Tokyo on Friday revoked South Korea’s preferential status as a trade partner for the purchase of dual-use materials vital to Korean industry. Most of the machinery and components South Korea uses for its auto and semiconductor production is believed to fall under this category. This drives bilateral relations to their lowest ebb in recent memory and raises questions over the grounds for the Japanese action.
Seoul-Tokyo relations have not been rosy since Prime Minister Shinzo Abe took power in 2012 – partly due to his support from Japan’s far-right, which itself utilizes anti-Korean sentiment. Since leftist Moon Jae-in took power in Seoul in 2017, the relationship has worsened further.
Last year, Moon struck down a “final and irreversible” agreement that was struck by his predecessor Park Geun-hye and Abe over “comfort women.” Last October, South Korea’s Supreme Court ruled that Japan’s steelmakers had to pay 100 million won (around $85,000) compensation each to four South Koreans who were victims of wartime forced labor. The ruling was seen as a direct challenge to the diplomatic understanding that all such claims were settled "completely and finally" under a 1965 treaty that established diplomatic relations between the two countries.
The concern in Japan is that the verdict could open the floodgates for other victims and their relatives, totaling more than 220,000, to file lawsuits against an estimated 300 Japanese companies accused of using forced labor during the colonial era. The potential reparations could swell to $20 billion or more.
A South Korean court in January approved the expropriation of some of Nippon Steel's equity holdings in PNR, a joint recycling venture with South Korean steelmaker Posco, to fund payments to the plaintiffs, prompting fears that other Japanese assets could be seized in the future.
"The Japanese government won't just watch South Korea seize Japanese assets," said Hajime Izumi, a professor of international relations at Tokyo International University, adding that further asset seizures by South Korea will be met by even tougher measures by Japan. "Japan would demand a return of any seized assets, no matter how long it takes, [whether] 100 years or 1,000 years.
The United States has expressed concerns that the deepening divide between its two major Asian allies could impact its ability to deal with threats from North Korea. A senior U.S. official has urged Tokyo and Seoul to sign a "standstill agreement" that would prevent further escalation of the dispute to allow talks to take place. But Japan's chief cabinet secretary, Yoshihide Suga, denied the report, saying "there is no such thing."
Is Tokyo’s action groundless?
South Korea is the first country ever to lose its position on Japan’s “white list” of preferred export destinations, gaining the status in 2004. Japanese companies will now need to obtain case-by-case approval from Japan’s trade ministry before exporting to Korea.
According to the Asahi Shimbun, that could result in months of processing paperwork for every export. Friday’s decision follows a July 4 move that tightened controls on exports of three chemicals essential for making semiconductors and flat panel screens used in smartphones and TVs. By choking off supplies of the chemicals -- Japan's market share for two of them stands at more than 90% -- the Abe administration was essentially taking aim at the engine that powers South Korea's high-tech economy.
The July 4th move, which took place on the day that campaigning kicked off for Japan's upper house elections, launched a bitter trade dispute between Japan and South Korea that has worrying implications not just for their domestic economies, but also for a global trading system already roiled by U.S.-China tensions. Financial analysts have warned that the global supply chain for tech equipment also could be disrupted.
Samsung Electronics, South Korea's biggest company, is already feeling the heat, as are major chipmakers like SK Hynix. "It is one of the worst situations we have ever had," said a senior Samsung official, who asked not to be named. "Politicians take no responsibility for the mess, even though it has almost killed us."
Lee Jae-yong, Samsung's vice chairman, visited Japan in July hoping to receive assurances that supplies would continue to flow unabated. But when he returned to Seoul, Samsung sent a letter to local vendors asking them to stockpile three months' worth of the Japanese chemicals. Meanwhile, South Korean companies are scrambling to find other sources of the materials.
Samsung acknowledged the challenges as it reported its financial results on July 31. "We are facing difficulties due to the burden of this new export approval process, and the uncertainties that this new process would bring," Vice President Lee Myung-jin said during a call to discuss its second quarter earnings. "The visibility is low."
Seoul has criticized Tokyo’s action, calling them retaliation for its court rulings and have taken the dispute to the World Trade Organization, where its representatives argued that the curbs constitute unfair retaliation for the court rulings. This, they say, runs counter to the principle of free and fair trade.
Tokyo insists the measure addressed security concerns, claiming there were “improper incidents” surrounding exports to South Korea. It has not given details, but the claims are probably not completely without merit. Some information has leaked out.
Former government official, economist and author Noriya Usami argues on his blog that China is procuring materials from South Korea to build their own high-tech industries. He points out that South Korea has a poor record of tracking materials exported to that country and notes that there are materials China seeks which Japan limits exports of.
So, he writes, China seems to be procuring them from South Korea in a roundabout fashion. (OP note: the other article mentions worries about North Korea instead of China.)
On a TV program on July 4, Kōichi Hagiuda, a Deputy Chief Cabinet member, argued vaguely that restrictions on exports to South Korea were necessary because in the past, shipments were unaccounted for.
Then, on July 5, on conservative Fuji Television, an unnamed ruling party member was reported to have said that large amounts of fluorine products shipped to Korea, which could be used to make chemical weapons, had not been properly accounted for by Seoul.
Of the three chemicals subjected to Japan's export restraints, hydrogen fluoride is the most sensitive. Not only is it used to produce semiconductors, but also in the enrichment of uranium and production of the lethal gas sarin.
