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Japan-South Korea economic spat rocks tech supply chain

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By: Naveed Qazi

In August 2019, as world watched the China-US trade war play out, another tit for tat spat occurred between South Korea and Japan, as it threatened the world’s tech supply chain and made the global economy more uncertain. It came at an unfavourable time when Brexit was also looming, and putting businesses under an onslaught.

The dispute involves historical grievances that date back hundred years. Despite both countries claimed to have imposed trade sanctions, in the interest of national security, the victimisation of trade became a worrying trend.

Recently, the tensions between the two countries escalated when South Korea refused to re-sign the military intelligence sharing pact it has with Japan. This announcement from President Moon Jae-in’s Blue House came after months of wrangling over a 2018 Supreme Court decision, in Seoul, that upheld claims that Japanese corporations must pay reparations to Koreans forced to work in their mines, and factories during World War II, at the time of Japan’s occupation of the Korean Peninsula from 1910 to 1945. Mitsubishi Heavy, one of the firms involved, had reportedly refused to comply with the court order, while two other companies have had their assets seized in South Korea.

Japan argues that a 1965 treaty between the two sides settled all such claims, as under the treaty, Japan provided South Korea with $300 million in grants and $200 million in lending, ostensibly as economic assistance. South Korea, contradicts this, and believes Japan must respect its court decision.

President Moon Jae-in’s administration insists that Japanese government has no authority to tell the country’s independent judiciary to reverse the ruling. Frustrated with the proceedings, and determined to put pressure on Moon’s government, to intervene, or change their decisions, in some way, Tokyo had dumped South Korea from its ‘white list of trading partners’, and slapped unprecedented trade restrictions, on several high tech South Korean exports.

These sensitive export goods include three chemicals crucial for producing semiconductor memory chips, which is South Korea’s top export item. South Korean semiconductor giants such as Samsung electronics and SK Hynix supply sixty percent of the world’s memory chips. The companies had soon warned that they couldn’t rule out production disruption, if Japanese export restrictions remain in place. This could significantly impact large global players such as Apple and Lenovo that leverage just in time delivery principles to minimise costs.

Affirming political gains, Japan announced it would tighten control over these three chemicals —fluorinated polyamides, photoresists, and hydrogen fluoride that are crucial to producing semiconductors in South Korea. Under new regulations, Japanese companies would need a license for each chemical to import them to South Korea, and the process could take up to ninety days. The country also claimed it was setting such restrictions because it believed South Korea was leaking sensitive information to North Korea, although they did not provide details.

Japanese officials also announced that some South Korean companies were inadequately managing the chemicals, implying that some were being leaked to North Korea for military applications. However, it did not indicate which companies were guilty in doing so, nor were any specific examples given.

Japan has repeatedly insisted that it has evidence that South Korea has not taken proper precautions to prevent the export of these products to third countries. Despite media reports that this involves North Korea, sources say the countries involved are in the Middle East.

South Korea denies this, and has strongly condemned Japan’s measures. It wants to take the issue to the United Nations, which oversees North Korea sanctions, and has lobbied the World Trade Organisation, calling the move a violation of global trade rules. At the same time, South Koreans have taken up the cause with a broad boycott of Japanese consumer goods and services.

It’s not clear if both countries foresaw the breadth of the potential economic fallout. Japan’s Uniqlo chain of clothing stores, for which South Korea is an important market, has seen sales fall nearly thirty percent at its more than one hundred eighty stores. Big brewers such as Asahi have seen similar declines as many stores refuse to stock Japanese beer on the shelves. Previously, Japanese beer had been the most popular foreign brand in the market. South Korean tourism to Japan has fallen about fifty percent last year, according to South Korean travel agents. At 7.5 million last year, South Koreans were the largest number of foreign tourists in what has become an important revenue earner for Japan.

David Kang, director of the Korean Studies Institute at the University of Southern California, says the Trump administration has failed to establish a sense of alliance in the region. Part of this is the attention on all the other crises the U.S. is currently entangled in, and part is because President Donald Trump simply does not care enough.

This trade dispute is a losing battle for everyone involved. South Korea is one of Japan’s most active trade partners, and the instability in their relationship will cause both economic and national security problems. Quite recently, the South Korean government announced that it was setting up a $6.4 billion fund to reduce its reliance on Japanese exports.

The weaponisation of trade, as evident in this dispute, was first used by US President Donald Trump who recently cited security concerns, and then put tariffs on steel and aluminum imports. China employed a similar tactic when it promoted government sanctioned trade boycott in online trade of South Korean products, and shutting down of its retail facilities, as South Korea introduced an U.S. anti-ballistic missile system to combat threats from North Korea.

According to an Oped written by Tim Shorrock in The Nation: “in the days leading up to the announcement, U.S. policy hard-liners had urged Trump to intervene, saying the tit-for-tat trade retaliation by Tokyo and Seoul, and a Korean boycott of Japanese goods threaten their collective stance against North Korea and China, and endanger both regional missile defense, as well as the 2016 intelligence pact known as the General Security of Military Information Agreement (GSMIA).”

‘This dispute is clear and presents danger to US national security interests’, according to Patrick Cronin, a former Pentagon official at the Hudson Institute, who said this at an August 7, 2019 seminar, on the trade dispute, at the Heritage Foundation.

Seoul’s foreign minister, Kang Kyung-wha, believed that the trade squabble was an astonishing decision, but a separate issue from the South Korea-U.S. alliance. Taro Kono, her equivalent in Tokyo, called the decision ‘extremely regrettable’, and reprimanded that Seoul completely misread the regional security environment.

China had also offered mediation. It is because the country is worried about the potential impact of Japan-South Korea trade spat on Chinese companies like Z.T.E and Huawei, which have already been targeted, in the ongoing trade war with the U.S., because if the trade war between U.S. and China continues, these Chinese companies would then look towards South Korea for vital supplies.

Overall, South Korea has been Japan’s second-largest trade surplus nation, after the United States, with a surplus last year of around $20 billion. But now, South Korean President Moon Jae-in left little doubt that the economic battle lines were now drawn.

An Oped in Foreign Policy written by William Sposato also raises an important question that foresees more regional instability: ‘After the two countries’ foray over the Dokdo Islands, controlled by South Korea but claimed by Japan as Takeshima, could an overflight of the remote Senkaku Islands controlled by Japan but claimed by China as the Diaoyu Islands be next?’

(Naveed Qazi is author of six books. He is the editor of Globe Upfront and can be mailed at naveedqazi@live.com

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