28 August 2019

The Japan-South Korea Trade Dispute and Its Impact on Asia-Pacific

Escalating tensions between Japan and South Korea, manifested in a trade war, have adverse effects not only for both countries' economic and diplomatic relations, but also for the region at large.

By Avantika Deb

The ongoing trade dispute between Japan and South Korea is causing significant tensions between the neighbouring countries and across the wider Asia-Pacific region. In July this year, Japan announced tighter export controls on certain chemicals that are crucial to the production of semiconductors, which are the primary exports of South Korea. Without giving any details, Japan claimed the controls were necessary to protect their national security while mentioning that South Korean companies were not regulating their chemicals adequately, which implied that some of the chemicals might have been leaked to North Korea for military purposes. Shortly afterwards, Japan removed South Korea from its 'white list' of trusted trade partners, a move which resulted in increased trade regulations for South Korea.

At the root of this trade dispute lies deeply entrenched historical grievances between these two East Asian countries which should otherwise be natural allies. Japan's decision was most likely triggered by a South Korean Supreme Court ruling which asserted that Japanese companies Mitsubishi Heavy Industries and Nippon Steel Corporation must pay compensation to South Koreans for forced labour during Japan's 1910-45 occupation of the Korean peninsula. Wartime atrocities inflicted by the Japanese Army, particularly the issue of 'comfort women', have been a recurring subject of bitter exchanges between the two countries.

Japan's move caused significant discontent among not just South Korean government officials, but also the general public. Demonstrations were held in Seoul and Korean consumers boycotted popular Japanese brands like Uniqlo and Asahi. The number of South Korean tourists visiting Japan in July dropped to its lowest level since last year, and air carriers subsequently reduced their scheduled flights between the two countries. South Korean officials also announced plans to remove Japan from its own 'white list' of trading partners from September.

The ongoing trade dispute has had a major impact on not just Japan-South Korea relations, but also on the economic and geopolitical stability of the wider Asia-Pacific region. The two countries' economies are greatly interdependent; South Korean technology giants like Samsung and LG are heavily reliant on Japanese companies for supplies. About 60 percent of the world's DRAM memory chips, which are essential for the manufacture of electronic goods, are produced by South Korea. Trade restrictions by Tokyo could lead to significant disruptions to the global technology supply chain. Japan's export-based economy, on the other hand, is also struggling to find a replacement market for South Korea; countermeasures from Seoul are also likely to affect Japan's TV manufacturing companies and may even trigger a fuel shortage, according to some analysts. Additionally, the Japan-South Korea spat is helping normalise the weaponisation of trade, a dangerous recent trend in international affairs. The global financial system is already reeling from the ongoing US-China trade war, and countries are increasingly using national security concerns to justify protectionist trade policies and tit-for-tat measures. In one such example, China boycotted South Korean products in 2017 after the latter deployed an American anti-ballistic missile defense system to protect itself from North Korean missile tests, citing it as a threat to Chinese interests.

The geopolitical ramifications of the Japan-South Korea trade dispute are significant. In the absence of security cooperation between the two countries, there would be fewer checks on the threat of a nuclear-armed North Korea. In a worrying sign on 22 August, the South Korean government announced the scrapping of its military intelligence-sharing agreement with Japan. The General Security of Military Information Agreement (or GSOMIA), which had been in force since 2016, enabled information sharing between Tokyo and Seoul regarding North Korea's nuclear and missile program. With the Trump administration gradually reducing its presence in the Asia-pacific region, it is up to the regional players to act responsibly and jointly tackle security threats. In this respect, fallout from this trade dispute threatens the security of the entire region, especially given that Pyongyang has resumed its short-range ballistic missile tests since May this year.

China, meanwhile, has tried to play the role of a mediator by inviting the foreign ministers of the two countries to a trilateral meeting in Beijing. China appears to be attempting to capitalise on the situation, given that the trade dispute leaves a vacuum in the technology industry which Chinese companies, particularly its nascent semiconductor industry, might be able to fill. Geopolitically speaking, by assuming the role of a mediator, China might also be attempting to fill into the traditional role of the United States in East Asia, which has shown no particular interest in resolving the dispute between two of its closest allies in the region.

Needless to say, the Japan-South Korea trade war may spin out of control if not handled carefully. The fate of these two powerful economies are greatly reliant on how Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in decide to proceed on the issue. Further trade restrictions resulting in reduced security cooperation will have a severely detrimental impact on overall regional stability.

Avantika Deb is an India-based political and security risk analyst covering East Asia and Oceania.