However, Abe has made guarded remarks indicating that the trade measures are responses to Seoul’s refusal to interfere with the court decisions.
While seemingly agitated in a debate broadcast on Fuji Television on July 7, Abe said: “Concerning the conscripted labor problem. If [Korea] is a country that can’t uphold an agreement, then, of course, we can’t be sure they are conducting proper management of trade [from a national security perspective].”
Fight and win
The trade tensions come as both South Korea and Japan are facing slowdowns in their economies. Neither side wants new headwinds, given the challenge of the trade war and the deceleration of the Chinese economy. But it appears they are also determined to teach each other a lesson.
This is a far cry from the relationship envisaged by the two countries' business leaders: a pair of U.S. allies forming an integrated market of 180 million people that can compete against China.
"The 21st century is said to be the Asian century, but which country will be leading the world?" asked Nobuya Takasugi, a counselor at the Asia-Eurasia Institute who was a business executive in South Korea for 19 years. "Is it OK to allow China to become the leader? Should Japan and South Korea not work together and take leadership?"
South Korea provides highly educated, international talent for Japan, which faces a labor force shortage amid an aging and shrinking population. Samsung symbolizes South Korean industrial strength in designing the Galaxy, a smartphone that stands head-to-head against Apple's iPhone. But it depends on Japan for technology and components to bring such products to market.
The tit-for-tat economic reprisals are not benefiting anyone -- and may hurt the Japanese suppliers of the three chemicals, who will see increased competition if the Moon administration's plans to jump-start domestic production are successful. The chemical exports are estimated to be worth about $500 million a year, a relatively small market that Tokyo may be willing to sacrifice for Japan Inc. But the business community is not happy.
"No industry wants to see its fate depend on a government policy," said Sota Kato, research director at the Tokyo Foundation for Policy Research and a former senior official at METI. "The Japanese semiconductor industry doesn't have its own lobbying organization because the Japanese government never previously resorted to a trade war; but if it does, then the industry needs a way to protect its interests."
He was referring to an open letter issued by the U.S.'s largest tech industry groups on July 24, pressuring Tokyo and Seoul for a negotiated solution to the dispute. Japan has economy-wide groups like Japan Business Federation, known as Keidanren, but lacks an industry group that actively lobbies the government.
However, some in Japan's chip equipment industry downplayed the impact of the trade spat. Even if South Korea loses "white country" status, it would simply be on the same footing as China, Taiwan and Singapore, said Ken Sasagawa, vice president of accounting at Tokyo Electron, a major chipmaking machinery supplier to Samsung Electronics and SK Hynix. "We have been able to deliver a substantial quantity of machines to these countries in a timely and precise fashion," he told reporters on July 26.
The restrictions may be hurting South Korea's economy already. Bank of Korea Governor Lee Ju-yeol cited Japan's export restrictions as a factor behind the central bank's decision to cut its growth forecast to 2.2% from an earlier projection of 2.5%.
"If export restrictions are realized and expanded, we cannot say that its impact on exports and the economy is small," Lee said July 18. "It is not desirable that it expands and worsens. It needs to be resolved."
But South Korea's politicians are encouraging the anti-Japan sentiment, betting it will help boost their popularity ahead of general elections next year. Cho Kuk, a high-ranking official in the Moon administration, leads the trend.
"Japan's state power is apparently stronger than that of South Korea," Cho said in a Facebook post. "But let's not be afraid of this. South Korea's state power has grown up to the level that cannot be compared to 1965 when the South Korea-Japan treaty was signed."
He said diplomacy is the best option for ending the battle. "But, if we cannot avoid legal and diplomatic battle, we should fight and win," he said.
The ruling Democratic Party of Korea set up a committee to deal with the matter, titled "The Special Committee on Japan's Economic Invasion," criticizing Tokyo of using a "suicide bombing" strategy that hurts its own economy.
Such rhetoric suggests that politicians in both countries are unlikely to back down any time soon.
"I can't foresee a short-term resolution to this. It's clear that both sides made miscalculations in letting this get to this point, but are now so invested that backing away is going to be politically damaging," says Friedhoff.
A picture that says it all:
Japanese foreign minister Taro Kono (right) and South Korean foreign minister Kang Kyung-hwa (left) in Bangkok Friday. pic.twitter.com/6nodDx9nN3— Mitsuru Obe (@mit_obe) August 2, 2019
Some more tweets:
South Korea's presidential office says it will take "comprehensive countermeasures" against Tokyo's decision to remove Seoul from its 'whitelist', including reconsidering its military information sharing agreement with Japan pic.twitter.com/ytIkqUQvOX— Joseph Kim (@josungkim) August 2, 2019
South Korea's finance minister says Seoul will reciprocate Tokyo's move and remove Japan from its trusted trade partner list pic.twitter.com/8nMbeVcJYQ— Joseph Kim (@josungkim) August 2, 2019
South Korean President Moon Jae-in tweets, "We will not lose to Japan again" https://t.co/Af8YYkMz50— Joseph Kim (@josungkim) August 2, 2019
source: @mit_obe, asiatimes , asia.nikkei, josungkim 2 3
I mixed two good articles that explain the rising tension (and boycotts) between Japan and South Korea since last October and alas give background on the latest foul reactions against Japanese K-pop idols as well as Korean celebrities promoting in Japan or even positively mentioning anything Japanese.