• With: John Bolton, former U.S. ambassador to the U.N.

    This is a rush transcript from "Your World," August 20, 2012. This copy may not be in its final form and may be updated.

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    NEIL CAVUTO, HOST OF "YOUR WORLD": All right, I want you to forget about Israel and Iran and worry about China and Japan. Those countries could be much closer to coming to blows over something that seems patently silly, but no less than Maggie Thatcher learned can turn deadly serious when it comes to who owns some disputed islands, in this case the chain of uninhabited islands between China and Japan in the East China Sea.

    Japan says those islands are theirs. China says, not so fast, they are ours. And after these Japanese nationalists reached the island shores and planted a flag in the rock, let's just say China is roiled, all hell breaking loose, as thousands took to the streets in protest, overturning cars and burning flags, and obviously from these scenes no small amount of territorial dispute.

    And for us, seeing as both of these countries buy a lot of our debt, this is no insignificantly small matter.

    To Ambassador John Bolton on why this could be a very big deal.

    Ambassador, no one saw this one coming. What happened?

    JOHN BOLTON, FORMER UNITED STATES AMBASSADOR TO THE UNITED NATIONS: Oh, I think it's been coming for a long time.

    And it not just the dispute in the East China Sea between China and Japan. It's China's very assertive, almost aggressive, territorial claims in the South China Sea as well against Vietnam and the Philippines and others. And people say, but these are just rocks, they're barely above water.

    True, except that they are also near undersea mineral deposits, oil and gas in some cases, and they provide potential strategic control for countries like Japan and Korea of sea lines of communication for trade and raw materials critical to their economies. So, they may not look impressive, but these are potentially critical disputes between these countries.

    CAVUTO: Now, of course, these countries have had at varied steps a tortured relationship going back to mass Japanese executions of Chinese citizens and soldiers dating back to World War II and prior.

    But this seems to be China just erupting at the thought that Japan would lay claim to lands that the Chinese see as theirs, that it's almost like they ripped off a scab here.

    BOLTON: Well, I think these demonstrations were probably organized by the Chinese government.

    But I do think there is raw emotion there, too, and therefore not to be underestimated. People do remember World War II, which the Chinese think began in 1937, when the Japanese attacked, not in 1939, when Germany attacked Poland.

    CAVUTO: Right.

    BOLTON: You know elites in the United States and Europe tend to underestimate the force of nationalism and religion in world politics. They say, oh, that is so old-fashioned.

    Somebody better give that memo to the Chinese and the Japanese, because these emotions run deep, no doubt about it.

    CAVUTO: Now, China of course, as you have reminded me, Ambassador, sees itself as the world's premier power, let alone Asian power. That, they thought was a moot point.

    If Japan is sort of teasing the tiger, so to speak, what -- what do we risk in this region? What could happen?

    BOLTON: Well, there is lot at stake for us. Remember, China is just really beginning to develop a blue water naval capability to get out to what the geographers call the first island chain or the inner island chain along China's eastern coast there.

    Japan has a very big coast guard, as they euphemistically call it and increasingly even -- even larger seagoing ships as well. So, the stakes here are high. And Japan looks at these sea lines of communication as its lifeline. And if China can control them, Japan is at China's mercy. And I don't think they will let that happen.

    CAVUTO: Now, we have learned from the Falklands and Maggie Thatcher that you can come to blows over stuff like this. Do you think this will result in these countries coming to blows?

    BOLTON: Well, we certainly hope not, but honestly it does take, it will take a more assertive American presence to show that we care about the outcome of these disputes. And we should.

    But with declining Navy, with the budget sequestration about to take effect, the line of the graph for the size of our Navy is straight downhill. So, this is something China sees and it's one reason they're being aggressive in both the East and South China seas. And I think it's a real problem for the United States, something that if we don't want to see the Chinese take over all these rooks and reefs, we better do something about it, and sooner, rather than later.

    CAVUTO: All right, Ambassador, we're watching closely.

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