BETWEEN JAPAN AND SOUTH KOREA, A TRADE WAR LURKS / GEOPOLITICAL FUTURES

Between Japan and South Korea, a Trade War Lurks 

The two seem to have every reason to cooperate. Yet here we are.

By Phillip Orchard

 

Last week, Tokyo abruptly placed new restrictions on exports to South Korea of high-tech materials essential to the country’s booming tech industry. Japanese firms now need to apply for a license to sell fluorinated polyimide (critical for making TV and smartphone displays) and etching gas and resists (critical to semiconductor manufacturing) to firms in their longtime frenemy across the Sea of Japan. With the approval process expected to take around three months – an eternity for industries built around lean, “just in time” supply chains – this spells major trouble for South Korean tech titans like Samsung and SK Hynix. These two companies alone account for around 60 percent of global memory chip production, meaning the spat may also create headaches for companies far and wide, including U.S. giants like Dell, HP and Apple. Meanwhile, Tokyo is also considering making South Korea the first country ever to be axed from Japan’s list of 27 “friendly” countries that are exempt from export controls on products that could be used for weapons manufacturing, threatening a wider array of Korean products and potentially the country’s upstart arms sector. Tokyo has justified the move on national security grounds, arguing, without providing much evidence, that some of the materials have been making their way to chemical weapons factories in North Korea and elsewhere. Framing the move in national security terms may help Tokyo avoid a World Trade Organization challenge and diminish international opposition more broadly. But Japanese Prime Minister Shinzo Abe admitted that the primary motivation is a series of recent South Korean court decisions requiring Japanese firms to compensate workers conscripted during Imperial Japan’s 35-year occupation of the Korean Peninsula. Already, assets belonging to two Japanese firms have been seized and are expected to be sold in the coming months. Seoul has rejected Japan’s request to settle the matter with third-country arbitration. Japan, it seems, just can’t convince South Korea to let 80-year-old bygones be bygones. The U.S.-led regional alliance structure, along with the well-oiled regional economic system, may pay the price. And there’s no reason to think the dispute will be resolved quickly. Tokyo insists there’s nothing to negotiate, and South Korea’s president has cautioned South Korean firms to prepare for a long fight. A prolonged spat may ultimately hurt Japan as much as South Korea, economically and strategically, and that Japan is digging in anyway reflects the depth and complexity of the historical, cultural and strategic divides shaping East Asia today. It’s yet another illustration of the inherent exposure of the region’s tightly integrated supply chains to geopolitical risk.   What Made Japan Snap? Japan’s move may appear to be out of character. After all, Japanese Prime Minister Shinzo Abe has spent much of the past two and a half years spearheading multilateral efforts to stabilize regional free trade amid threats from U.S. and Chinese protectionism by, for example, rescuing the Trans-Pacific Partnership and signing a landmark free trade agreement with the European Union. At the G-20 summit in Osaka, just two days before he moved against South Korea, Abe pledged again that Japan would lead the charge for “free, fair and indiscriminate” trade. The restrictions also appear out of step with core Japanese geopolitical imperatives. The island nation, famously, is almost wholly bereft of natural resources. It owes its survival to the free flow of commodity imports, and it owes much of its wealth to the free flow of exports of high-tech products. Its very strategy for securing its future is embodied in Abe’s “Free and Open Indo-Pacific” concept, which South Korea endorsed at the G-20. Yet, here we are. What made Japan snap? For one, Japan has never really been able to live down the sins it committed as a colonial power – sins that have routinely dogged bilateral ties with South Korea, even after the two signed a treaty in 1965 in which, according to Tokyo, Seoul agreed to refrain from pursuing reparations. In the 1990s, Japan issued vague admissions of responsibility for past wrongs and has even made repeated (if sometimes token) efforts to right them. Tokyo thought it put the issue to rest for good in 2015, when the two sides resolved in writing “finally and irreversibly” the issue of Japan’s conscription of wartime “comfort women,” with Tokyo agreeing to establish a fund for survivors and Seoul agreeing basically to just shut up about it.

