The Economic Damage from the Japan-Korea Trade Tension

Japan and South Korea are frequently referred to as ‘economic miracles’ as a consequence of their remarkable pace of economic growth achieved after World War II (Zang & Baimbridge, 2012). South Korea has transformed from one of the poorest developing countries to a newly industrialized country in just three decades by sustained high rates of economic expansion. While Japan has achieved amazing economic growth to become the first country to move from less-developed to developed economy status in the post-World War II era. As the two countries originally were neighbors and both lacked natural resources after the war, the trade between Japan and South Korea dramatically expanded brought by the diplomatic normalization in 1965. Along with it, investments and personnel exchanges also increased.

But lately, the tension between these two got flare-up. 2020 is almost over means the relationship has been in free fall for over two years. The heart of this tension centers around Japan’s occupation of the Korean Peninsula from 1910 to 1945. In 1910, Japan annexed Korea and turning it into a colony. In the late 1930s, Japan was starting to mobilize for war, so it began to force Korean people to work in factories and mines, or even enlist as soldiers. Finally, Japanese control of the peninsula ended in 1945 when it was defeated in the war. But the colonial period remains firmly planted in the collective memory of Korean people. During that time, thousands of so-called ‘comfort women’ were forced into sexual slavery and thousands of more people were coerced to work without pay (Maizland, 2019).

At the end of 2018, turns out that this old problem has been an open wound in the bilateral relationship between these two. South Korea’s top court demands compensation from Japanese companies to be given to forced wartime laborers and their families (Ezell, 2020). But Japan refused to comply with the court order. They argued that the matter has settled when the two countries established official diplomatic ties in 1965 and provided more than $800m in Japanese financial help (“South Korea and Japan’s feud explained”, 2019). They also fly an accusation to Korea for violating the 1965 Treaty by reopening claims for compensation.

In July 2019, Japan made decision to place national security restriction on the export of three chemicals such as fluorinated polyimide, resist polymers, and hydrogen fluoride to South Korea which are critical for the production of semiconductors and smartphone screens. The Japanese government claims that these sensitive technologies had been illegally sent to North Korea, Syria, and Iran for the use of making weapons. Japan also followed up the action by removing South Korea from the ‘white list’ of trusted partners, causing more than 1.100 products eliminated from the list. While Japan claimed its decision was a pure technocratic law enforcement issue, South Korea insisted that Japan’s move has political overtones and has led to higher costs, unnecessary delays, and disruptions to global supply chains. The outlook for both economies is not particularly great and would certainly not benefit either country, furthermore crushed South Korea’s tech industry. This because of Japan produces 90% of the world’s supply of fluorinated polyimide and 70% of global hydrogen fluoride production. Also, Japan supplies 90% of South’s Korea fluorinated polyimide imports and 44% of its hydrogen fluoride imports (Ezell, 2020). Those are the chemicals that South Korea’s tech giants, like Samsung, LG, and SK Hynix rely on. Even though the relative value of South Korea’s import of these three chemicals is just $33.6m each month, they export $8.4b worth of semiconductors made of those each month. It means that South Korea’s export-loss exposure is 250 times greater than Japan’s.

Meanwhile, Japan is also not at an advantage. South Korea responded to Japan’s action by removing Japan from its own ‘white list’ and announced its intention to withdraw from GSOMIA (General Security of Military Intelligence Agreement). Moreover, over 11% of Japan’s exports to South Korea are in the semiconductor sector. So if Japan’s restriction harms South Korea’s semiconductor sector, then it could harm its own ICT companies as well. However, Japan’s automotive, retail, tourism, and beer sectors have been hit the hardest in this tension. That is because South Korean consumers have boycotted Japanese products and travel to Japan. One of the products is Japanese beer, the share fell 49.2% in 2019 and has essentially stopped since August. For the automotive sector, a few Japanese brands like Toyota and Nissan experienced sales slumps of 36.7% and 39.7% for the year.

The tension was successfully concentrated to prevent spreading to both trade relations. At the end of 2019, things looked to be getting better not only renewed the GSOMIA but also agreed to pause its WTO action. However, in February 2020 it is Japan who submitted a case to WTO, challenging South Korea’s government to its shipbuilding industry. South Korea responded in June by reopening its case against Japan. The sentiment in both countries finally formed the unwillingness to compromise citizens even in the face of economic ruin.

References

Ezell, Stephen. (2020, 16 January). Understanding the South Korea-Japan Trade Dispute and Its Impacts on U.S. Foreign Policy. ITIF. https://itif.org/publications/2020/01/16/understanding-south-korea-japan-trade-dispute-and-its-impacts-us-foreign

Maizland, Lindsay. (2019, 5 August). The Japan-South Korea Trade Dispute: What to Know. CFR. https://www.cfr.org/in-brief/japan-south-korea-trade-dispute-what-know

South Korea and Japan’s feud explained. (2019, 2 December). BBC News. https://www.bbc.com/news/world-asia-49330531

Zang, Wenyu & Baimbridge, Mark. (2012). Export, imports and economic growth in South Korea and Japan: a tale of two economies. Applied Economics, 44(3), 361-372. http://dx.doi.org/10.1080/00036846.2010.508722

Author: Anindhita Putri

38 thoughts on “The Economic Damage from the Japan-Korea Trade Tension

  1. Good and clear in summary for the subject above
    Suggested to submit a proposal how to find the solution at the end article in term of some alternatives based on previous happened in other countries relation

  2. Like almost all trade wars, I think this one has no winners and the economic outlook for both countries will just worsen at the end.
    Good article!

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