Japan and South Korea have been engaged in a trade dispute following Japan's decision to tighten export control of several high-tech materials to South Korea on July 4, 2019. The materials in question are Fluorinated Polyimide, Resist, and Hydrogen Fluoride (etching gas); materials which are essential for the production of smartphones and LED displays and semiconductors for South Korean tech manufacturers. South Korea is dependent on Japan for these materials. ^[1]

Background

Japan and South Korea have long been embroiled in a variety of disputes, key among them are disputes related to historical issues.

In October and November 2018, South Korea's Supreme Court issued a ruling order to Nippon Steel & Sumitomo Metal Corporation and Mitsubishi Heavy Industries to compensate to South Koreans who were victims of forced labor by these companies during the Second World War. ^[2] The court ruling was denounced by Japan, which claimed that all matters of compensation was settled in 1965 when both established diplomatic ties and that the ruling is in violation of the treaty. ^[3] During the November ruling the court stated “The treaty does not cover the right of the victims of forced labor to compensation for crimes against humanity committed by a Japanese company in direct connection with the Japanese government’s illegal colonial rule and war of aggression against the Korean Peninsula”. The companies refused to follow the ruling on the grounds of that the issue was settled in the 1965 treaty. On January 2019, a South Korean court ordered local assets of Nippon Steel to be seized at the request of the plaintiffs. ^{[4] [5]} On March, a South Korean court ordered Mitsubishi's assets to be seized. ^[6] On May 20, 2019, Japan announced it would be seeking an arbitration panel to settle the dispute with South Korea under the term of the 1965 treaty. ^[7] Both countries failed to make a breakthrough on their disputes during the 2019 G20 Osaka summit. ^[8]

Export control and follow on events

On June 30, 2019, Japan announced it will tighten export of several high-tech materials (Fluorinated Polyimide, Resist, and Hydrogen Fluoride) to South Korea and will be put into effect on July 4. ^[9] Specifically, the Japanese government will remove South Korea from a list of "white countries" and exporters will have to apply for individual export license in order to export these materials to South Korea: which can take up to 90 days for approval. The Japanese government has also called for public opinion on the matter. ^[10] The "white countries" is a list of countries that are deemed to have strict export control regime and thus face minimum trade restrictions. The reason for South Korea's removal from the list is said to be due to deteriorating trust between Japan and South Korea. The removal will go into effect in August. ^{[11] [12]} South Korea protested the restriction and announced that they will file a complaint to the World Trade Organization (WTO). ^[11]

Following Japan's announcement on the export curb, calls for boycott of Japanese products have risen in South Korea. ^[13] President Moon Jae-in pledged to fund local industries to offset their dependency on Japan. ^[14] To circumvent the export restriction, South Korean chip makers, such as Samsung Electronics and SK Hynix, have sought to acquire the materials from other countries, such as Taiwan and China. Experts have estimated that these chip makers may have a couple months worth of stockpile for the materials and that finding alternative suppliers will be difficult due to South Korea's large dependency of Japanese suppliers for said material. ^[15]

Japan further indicated that the export control was due to concerns that South Korea was transporting the high-tech materials to North Korea. South Korea rejected the claims and claimed that Japan's export control was implemented as a retaliation for the forced labor court ruling. ^[16]

A bilateral meeting was held in Tokyo between the two countries on July 12, but both nations failed to reach a consensus. ^[17] South Korea requested further talks be held, but was rejected by Japan. ^[18] Japan, instead, said it will be seeking South Korea's agreement to an arbitration to settle the forced labor compensation dispute by its deadline July 18. ^[19] South Korea rejected the arbitration request. ^[20]

On July 19, a South Korean man conducted a self-immolation protest outside of the Japanese embassy in Seoul. He died hours later in a hospital. According to the man's family his father-in-law was conscripted as a force laborer during Japan's colonial rule over the Korean peninsula. ^[21]

On July 24, both countries presented their case at the WTO meeting although neither side gained any support from other WTO members. ^[22] Japan announced it will decide on August 2 to remove South Korea from the "white countries" list. ^[23]

On August 2, Japan approved of the order to remove South Korea from the "white countries" list, making South Korea the first country to be removed from the list. The removal will go into effect on August 28, 2019. ^{[24] [25]} South Korea denounced the removal, with President Moon Jae-in calling the action reckless and unfair. ^[26] A senior South Korea official said the country may consider scrapping the General Security of Military Information Agreement (GSOMIA) with Japan but said a "cooling-off period" will be needed before a solution is decided. ^[27]

Reactions and views

South Korea

The South Korean government's stance on the dispute is that Japan's export control is groundless and unfair. They argue that it has a sufficient catch-all control system and the lack of communication was on Japan's end. They further stated that Japan's export control is in violation of international law and will be both disruptive and harmful to both countries economies and the global market. The South Korean government urged Japan to withdraw its export control as they claim would damage their relationship further. ^{[28] [29]} President Moon Jae-in also claimed that Japan's export curb will backfire and negatively affect Japan more as South Korean companies will look for materials elsewhere or localize production. ^[30]

In response to Japan's export control, anti-Japanese sentiment has risen; with many South Koreans participating in boycotts of Japanese products. A poll conducted by Realmeter involving 504 adults reveal that, as of July 24, 62.8% of respondents say they are boycotting Japanese goods. ^{[31] [32]} Another poll conducted by Gallup Korea involving 1,005 adults found that only 12% held favorable views on Japan, while 77% have negative views. Likewise the poll found that 61% of respondents blame the Japanese government for the conflict, while 17% hold the South Korean government responsible. ^[33]

