After a long period of isolation, China embarked on an open door policy in 1978. Keen to modernize her economy and improve her living standards, China sought to intensify her economic relations with Japan, one of her closest neighbours and one of the most advanced and dynamic economies in the world. An air of optimism marked the signing of the Japan-China Long Term Trade Protocol in 1978. China was confident that this agreement would launch her into the path of modernization in a relatively short period of time. This process of intensification of economic links with Japan, however, was not without difficulties. Over the years between 1979 and 1985, the Chinese failed to fulfil key obligations of the agreement including the non-payment for service received and the permiting of, severe shortfalls in the supply of agreed goods. The execution of the agreement was beset with problems. The agreement from which both sides had hoped to reap substantial economic benefits did not bear fruit; instead friction developed, which had ensued with disastrous consequences for both sides. What was the root cause of this friction? Was it the consequence of the incompatibility of the economic systems, one communist and the other capitalist? Or was the failure the result of political factors? Or could it be a much deeper reason relating to inherent socio-cultural factors which affected the decision-making processes in each of the countries? This thesis seeks to examine closely the root cause of the Chinese-Japanese trade friction. The writer argues that while different ideologies and political systems contributed to the problem, the dominant reason has socio-cultural origins, which have to do with the way the Chinese and Japanese societies evolved historically. Although both societies had Confucian ethical underpinnings of their social systems, they began to develop their own distinct characteristics. This coloured their world views and had a major impact in the way each society evolved its management practices. The Chinese rejection of some key aspects of Confucianism and its acceptance of Qinstyle authoritarianism, as subsequently modified by Sino- Marxist principles, produced an organisational framework and set of practices that did not prepare China to meet the demands of economic modernisation. This had adversely effected China's abilities to manage its trade relations with the economically advanced Japan. Section One of this thesis, which includes Chapters 1 and 2, outlines the framework of Chinese-Japanese trade cooperation beginning in the late 1970's. Chapter 1. seeks to give an overview of the rationale behind China's new open-door policy and its expectations of trade co-operation with Japan. It outlines the nature of trade co-operation including the structure of China-Japan trade. Chapter 2. proceeds to discuss the ensuing difficulties and the responses of the Chinese and Japanese governments. The writer then discusses the subsequent actions taken by the two governments to revive the co-operation that had gone wrong. An analysis of the faults of both governments that led to the disastrous consequences is then made. Section Two, which includes Chapters 3 and 4, seeks to examine the fundamental causes of the friction in the trade relations between the two countries. The writer examines the role played by socio-cultural factors and how they affected the decision-making processes in both countries. In particular, Chapter 3. analyses the role of feudalism in China as modified by the emergence of the centralized bureaucracy which characterize the Qin dynasty (221 to 207 BC). The impact of the anti-merchantilism, which was the direct consequence of Qin-style bureaucracy, and the question of the destruction of the urban middle class by the bureaucracy are highlighted. The writer argues that the absence of the urban middle class is one of the fundamental reasons why China is unable to produce an economically-progressive, capitalist-oriented society. This led to a state of economic backwardness. Chapter 4. contrasts the Chinese situation with Japan, by analysing the ideological underpinning of Japanese society. It outlines the various reform movements in Japan that led to the development of a society that is economically dynamic . A modern state has emerged in Japan in contrast to the emergence of a backward society in China. The writer also discusses the influence of Japanese Confucian values in the development of this modern state. This was to have a significant impact on Japanese management philosophy and practices. The last Section, which includes Chapter 5, 6, and 7, discusses the lessons to be learnt from the trade friction betwen the two countries. In particular, Chapter 5. analyses the vastly different approaches taken by the Chinese in contrast to the Japanese. The Chinese decision-making process which is characterized by chaos, inefficiency and bureaucratic bungling is contrasted with the Japanese style. The latter's approach is systematic, well thought out and meticulously planned. The Japanese, however, failed to take into account the vastly different operating environment in their dealings with China. Chinese behavioural responses were a variable that the Japanese were unprepared to deal with. This resulted in chaos in the strategic management of the trade relations between the two countries. Notwithstanding this friction, however, both China and Japan realize that they must proceed with their trade relations and minimize whatever frictions emerged over time. The last part of the thesis, Chapter 6. outlines the possible approaches that both sides can adopt in their dealings with each other. An approach with Lindblom's "muddling through" perspective is recommended by the writer. Chapter 7 contains the conclusion drawn from this study.