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Chinese demonstrators stage an anti-Japanese protest over the disputed Diaoyu Islands, known as the Senkaku Islands in Japan, outside the Japanese Embassy on September 15, 2012 in Beijing, China. - 

The ongoing fight between China and Japan over a chain of islands continues, and now it has Toyota is scaling back production of its luxury Lexus models because of reduced demand in China.

The tension between the two countries wasn't always so high. Ten years ago, with the U.S. poised to wage war on Iraq, China was busy making friends.

"That was the era of really effective Chinese soft power. They're speaking softly, and yet they're putting their money out there, and they're diplomatic and their stature rose considerably in the region in that period," says Beijing law professor Stan Abrams. "But then they get up here to a much higher level, and they start acting like the U.S."  

Now, China's been turning up the heat on Japan. It's encouraged protests at local Japanese consulates; many that have turned violent.

Japan, China, and South Korea agreed in May to begin talks on a free-trade zone. Japan's government says the deepening conflict with China will impact these trade talks, and the Japanese prime minister is expected to instead begin work on a deal with the United States.

Abrams says Japan's renewed focus on a free-trade pact brokered by the U.S. in the region could mean the big winner out of this row between China and Japan might end up being the American economy.



Follow Rob Schmitz at @rob_schmitz