China and Japan appear to be on the verge of a shooting war over some tiny islands that are the subject of a territorial dispute.

Tension between these countries is escalating irrespective of the islands, and it is a matter of immense national concern for the United States and the rest of the world.

Yesterday in Davos, I sat down with Ian Bremmer, the president of geopolitical consulting firm Eurasia Group, to get his take on the situation.

Blodget: What’s going to happen with China and Japan?

Bremmer: The big problem is that the relationship, the balance of power between these two countries, has changed and is changing dramatically—and really, very strongly not in Japan’s favor.

From a security perspective, a political perspective, an economic perspective, this is just creating big, big problems for the Japanese. And now they finally have a leader that has a good shot at staying around for a while. He has a more—not just nationalist inclination—but a more pro-democracy inclination. He was prime minister last time and people said he was more pragmatic, but if you met with him, he talked about wanting to create a league of democracies in Asia [and] orienting much more towards India and Australia and New Zealand. He was Mr. Pivot before pivoting was fashionable, right?

Now he comes into a context where the U.S. is already acting in a way that’s concerned about a Chinese challenge in the region. It’s the single biggest strategic effort that the Obama administration has engaged in, from a foreign policy perspective.

And you have to think that the Chinese are going to see all this as provocative. The real question is, to what extent is the Chinese government prepared to respond in an escalatory fashion? Is this Russia vs. Georgia? A little bit, right. Are you poking the bear?

And I don’t know the answer to that, but I suspect it’s not good.

A couple of quick points on that:

First of all, unlike Hu Jintao who really didn’t have control over the military, Xi Jinping does. He has much more direct consolidation of these, sort-of standing committees around him. He’s a much stronger figure, much stronger personality, has much more loyalty from the military. So, if he wants to escalate, he can feel much more comfortable and confident that he can ratchet up and ratchet back without it getting out of control.

That’s dangerous for Japan.

Also if you look at the way the Chinese have engaged before on this issue: buzzing the territories with planes right before the elections, almost as if they didn’t want [Shinzo] Abe in, [but] they certainly didn’t mind Abe in. Anti-Japanese nationalism is a fairly easy play for the Chinese to engage in that allows them to defuse some of what would otherwise be discontent with things that would be more problematic for the Chinese government.

One final point on this: when you look at China vs. Japan, compared to all of the other territories in the region — you talk about East China Sea, South China Sea — with all those countries in the South China Sea, the Chinese themselves are a much larger economy than any of those countries, but also the Chinese have very large diaspora communities that dominate the economies of those countries. They are the key business people, and over time, that makes the Chinese much more comfortable. They know what’s going on inside the country, it creates more transparency. But also it means that over time the Chinese really feel like if they just build the economic relationship, the security will come.

They are going to get the political influence, they’re going to get the security influence, bilaterally. All they can do is make sure the U.S. isn’t able to create strong multilateral ties in the region.

With Japan that’s not true.

There are no Chinese in Japan that have significant business influence. It’s very opaque to them the way the system actually works. Japan’s much bigger, so if you’re China, [you are] thinking about how you’re going to tip the balance over time in your direction. When you become the world’s largest economy, as you’re building out your military, your problem is Japan.

The country that you’re prepared to be more aggressive towards — call it assertive now — but over time perhaps aggressive is Japan. And all of these things, all of these structural factors, really worry me. There’s no question that the economic ties are still important between these two countries. There’s no question that the United States certainly does not want to see conflict between their allies Japan, and the Chinese. But how much effort the U.S. will be able to put into stopping it and given how tied the Americans are to the Japanese; it's not clear to me this isn’t going to get worse. If I had to bet right now, I think there is [going to be] a significant run of escalation in 2013.

And I think by far, China-Japan is the most significant geopolitical tension on the map, in terms of direct bilateral conflict in the coming years.

Blodget: Do you think they’ll go to war?

Bremmer: I think they are at war. I think that cyberwarfare against Japanese banks has gone up greatly. I think you look at the anti-Japanese demonstrations that were clearly stimulated by the Chinese government, and the impact that’s had directly on Japan investment in China. Warfare is conducted by other means today. And we can certainly not say that these guys are friends. The question is are they frenemies or are they enemies?

