© YONHAP News

Following Japan’s decision to impose tighter restrictions on exports of key materials for semiconductors and displays to South Korea early this month, Tokyo has also warned of further restrictions. In an effort to pressure Japan to withdraw its export regulations, the Korean government will bring up the issue at the World Trade Organization’s General Council, scheduled for July 23^rd and 24^th in Geneva. With no signs of a thaw in relations between the two neighboring countries, the trade row is only intensifying. 

To discuss the fierce trade conflict between Seoul and Tokyo, here is Kim Dae-ho(김대호), director of the Global Economic Research Institute.

Both South Korea and Japan are members of the World Trade Organization or WTO, which is in charge of defining the global trade order. Their trade issue will be put up for discussion at the WTO’s General Council, which is the organization’s highest decision-making body, aside from the regular Ministerial Conference that is held every two years. It is an important and meaningful step for Korea, as council members will listen to both sides’ arguments and determine which side is right. 

Trade officials of Korea and Japan will argue their respective positions before the General Council meeting of the WTO, as Seoul had earlier requested that the WTO take up the issue as a formal agenda item. 

The General Council meeting this week, which will be attended by 164 members, means that the international community will discuss Japan’s trade restrictions seriously. During the meeting, the Korean government will focus on helping WTO members better understand the problems of Japan’s unilateral measure and enlist their support. Japan, on the other hand, is expected to reiterate its claim that the restrictions were imposed based on security reasons. 

When Seoul brought up the issue at the meeting of the WTO’s Council for Trade in Goods on July 9th, Tokyo refuted the charges immediately, saying that South Korea failed to manage the trade of strategic goods such as etching gas and photoresist and that they were diverted to North Korea. Japan claimed that North Korea could use those industrial materials to develop nuclear or other weapons, which would pose a threat to Japan, so it was necessary to tighten export restrictions on South Korea. 

It is significant, of course, that the issue of Japan’s export curbs has been named as an official agenda item of the WTO’s General Council. However, along with Korea, Japan will also voice its opinion at the meeting. So, Korea should make thorough preparations and get ready to logically refute Japan’s possible arguments one by one. 

It is reported that Japan will send a director general-level official of its Foreign Ministry to Geneva for a head-on clash with South Korea. Seoul is also concerned that Japan may remove Korea from a so-called “white list” of countries that receive preferential trade treatment. 

The exclusion of South Korea from Japan’s white list of national security allies will deal a heavy blow to Korean manufacturers who import materials and parts from Japan. On July 4th, Japan strengthened export restrictions on Korea on three key materials used in semiconductors. But 1,100 items on the white list will all be subject to export controls, once Japan removes Korea from the list. It is easy to imagine that the repercussions on the Korean economy will be enormous. In addition to Korean semiconductor producers, automakers and small firms will be hit hard by the measure. It is feared the trade row could escalate into a full-fledged economic war. 

If South Korea is excluded from the list of white countries, all Japanese manufacturers of strategic goods will be required to get approval from the government each time they export their items to Korea. While the earlier export restrictions on three materials target the semiconductor sector in Korea, the removal of the country from the white list targets the Korean industry overall. 

Korea exported 25-thousand units of electric cars from January to May of this year. In addition, the country imports Japanese materials to make motors, the key part of the electric vehicles. Some car transmissions as well as camera lenses for self-driving cars are also from Japan. Compared to semiconductors, those materials are relatively easier to replace with other alternatives. Still, Japan’s expanded export curbs will cause a major setback on the Korean industry as a whole. However, Seoul will not be the only victim of Tokyo’s trade restrictions. 

Under its economic retaliation, Japan refuses to sell its products to Korea. Japanese firms that export goods to Korea will suffer an inevitable blow. Local manufacturers of strategic materials bound for Korea have already seen their stock prices fall. 

In fact, Korea has never posted a surplus in trade with Japan since the two countries normalized diplomatic relations in 1965. That is to say, Japan has enjoyed a massive trade surplus with Korea for over 50 years. But now, Japan argues that it is necessary to stop exporting to Korea, meaning that it will give up its trade surplus of its own free will.

Korea’s cumulative trade deficit with Japan has amounted to 604 billion US dollars since 1965. In other words, Japan has exported large amounts of goods to Korea for decades. Therefore, export restrictions will damage Japanese exporters. The export growth in Japan has already been negative this year. Despite its weak outbound shipments, Japan pushed ahead with tougher regulations on exports to Korea, a major trade partner, with which it has constantly recorded a surplus. The drastic measure will take a toll on not only the Korean economy but Japanese companies as well. For that reason, Korea is urging Japan to engage in dialogue, while staging a diplomatic war at the WTO. 

Meanwhile, many analysts are calling for Korea to cope with the situation properly and effectively in order to turn the crisis into an opportunity. 

It’s no good to criticize Korea’s heavy reliance on imported materials and parts from Japan. Rather, Korea needs to restructure the industry from a long-term perspective. Korea has been rather passive about nurturing the parts and materials industry not because it lacks the technology or capability but because it has trusted Japanese businesses and adopted their standards in many industries. 

Korea-Japan relations may improve in the future. But regardless of progress in bilateral ties, it is urgent for Korea to formulate a contingency plan to reduce its dependence on Japanese materials, while trying to solve the problem diplomatically. 

What Korea has to do now is to come up with effective countermeasures to handle the emergency situation. As Korea and Japan are expected to clash with each other diplomatically on the international stage, Seoul needs to develop a more elaborate strategy to successfully overcome the crisis. At the same time, it should devise ways to manage the economy for a worst-case scenario and achieve technology independence from Japan.