will need to be put into effect – presumably in order to reassure voters about the high integrity of politicians. Make 10 pledges, you can get away with implementing two; make 50, and you will have to implement at least seven or eight, if not 10.

Once the primary season is over, the game changes. Now the candidates are looking for the elusive “soccer mom” independent, who has all kinds of needs and desires but who above all wants to be reassured that the next president won’t do anything rash or expensive, because it might cost too much money or damage the economy.

The focus goes on to tiny little non-partisan initiatives, exquisitely crafted to win a particular voting bloc, but each only moderately expensive and hardly any of them economically damaging. More of these have to be implemented after the election – maybe 5 out of each 10 – so their aggregate effect is quite expensive and damaging, but no one initiative can be blamed for this problem.

Then, after the election, the politicians go back to rewarding large campaign donors and potential campaign donors in the usual ways, with the occasional populist panic when a crisis occurs.

The problem now is that the Clinton/Obama primary contest has gone on too long.

On trade, both candidates, who had been considered fairly moderate and rational, have already:

• Come out against a perfectly benign free trade agreement with Colombia.
• Have promised to renegotiate the North American Free Trade Agreement (NAFTA), already in effect for 14 years.
• And have made threatening noises against the evil multinationals that “outsource” good U.S. jobs to Third World markets.

Obama, for example, has proposed substantial tax breaks for those “Patriot” companies that keep jobs in the United States, and that pay union wages and benefits. If either candidate is elected, and puts into effect half of the protectionist policies they have supported, world trade will be thoroughly obstructed, and will probably decline in total. That’s a highly undesirable outcome; the only time we’ve seen this previously was in the 1930s.

Then there’s housing. Both candidates want to spend at least $30 billion to bail out the scorched U.S. housing market, helping defaulting homeowners through federally guaranteed loans that forgive part of the principal. Clinton even wants to add a feature, proposing the government buy foreclosed houses in the hope of reselling them later on.

This would all create an artificial price floor under the housing market, which sounds like a good idea until you realize that since the market prices would be artificial, there would be few free-market buyers supporting the market. That “reality” brings with it a high probability of a further downward lurch in home prices that could devastate market confidence and damage the U.S. housing market for years – if not decades – to come.

Both candidates have healthcare plans, and are currently accusing each other of being too mean to consumers. Only on the subject of taxation does the competition not run to who can give the biggest benefits; here the argument is who is calling for the bigger tax increase for the rich – sticking it to the rich is a key aim of many Democrat primary voters, however counterproductive it may be economically.

Once Clinton or Obama has been anointed as the Democratic nominee, the rhetoric will change radically. Gone will be all the hostility to multinationals, foreign competitors and those of higher incomes. Likewise, you’ll also be able to watch and see as the lavish handouts to subprime homeowners and the uninsured suddenly disappear.

In will come soothing statements about the candidate’s commitment to world trade and fiscal responsibility, combined with explanations of how their health and housing plans will be carefully targeted at those most in need.

From the U.S. economy’s point of view, that day cannot come soon enough.

[Editor’s Note: Money Morning Contributing Editor Martin Hutchinson has personally interviewed the economic advisors for candidates McCain, Obama and Edwards, and concluded that Obama and McCain would be the best candidates for investors. He wrote about the "Potomac Primaries" in mid-February. For a full report on the "presidential profit plays," please click here. The report is free of charge].

(It must be because of America’s supposed symptomatic misogynism that the Ripley folks haven’t come calling yet…)

For one, there’s Hillary’s campaign manager, Maggie Williams. While hammering home the message that evil capitalists engineered the subprime mortgage crisis to bleed America’s poor and middle class, she herself raked in a cool $200,000 as a director on the board of a Long Island subprime lender until the company went belly-up last December.

(They served their underprivilegend clients with such niceties as prepayment penalties. Hillary now is against those. And who wouldn’t be. After all, those 200 grand have been banked and are hopefully FDIC-insured.)

Hillary is now proposing that taxpayers bail out not just dishonest subprime lenders but also less-than-honest borrowers who told their bank they could swing a $400,000 McMansion on a call center temp’s earnings.

Then, there is the whole NAFTA and free-trade thing. After suggesting that she gained chief executive experience by Yoda-like guiding President Bubba through all the major decisions of his tenure — NAFTA being one of the rational things he completed — she now has “long been a critic of the shortcomings of NAFTA”. Especially whenever she is addressing audiences of American manufacturing workers and unions.

But her husband’s determination to finalizing NAFTA back in the early 1990s is no good reason to not blame the free-trade treaty on evil Republicans. Nor was the fact that Hillary’s chief campaign strategist, Mark Penn, was meeting with representatives of the Colombian government to help promote the very free trade agreement that Hillary Clinton opposes. Until she fell behind in the polls. Then money, suddenly, did indeed have an odor.

But it’s not just that free trader in sheep’s clothes Mark Penn that can successfully separate the major campaign creeds from his very personal need to make a fast buck. Bubba, too, appears to be so divorced from core liberal creeds that he had no problems at all collecting $800,000 giving speeches for a Bogota-based group that supports the Colombia free trade agreement — the same trade deal she currently opposes.

Some speeches those must have been for 800 grand…

Hillary has a very good explanation for what would be the trigger, hammer and spark for years of liberal glee and moralist outrage had similar hypocrisy been committed by a Republican:

Click here to see some presidential poise in handling inconvenient questions.

Cynicist reprobates on the back benches might be tempted to look at this as the equivalent of predatory capitalist and engineer of many a financial crisis bleeding dry an emerging market, George Soros, publicly bewailing the cruelty and callousness of the world financial system!

(Ooops, my bad: He now does that for a living…)

Realists, however, will realize that applying the non-linear logic underpinning the liberal world-view, the world can be round or flat, depending what audience you’re addressing.

As long as you speak its language.

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