The Liberty Korea Party, while calling on Japan to remove the export restriction, have also criticized President Moon's handling on the issue. Rep. Na Kyung-won claimed that Moon's administration have exacerbated the issue and have also damaged relationship with the US to the point where US will not intervene. ^{[34] [35]} The LKP called for the government to focus on finding a diplomatic solution with Japan rather than a take hard-line stance. ^[36] South Korea's major political parties have agreed to cooperate with each other to tackle the trade dispute. ^[37]

Some South Korean media have expressed concerns about the trade dispute; such as the large dependency on Japanese materials, the dispute prolonging, doubts about US intervention, and the government having few options to tackle the dispute. ^{[38] [39] [40] [41]} The Korea Times editorial have criticized the Blue House's response to the issue. ^[42]

Japan

The Japanese government's stance on its export control is that it's implementation is due to deteriorating trust with South Korea. ^[10] They argue that, while South Korea's catch-all control covers WMD-related goods, it has never clarified whether it covers conventional weapons as well. The Japanese government also claimed that South Korea has repeatedly postponed policy dialogues between the two nations. Japan also maintains that South Korea will simply be treated as a normal trade partner and will not get incentive measures as a "white country", the change does not break international law and that it's not an embargo. ^{[43] [44]}

According to a survey conducted by Asahi Shimbun, 56% of respondents support the export control while 21% did not. Among those who support Prime Minister Shinzō Abe, 74% of respondents support it. Among those who disapprove of Shinzō Abe, 43% say they support the export control while 36% say they're against it. ^[45]

On July 26, 2019, a group of 75 mostly Japanese citizens criticized the Japanese government for treating South Korea “almost like an enemy.” The group created an online petition which called for the Japanese government to adopt a cool-headed approach with South Korea and the immediate removal of the export control. ^[46]

Others

The dispute between two of its allies has raised concerns for the United States. President Donald Trump has offered to get involve at President Moon Jae-in's request. ^[47] On July 20, 2019, U.S. national security adviser John Bolton departed for Japan and South Korea to discuss about the trade dispute among other issues. ^[48] US Secretary of State Mike Pompeo left for Bangkok, Thailand to meet with Japanese and South Korean foreign ministers. The U.S. also urged both sides to sign a "standstill agreement" to give either side more time to negotiate. ^{[49] [50]}

There are concerns that the trade restriction will have a domino effect on global supply chain as tech companies dependent on South Korean semiconductors will also be adversely affected. ^{[51] [52] [53] [54]} There is also concerns that the trade dispute could jeopardize the China–Japan–South Korea Free Trade Agreement. ^[55]

Some observers have pointed out that the dispute may have been exacerbated by both of the countries' leaders to drum up political support. During the beginning of the trade dispute Prime Minister Shinzō Abe's ruling Liberal Democratic Party were gearing up for Upper House election on July 21. At the same time, President Moon Jae-in faced criticism for his economic policy and lack of progress in relationship with North Korea. Observers noted that both leaders are unlikely to back down from the dispute due to political pressure. ^{[56] [57] [58] [42] [59]}

Japanese and South Korean media reported that the General Security of Military Information Agreement may be in jeopardy because of the dispute. ^{[60] [61]}

Effects

South Korea

South Korean stocks experienced loses following Japan's announcement to tighten export of several high-tech materials. On July 8, 2019, KOSPI and KOSDAQ reportedly fell by more than two percent and nearly four percent respectively. ^[62] Samsung electronics lost 16 trillion won (about $13 billion) from its market cap while SK Hynix lost 1.5 trillion won (about $1.2 billion). ^[63] Following Japan's approval to remove South Korea from its "white countries" list (along with President Trump's announcement to tariff more Chinese goods on August 1), KOSPI fell by 19.21 points, or 0.95%, finishing below to 2,000 point-threshold at 1,998.13 points. Share loses were reported among various tech, financial and chemicals firms. The price of South Korean won sunk at 1,198.0 won against the U.S. dollar, lower than its previous close at 1,188.5. ^{[64] [65]}

The trade dispute (along with the China–United States trade war) is predicted to have a negative impact on South Korea's economy. Several financial services companies have lowered their forecast on South Korea's 2019 economic growth to around two percent or lower. ^{[66] [67] [68]} The Bank of Korea has lowered South Korea's economic growth from 2.5% to 2.2%. In response to the economic forecast, they have also lowered interest rate from 1.75% to 1.5% on July 18, 2019. ^[69]

Japan

Boycotts of Japanese products and services in South Korea have affected Japanese brands and tourism to Japan. On July 29, 2019, a Korean credit card company reported that credit card sales from Muji fell by 33.4%, ABC Mart sales fell by 11.4% and Daigaku Honyaku Center fell by 55.3%. ^[70] Uniqlo sales dropped by 40% and announced it will close down its Jongno 3-ga store in central Seoul. ^[71] Similarly, credit card spending from South Koreans in Japan have also decline. JTB Corporation reported that the number of Koreans visiting Japan declined by about 10%. ^[70] Some South Korean airlines announced they will reduce flights or suspend direct routes between major Japanese and South Korean cities. ^[72]

References