I would tell you that looking at the entire G20, the single worst bilateral relationship among any two countries in the G20 is China-Japan, right now. I think that’s clear. By the way, 10 years ago, it was Russia-Japan. Now, at that point it was also over contested territories. The Japanese actually worked really hard to try to improve that relationship.

It was a lot easier for many, many reasons. You didn’t have the cultural issues. The Russians saw Japanese as being able to write checks, and all this sort of thing. In China-Japan, it’s radically harder.

Do I think that they will come to direct [confrontation]? This isn't Russia invading Georgia with tanks, but we could absolutely see direct military skirmishes over the contested territory, sure. And that potentially could involve escalation of American presence in the region. The danger here is that it has the knock-on impact of deteriorating U.S.-China relations as well.

Blodget: So what happens if we get exactly that. A Japanese plane shoots tracers at a Chinese plane. The Chinese plane responds and shoots down the Japanese plane. What happens?

Bremmer: Well, first of all, you’re gonna see a cut-off of diplomatic ties between the two countries. The ambassadors of course, will immediately be withdrawn. Not complete secession, but that’s the first thing that happens. You’ll see anti-Chinese and anti-Japanese across the board. You’ll see some violence.

There will probably be Japanese ex-pats living in China that will be roughed up and killed. Japanese exposure in China which has already taken a beating would be considered unsustainable. Japanese companies would be leaving China in droves.

That’s bad enough. Those are things that are virtually certain to happen if you had that type of a confrontation. The question would then be, can both sides dial it back?

I suspect from a military perspective they would. The Americans [would] immediately have a show of force. There obviously would be highest alert for both sides, but there would also be a lot of confidence-building measures between the U.S. and China to try to assure the Japanese-China military conflict would not spill out of control.

Now keep in mind, Japan spends something like 1% of its GDP on the military. The Japanese aren’t defending themselves on this stuff, we are. That makes life easier in terms of thinking about how bad it can get, but because there’s no danger of going to war, right — direct military conflict — that allows both sides to believe that escalation is more feasible.

The Cold War, if there had been conflict — East and West Germany — people were talking World War III. No one’s talking about that here.

Blodget: Because Japan’s so weak.

Bremmer: In part because Japan’s so weak. In part because Japan, China, and the United States have so many interlocking interests with the Chinese.

Blodget: But if the U.S. has a show of force, it is to protect the Japanese?

Bremmer: Has to be. Japan’s our ally.

Blodget: We have huge interests in China as well.

Bremmer: Yes, we do.

Blodget: We’re going to take a side immediately?

Bremmer: We have taken a side. If you look at Hillary Clinton on this point, it is very much, “We don’t want to get involved in this conflict, but let’s be very clear: we support Japanese territorial integrity.” And look, we gave the Japanese administration over these islands. They are our strategic ally. We are committed to that.

We have huge interests in the Middle East in energy that are going down over time. Israel is our ally. That gets us into trouble. This is clearly an analogous-type situation, but China is much more important to us economically than all these folks in the Middle East.

BIodget: So if China decides to take these islands, we defend Japan? Do we go to war with China?

Bremmer: I think the likelihood of that scenario is very low indeed, precisely because the United States is involved. And so, while the Chinese have prepared to play hardball with Japan, I don’t believe the Chinese are prepared to play hardball with the United States.

And that’s going to have a knock-on economic effects. It’ll impact U.S.-China trade relations, and it’ll certainly make it much colder between the two countries. It makes the potential for a nascent cooperation on things like Syria over time very de minimis. North Korea and plenty of places where we need to cooperate are much, much harder.

These are the world’s two most important powers right now.

But, I think the likelihood of the Chinese [engaging militarily] with the Americans in the region defending the Japanese is very low indeed. That to me, is fear mongering.

Where I think the potential is — for actual serious economic conflict between Japan and China, over a military skirmish. That’s actually real, that’s on the table right now, that could happen tomorrow.

That’s a real thing.

Blodget: Thanks, Ian.