The Other Trade War
Overshadowed by the US-China trade war, there’s another serious trade altercation with equally grave consequences for the global economy unfolding at this moment. In July 2019, Japan announced it would limit exports of three chemicals, fluorinated polyamides, photoresists, and hydrogen fluoride, that are crucial to producing semiconductors. Under new laws, Japanese companies would need a license for each chemical to export, a process that could take up to 90 days. Semiconductors, one of South Korea’s top export item, are significantly affected and a delay in their productions could pose a significant threat to its economy. An important feature of these new regulations pointed out by the Koreans is that they are targeted exclusively at South Korea. Neither Taiwan, home to the largest semiconductor company Taiwan Semiconductor Manufacturing Company, nor China, where most semiconductors are created, are on the banned list or subject to any other regulation.
Japan claimed it was setting such restrictions because it believed South Korea was leaking sensitive information to North Korea (but did not produce any hard-hitting evidence of the sort). They insisted that certain South Korean companies were inadequately managing the chemicals, implying that some were being leaked to North Korea for military applications. Yet Tokyo did not indicate which companies were guilty of these acts nor were any specific instances of these leaks provided. Japan also did not explain why South Korea would be equipping a hostile nation with capabilities or materials to better attack South Korea. South Korea denies any claims of mismanagement and has requested the United Nations to investigate Japan’s claims to prove their innocence.
After South Korea denied the accusations, Japan subsequently removed South Korea from its “white list,” a collection of trusted trade partners in August. This would lead to even more delays in exports of items like auto parts and household electronics to South Korea. Japan said that the new policy was in line with concerns of national security as well as a new policy of treating South Korea in the same manner as China and other Asian neighbors, trade-wise.
South Korea then filed a complaint with the World Trade Organization about Japan’s export controls and removed Japan from its own whitelist of trusted trade partners. It also announced that it would not renew the General Security of Military Information Agreement (GSOMIA), a bilateral arrangement that facilitates exchanges of sensitive intelligence, including about North Korea’s nuclear and missile programs (Though, they renewed it later on in December 2019)
For obvious reasons, South Koreans are furious at Japan. They demonstrate their dissatisfaction by boycotting anything Japanese such as Japanese beer, clothing brands like Uniqlo, and tourism to Japan. The South Korean government is also looking into removing Japan’s preferred trade partner status and potentially creating a new low-tier category just to isolate the country from future benefits.
When discussing the trade restrictions in a cabinet meeting, South Korean President Moon Jae-in stated: “We will never again lose to Japan…As we have already warned, if Japan intentionally strikes at our economy, Japan itself will also have to bear significant damage…”
Deep historical roots
This trade war is something that hurts both countries, including the one that initiated. Replacing each country’s trade privileges with export controls makes little economic sense. Economics 101 would tell us it does not make any economic or diplomatic sense and isn’t something that any reasonable economic agent or actor would do. So in light of a lack of reason, we turn to emotion, the most unreasonable agent of them all. The trade war is really more about historic grievances than national security or economic protection. When South Korea was subject to Japan’s colonial rule from 1910 to 1945, laborers from South Korea were forced to work in Japan. In 2018, South Korea’s Supreme Court made a decision that ordered several Japanese companies, including Mitsubishi Heavy Industries and Nippon Steel, to compensate South Korean families whose ancestors were forced to supply labour for World War II war efforts, such as building ships and aircraft for Japan without pay at a Mitsubishi shipyard and machine tool factory in Nagoya in 1944. After these companies refused to follow the court order, in January of 2019, the Daegu District Court approved a request by the plaintiff to seize 81,075 shares held by Nippon Steel in the POSCO-Nippon Steel RHF Joint Venture (PNR), part of 2.34 million shares worth about 9.78 million USD owned by Nippon Steel and in March of 2019, Daejeon District Court approved a seizure of Mitsubishi Heavy Industries trademark and patent assets. These decisions infuriated the Japanese government, claiming that the issue was settled under the 1965 treaty of Normalization of Diplomatic relations, in which they gave Seoul $500 million in aid to normalize their relationship.
While Japan feels that they have done enough to apologize for its actions in World War II, South Koreans still feel that they haven’t truly received an actual, heartfelt apology from Japan. Japan has given out previous apologies but South Koreans feel that they aren’t genuine: Japanese Prime Ministers have rejected previous apologies, the Japanese government has failed to acknowledge that South Korean “comfort women” were forced into prostitution, and the Ministry of Education approves textbooks that either glance over or refuse to mention wartime atrocities committed by the Japanese. In fact, 24% of South Koreans still believe that Japan has never apologized for its colonial rule while 58% believe Japan has not apologized sufficiently.
Dissatisfaction with the Japanese’s revisionist approach to their colonial history is not unique to South Korea. Other countries that were affected by Japan’s actions in World War II also feel that Japan has never fully and truly apologized for their actions. A comfort woman from Taiwan stated, “It’s unacceptable that the Japanese government still refuses to apologize for what it did”, while previous Taiwanese President Ma Ying-jeou declared that, “It is the responsibility of the Japanese government to admit its mistakes and apologize … The battle is not over yet and it is regretful that the Japanese government still refuses to face its mistakes.”
The economic consequences of the spat are already becoming apparent. Rising tensions, together with a broader economic slowdown, caused South Korean exports to Japan to fall by 6.2 percent year on year in August. Over the same period, Japanese car sales in South Korea plummeted by 57 percent, owing largely to consumer boycotts, and the number of Korean visitors to Japan dropped by half.
Japan and South Korea are the world’s 4th and 5th largest exporters, respectively, and major players in global tech supply chains. South Korean companies Samsung and SK Hynix provide 60 percent of the world’s DRAM memory chips, which are used in many electronics that are used every day. A shortage could affect everything from iPhones to laptops and potentially slow down an already cooling global economy. At a time of rising protectionism worldwide — exemplified by the protracted U.S.-China trade war — and heightened geopolitical risks, a Japan-South Korea trade conflict is the last thing the global economy needs.
The best chance of convincing Abe and Moon to compromise lies with intervention by the United States. But U.S. President Donald Trump’s administration has so far taken a largely hands-off approach to the dispute, which it seems to have assessed solely in terms of U.S. economic interests. This misses the tremendous strategic importance of ensuring continued cooperation between two major Asian allies, both for managing North Korea’s nuclear ambitions and for coping with growing Chinese influence.
In fact, China is already seizing the opportunity created by the Japan-South Korea rift to expand its influence, including by playing the role of mediator. At a trilateral meeting of foreign ministers in late August of 2019, China encouraged Japan and South Korea to engage in continuous dialogue to resolve their differences.
The Korea-Japan trade war could harm the already-slowing global economy, but its effects could run much deeper. The most obvious concern is how the trade war is helping to normalize the use of national security to justify trade policy. The US already set an example by citing national security concerns to threaten tariffs on auto imports from Japan and the EU unless they negotiated trade deals with the US. While the tension right now is between two US allies, the weaponization of trade could become a larger threat for the US if its adversaries use trade to target US allies.
References are hyperlinked in the article.