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Yet, powerful political factions in South Korea haven’t been so quick to forgive. Reconciliation has frequently fallen victim to dramatic political swings in Seoul.   The 2015 agreement on wartime comfort women, for example, fell apart shortly after the president who signed it, Park Geun-hye, lost her position after a corruption scandal. Meanwhile, nationalist factions of Japan’s own have made it difficult for governments to show the appropriate level of contrition. Abe’s Liberal Democratic Party will be counting on support from some of these factions in Upper House elections later this month. In general, strategic and economic necessity has contained tensions to little more than political and diplomatic posturing, particularly during the Cold War. More recently, though, it has frustrated U.S. efforts to get its two most important East Asian allies to work more closely together on defense matters. In 2016, for example, the U.S. finally forged a trilateral intelligence-sharing mechanism, which Seoul had resisted for four years for political reasons. But just a year later, Tokyo claimed Seoul was refusing to share intelligence on matters like Chinese activities in the East and South China seas. (The pact was extended for a year in 2018 but will be up for review again this fall.)   With Allies Like These It might seem like the time for Japan and South Korea to put the past to rest. Security threats from China and North Korea threaten them both, and both have every reason to insulate global trade from U.S. protectionism and from Chinese state-backed competition. And besides, other countries where Japanese wartime abuses took place – Vietnam, the Philippines, Taiwan – face the same threats and are nonetheless actively courting Japanese military and economic support. Why not South Korea? The answer isn’t so simple. South Korea’s distrust of Japan isn’t just a case of colonial resentment. It’s about South Korean geopolitics. The Korean Peninsula is the proverbial “minnow between whales.” Historically, China, Japan and even Russia repeatedly sought to prevent the peninsula from being used by one power to threaten the others, putting it at constant risk of invasion. Today, South Korea is strong and independent, but still perpetually uncomfortable. It’s certainly wary of China’s ascent – Beijing’s maritime assertiveness, along with its recent attempts to use its economic heft to bully South Korea into relatively minor strategic concessions, have dashed any illusions in Seoul about Beijing’s approach to winning friends. But it’s also wary of another side effect of China’s rise – namely, Japan’s own increasingly urgent remilitarization – and the rising risk that Korea once again finds itself caught in the middle. No amount of performative penance from Tokyo can overcome Seoul’s inherent need to keep its distance. For Japan, two issues besides domestic politics are at play. One is strategic divergence over threats from North Korea and China, with Tokyo feeling sidelined and exposed by the U.S. and South Korean diplomatic detentes with Pyongyang and frustrated with Seoul’s relative passivity over Chinese maritime behavior. The other involves economic changes – and the feeling in Japan that it helped cultivate South Korea’s breakneck industrialization to its own detriment.

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And there’s a case to be made that it did. In the second half of the 20th century, Japanese aid, combined with unfettered exports of high-tech component parts, machinery and materials, contributed to the rise of South Korean sectors like consumer electronics, automobiles and shipbuilding. In the 1990s, Japan looked the other way as South Korea started restricting imports of Japanese finished goods like automobiles and TVs. By the turn of the century, with Japan mired in its “lost decades,” South Korean firms in these sectors had begun to outperform Japan’s own. (Many of them enjoyed considerable state assistance.) Since then, as the dominance of South Korean firms grew, they began to increasingly route supply chains through China, which replaced Japan as the South’s largest trading partner in 2007. Naturally, as South Korea’s dependence on Japanese firms declined, so too did Seoul’s incentives to keep diplomatic spats contained. But South Korea’s manufacturing success has not extended to all parts of the supply chain, concentrated instead around a handful of family conglomerates exporting mostly finished products. The country has yet to become a major player in key industries further up the supply chain. Japan, for example, accounts for nearly 90 percent of the global supply of fluorinated polyimide and around 70 percent of the world’s supply of resists and etching gas. As a result, South Korea is in a position similar to China’s, gobbling up market share but still highly dependent on outside, potentially adversarial suppliers. Japan is trying to exploit what little leverage it has left over South Korea to try to nudge Seoul into a more mutually beneficial economic and strategic relationship. Doing so may damage Tokyo’s effort to portray itself as a steady champion of free trade. (Japan is arguing that this isn’t a free trade issue, pointing out that South Korean firms will merely face the same import hurdles as Chinese and Taiwanese firms already do.) It may give China’s embattled tech industry a much-needed and timely boost, creating an even bigger long-term problem for Japan. Samsung’s loss could be Huawei’s gain, for example. The problem with weaponizing supply chain dependencies is that it can hurt domestic firms as much as foreign by accelerating the development of alternative suppliers and risking the permanent loss of market share. Japanese firms are claiming that the restrictions may force them to move more production offshore. But Tokyo thinks it needs quite a bit more from South Korea as a regional partner – and, at minimum, to make clear that there’s a cost to keeping Japan perpetually at arm’s length. Evidently, it thinks this makes the risks worth taking.