JUDY WOODRUFF: Next: China flexes its growing economic and military power. And that flexing brought results over the weekend, when Japan yielded to Chinese demands and released a trawler captain. Margaret Warner has our report.
MARGARET WARNER: The Chinese fishing captain came home to a hero'swelcome last weekend, three weeks after he was arrested by the Japanese coast guard in disputed waters.
ZHAN QIXIONG, Chinese fishing captain (through translator): TheDiaoyutai are a part of China. I went there to fish. That's legal. Those people grabbed me. That was illegal.
MARGARET WARNER: He had been captured after colliding with two Japanese patrol boats in the East China Sea. That's an area rich in gas deposits around a string of uninhabited islands with rival names, called the Diaoyus in China and the Senkakus in Japan.
The seizure sparked a test of wills between Asia's traditional economic and military power, Japan, and its rising one, China. China didn't to hesitate to threaten, and use, its clout.
WOMAN (through translator): China will take strong countermeasures, and all the consequences will be borne by the Japanese side.
MARGARET WARNER: Beijing's countermeasures took aim at the heart of the Japanese economy. China blocked exports to Japan of so-called rare earth elements, key components of high-tech manufactured items, from iPhones, windmills and computer hard drives, to sophisticated military equipment.
China controls an estimated 97 percent of the world's current market in these rare earth elements.
MICHAEL PILLSBURY, former defense department official: Frankly, these stories about the rare earth exports being held up to Japan is a kind of leverage that I thought went out with the Cold War 20 years.
So, I would characterize it as a harsh reaction, unnecessary, in terms of the Japanese overall goodwill toward China.
MARGARET WARNER: Reagan-era Defense Department official Michael Pillsbury says he was surprised by China's move.
MICHAEL PILLSBURY: The old school of thought about China was that they would be modest in their rise as a world leader, they wouldn't provoke difficulties with other countries, and just bide our time and build up slowly.
That was Deng Xiaoping's guidance for a long time. So, it's a surprise to see them be this assertive, shall we say, on the world stage.
KEN LIEBERTHAL, former staff member, National Security Council: They're breaking diplomatic eggs which, three or four years ago, they wouldn't have broken. So, I think the change is palpable.
MARGARET WARNER: Clinton-era National Security Council official Ken Lieberthal thinks China's new assertiveness reflects its sense of its growing might.
KEN LIEBERTHAL: They're stronger economically and they're stronger militarily. And there's pressure within China to revisit issues of longstanding concern to China and see if they can move the needle with other countries around the region.
And the Chinese Navy in particular has grown much stronger. I think that they are pressing to have the government back fairly assertive territorial claims -- on balance, not very good news for the region.
MARGARET WARNER: China and its rapidly expanding navy are also laying claim to swathes of the South China Sea and islands, over the protests of neighbors like Vietnam, Taiwan, Brunei, Malaysia, and the Philippines. The area hosts crucial shipping lines and rich oil and gas deposits.
But it is China's economic muscle that makes it most formidable. This year, it overtook Japan as the world's second largest economy, built on inexpensive manufacturing, cheap exports, and a growing market at home.
Its economy grew nearly 9 percent last year, in the midst of a global recession. Free of debt, with plenty of cash, China has been gobbling up natural resources it needs to sustain its pell-mell growth from countries around the globe, from Brazil, which received billions in loans in return for Chinese access to its oil reserves, to Sudan, where China refines its oil in return for a hefty percentage, to Afghanistan, where China is developing the war-torn country's copper reserves.
U.S. policy-makers are also struggling with China's more assertive role. The U.S. has been trying for years to get the Chinese government to stop undervaluing its currency, the renminbi, to make Chinese exports artificially cheap. President Obama raised the issue again today in Iowa.
U.S. PRESIDENT BARACK OBAMA: The reason that I'm pushing China about their currency, it's because their currency's undervalued. And that effectively means that their goods that they sell here cost about 10 percent less. They are managing their currency in ways that make our goods more expensive to sell and their goods cheaper to sell here.
MARGARET WARNER: But, so far, despite promises, Beijing has done little.
Today, the House took matters into its own hands, passing a bill authorizing punitive tariffs on Chinese imports if Beijing doesn't act on the currency front. But the measure's prospects in the Senate seem uncertain.
Lieberthal predicts this threat, like earlier ones from Washington, will have little effect.
KEN LIEBERTHAL: We have done that for years, and we have never followed through. So I think, in China now, it is hard for people internally to make the case that the U.S. is serious, and is not simply crying wolf. So, how you gain credibility on that is not quite clear, because we don't want to have a trade war.
MARGARET WARNER: The U.S. also needs China as a partner in tackling thorny global issues like Iran and North Korea. President Obama tried to walk that line when he met with Chinese Premier Wen Jiabao at the United Nations last week. He had encouraging words in public.
BARACK OBAMA: Because the world looks to the relationship between China and the United States as a critical ingredient on a whole range of security issues around the world.
MARGARET WARNER: But when the doors closed, President Obama bluntly expressed his disappointment in Beijing's failure to act on the currency front and warned of trade actions if it didn't.
The U.S. is also pushing back with a stronger diplomatic role in the region, at the request, U.S. diplomats say, of China's nervous neighbors. In New York last week, President Obama met with leaders of the Asean, an Asian security organization in which China is not a member.
And he plans another trip to Asia in November, this time to Indonesia and India. Michael Pillsbury says China is taking a gamble with its new boldness.
MICHAEL PILLSBURY: You have a number of thoughtful Chinese intellectuals already cautioning the Chinese leadership not to go too far, not to create a coalition of other countries hostile to China that will cooperate.
This, in many ways, is the Chinese nightmare. If India, Russia, Vietnam, the United States and many other countries coordinated a policy toward China, and decided to control China's rise, and to prevent them from becoming the leader of the world, this would be the kind of nightmare China is worried about from its own past history.
MARGARET WARNER: Lieberthal thinks some in the Chinese leadership see
KEN LIEBERTHAL: I think the Chinese are smart enough to see that they're creating their own problems here.
I have had very high-level Chinese officials ask me, why is the U.S. changing its policy in Asia? And my response to them, very simply, is, we aren't. You are. And your policy changes are requiring that we take some compensatory measures. And, if you don't want to see that happen, stop moving in the direction you're moving in.
MARGARET WARNER: In the last 24 hours, without any announcement, China lifted its ban on rare earth metal exports to Japan.