Trade War Between Japan And South Korea

Japan moved to tighten controls on exports of hi-tech materials to South Korea this month, a move that has caught Seoul off guard. These materials are vital to the production of smartphones and other technologies, and South Korean tech giants, such as Samsung Electronics, SK Hynix and LG Display, are likely to be hit the hardest, as the South Korean firms are heavily reliant on Japan for these materials.

The move comes as the latest row between South Korea and Japan over the result of a South Korean court ruling that ordered Japanese firms to compensate the victims of forced labour during Japan’s colonization of the Korean Peninsula.

The seeds of the trade war between South Korea and Japan date back to Japan’s history of conquest over the Korean Peninsula for centuries. The legacy of Japanese colonization prior to the end of World War II has caused friction between Seoul and Tokyo over the issues of forced labor and ‘comfort women.’ Tokyo believes that all issues were settled under a 1965 treaty that normalized the relationship with Seoul and has been angered by a South Korean court’s recent order that Japanese firms must compensate wartime victims of forced labour.

In response, Tokyo will impose export restrictions on the three materials: fluorinated polyamides, used in smartphones; photoresists, used in semiconductors; and hydrogen fluoride, used in semiconductors. According to the Korea International Trade Association, the country sourced over 90% of fluorinated polyamides and photoresists from Japan last year, so this new restriction is likely to hurt South Korean companies in the short term.

However, some experts say that this is a move that can backfire on Tokyo down the road, and force these companies to rethink their supply chains in the long term. As once South Korean companies work through their stockpiles, in a few months, any further restrictions could force Seoul to rethink their supply chains and diversify sources. At present, Japanese products are chosen for their high quality but could be swapped out for U.S. or Chinese-made components.

Already the U.S.-China trade war and the concurrent technology cold war means that companies have started figuring out new ways to source production materials. Many manufacturers – not just American ones – are looking to dilute their China presence by taking an ABC (Anywhere But China) policy to new facilities. This newest trade war between South Korea and Japan can ultimately benefit China. At a time when companies are looking to decrease their reliance on China, the restrictions will create a power vacuum that China can fill.

According to June Park, who teaches at George Mason University in South Korea, “If we limit the ongoing trade conflict to a short-term squeeze on the South Korean semiconductor industry, we can anticipate that if South Korea’s performance on the global market is restricted, China may seize the opportunity to climb to the top. China certainly has motivations to up its game in the semiconductor industry … time will tell whether China becomes the sole beneficiary in this process.”

“Japanese companies would find it hard to restrict exports for an extended period, as Korean companies contribute to a considerable share of their earnings,” said Eo Gyu-jin, an analyst at eBEST Investment & Securities.

Even Chief Cabinet Secretary Suga appeared to acknowledge this was a risk in Japan’s strategy, saying the government would “closely watch the impact on Japanese firms”.

KB Securities analyst Kim Dong-won warned there could be  effects for other countries across the world. Samsung and Hynix together supply 70% of DRAM chips worldwide and 50% of NAND flash memory chips. “Japan’s export restrictions would lead to price hikes in parts and components, hitting not only Korean companies but other global handset makers,” he said.

“Japanese conservatives have for some time been calling on Abe to take bilateral measures that make South Korea feel pain, and that is exactly what he has done,” said Yoichi Shimada, a professor of international relations at Fukui Prefectural University.

Korea and Japan’s historical tensions are rooted in a decades-old wartime disagreement. It comes amid deep frustration in Japan over what Tokyo sees as Seoul’s failure to act in response to a South Korean court ruling ordering a Japanese company to compensate former forced laborers from World War II.

The tensions between the two countries do not look like they will be dissipating any time soon, as Korea still feels much grief and anger towards Japan’s actions. On one hand, the Korean people are justified as Japan’s treatment of them during colonization can be characterized as brutal. Japan’s treatment of colonies is infamous as forced labor and the use of comfort women– a practice Japan continues to deny– throughout various parts of Asia brought suffering to the colonized. On the other hand, South Korea must try to move on.
Though the trade war between South Korea and Japan will have less of a global effect than the trade war between China and the United States, it does still have the ability to cripple parts of both countries’ economies. Historic grave mistakes have been made, but new treaties and agreements have been signed and agreed upon as well. Apologies must be given, and the countries must work together for a better future, especially with China close to both countries’ shores.