Japan-South Korea Trade Tensions

The two major East Asian economies—Japan and South Korea have got embroiled in trade tensions. Japan has imposed restrictive trade measures on South Korea by tightening export control of three chemicals, including hydrogen fluoride gas, fluorinated polyimide, and photo-resists used in high-tech industry, citing national security concerns.

Japan has articulated its concern over the end use of those chemicals, which may also have military applications. Tokyo has reportedly expressed anxiety concerning South Korea’s implementation of UNSC sanctions and compliance with international export control regime pertaining to sensitive material. Furthermore, Japan has removed South Korea from Japan’s preferential ‘white list’ of trusted trading partners, implying stricter export screening for over 1,100 critical items. In case the restrictive trade measures continue to escalate, it may adversely affect the global supply chain.

Leading South Korean companies depend on Japan as a key supplier of chemicals which are important in the production of chips and cutting-edge screens. However, under the current restrictions, Japanese exporters need permission prior to sending materials to South Korea, which may take upto ninety days. South Korean companies are relying on the stocked chemicals for sustaining production. However, if the current trade tension remains unresolved, it may have adverse implications for the production of smart phones, computers, and other electronic items. Meanwhile, South Korea has also downgraded Japan from its ‘white list’ with fast-track trade status and Tokyo will be placed under a newly-designed trade category for nations who have not run export control systems in accordance with international principles. Additionally, Seoul has tried to pursue its case at the WTO’s General Council, hoping to garner international support.

If the trade tensions remain unresolved and Japan’s export controls disturb supply of strategic items, it will have an unfavourable effect on intermediate goods and have consequence in end-use industries. South Korea has downgraded its economic growth outlook for this year to 2.4-2.5 percent compared to the earlier 2.6-2.7 percent. The South Korean government has planned to inject around US$ 1.6 billion into the local industries to help them cope with Japanese export controls. Companies are also exploring to diversify their suppliers in China to sustain the supply chain.

South Korea argues that Japan is undermining its’ economy because of Tokyo’s inability to address the larger historical issues in the bilateral relations. The restrictive trade measures are politically motivated. Earlier in 2018, the South Korean Supreme Court had ordered Japan’s Mitsubishi Heavy Industries to pay compensation for forced labour during the colonial period, following which its’ assets were seized. In addition, two other Japanese companies including Nippon Steel Corp. and Nachi-Fujikoshi Corp. also had their assets seized in South Korea ensuing court orders to pay complainants for forced labour. Meanwhile the Japanese government maintains that all such claims were settled with the 1965 Treaty that normalised relations between the two countries.

The ongoing trade friction has percolated beyond the economic domain and affected security related matters between these two traditional US allies in East Asia. South Korea has suspended the General Security of Military Information Agreement with Japan. This is because Seoul finds it difficult to share intelligence with Tokyo who has raised doubts about Seoul’s managing of sensitive material. The Agreement was aimed at enabling faster exchange of information between the two US allies and enhancing security cooperation to better cope with North Korea’s nuclear threat. Before this Agreement, Japan and South Korea exchanged intelligence through the United States.

The two sides need to demonstrate political will to resolve outstanding issues in their bilateral relations and invest in addressing the prevailing trust-deficit as the current Japan-South Korea trade tensions does not auger well at a time when the larger US-China trade war is affecting the export-driven economies.

Both Japan and South Korea are important strategic partners of India and key actors in India's ‘Act East’ Policy. De-escalation of trade tensions is important in pursuit of free trade and open markets.

Script: Dr. Titli Basu, Strategic Analyst On East & South East Asia