Asian scramble: how the export standoff of Japan and South Korea could affect world trade

Trade contradictions with Japan have already affected the South Korean economy. The authorities of the republic lowered the forecast of economic growth from 2.5% to 2.2%, and the Bank of Korea for the first time since 2016 lowered the interest rate to 1.5% per annum.

In early July, the Ministry of Economy, Trade and Industry of Japan announced the introduction of export restrictions on South Korea. The report, published on the website of the department, says about removing the republic from the list of “white countries”, for which the export control passes under a simplified scheme. The official statement also reported on "undermining the trust relationship between Japan and Korea in the field of export control and regulation."

Thus, the Japanese authorities claim that high-tech raw materials were sold to Korea without proper control of companies, so it was decided to tighten the regulation of supply.

The Ministry in its official statement did not name either Japanese suppliers or Korean companies that violated the existing export regulations. However, it is assumed in Tokyo that South Korea could resell raw materials imported from Japan to the DPRK. This was reported by the Japanese newspaper "Asahi" with reference to an anonymous government representative. In addition to the existing sanctions, Japan may impose similar restrictions on all materials that can be used in the military industry.

The South Korean government connects the introduction of export restrictions with the confiscation of property of the Japanese company Nippon Steel & Sumitomo Metal. In the autumn of 2018, the Supreme Court of the Republic of Korea ruled that the corporation must pay compensation in the amount of $ 89 thousand to four Koreans. During World War II, Sumitomo Metal used the forced labor of these workers. In 2019, the Korean Supreme Court rejected the appeal of the Japanese side.

“We believe that the Japanese move is a clear act of economic retaliation,” said Hon Nam Gu, Korean Economy and Finance Minister, in an interview with the Korean CBS radio station.

Threat to the economy

South Korean President Moon Zhe Ying predicted negative consequences for the Japanese economy due to the loss of such a large importer of raw materials like South Korea. He said that export restrictions would spur South Korean production of materials needed in high-tech production, the Yomiuri newspaper reported.

Denis Shcherbakov, head of the HSE and Kyonha University joint program on Economics and Politics in Asia, noted in an interview with RT that it is possible to establish these materials in Korea in the medium term. However, the expert did not rule out that at the initial stage, Korean companies will take the path of searching for alternative suppliers.

“Since these materials can be used in the manufacture of dual-use products, the selection of new supplier companies will be slow. Now various countries are ready to help Korean companies, including Russia. However, in many of them there are the same legislative opportunities as in Japan, that is, at any time to stop the export of these materials, ”said Shcherbakov.

Measures to restrict exports have caused a negative reaction from not only Korean businessmen and politicians, but also consumers. According to a survey by the Korean Sociological Agency Realmeter, 66.8% of the population is ready to join the boycott of Japanese goods.

Curiously, Japan in trade with Korea for a long time retains a significant surplus. According to the South Korean Association of International Trade, after the signing of a trade agreement between the two countries in 1965, the country never registered a trade surplus with Japan. In just 54 years, the trade deficit was $ 646 billion, and in the first five months of 2019, it was $ 8.5 billion. Last year, this figure reached $ 24.8 billion, which was the maximum among all trade partners of the Republic of Korea.

Experts believe that the emerging trade war may have an impact on both countries, whose economies are highly interconnected. However, Japan has a significant trade surplus, so Korea may suffer more.

“In the mutual trade between Korea and Japan, there was always a surplus for Japan of about $ 20–25 billion. Therefore, I think that this will not hit Japan particularly hard. Creating artificial obstacles to the acquisition of Japanese components and these basic elements for the production of semiconductors will be very sensitive for the entire South Korean industry associated with smartphones, ”said Kim Yo Un.

Interest from America

Three types of raw materials, subject to Japanese export restrictions, are necessary in the manufacture of chips, chips, semiconductors and displays. One of the main buyers of these materials is Samsung Electronics - the largest representative of the Korean industry. According to Statista.com, in the first quarter of 2019, Samsung occupied 23.1% of the global smartphone market. Chinese Huawei ranks second (19%).

Although experts expect the continuation of a trade war that affects the production of digital technology, they do not predict a significant increase in prices in this market.

“I don’t think that retail prices will increase for buyers of smartphones, displays or TVs, since their share in the final product is relatively small. The temporary appreciation of these materials can be offset by subsidies from the companies themselves, ”says Denis Shcherbakov.

The crisis in the economic relations of Korea and Japan coincided with the trade war between the United States and China.

Analysts emphasize that cooperation with Japan and South Korea is very important for China. According to the Japanese organization of foreign trade, China is Japan’s largest trading partner with a share of exports and imports for 2018 of 19.5% and 23.2%, respectively. For Korea, the share of exports to China was 25%, and imports - 21%. Such data leads "UN Comtrade."

Experts emphasize that, despite the close relations in trade with China, the strategic partnership with the United States is decisive for Japan and Korea. The United States, in turn, is not very pleased with the contradictions in the trade relations of its junior partners in the strategic triangle Washington-Tokyo-Seoul.

“The United States will not directly participate in resolving the Japanese-Korean contradictions, because the difficulties that will be created for the South Korean electronics industry will benefit American corporations and strengthen the position of Apple, Samsung’s main competitor. In words, they, of course, will sympathize with the Koreans, but officially everything should be decided within the framework of bilateral relations, ”Kim En Un concluded.