A Lose-Lose Trade War between South Korea and Japan

August 12, 2019
Writer(s): Stephanie Nguyen, Jessica Elvina

Rising tensions between South Korea and Japan have reached an all-time peak sparking fears of a trade war. Japan’s recent announcement to tighten controls on exports of hi – tech materials to South Korea has added fuel to the fire with Japanese manufacturers needing to file individual applications for South Korea – bound exports of fluorinated polyimide, hydrogen fluoride and resists. All of these materials are integral in the manufacturing process for chips and smartphone displays. Although Japan’s Chief Cabinet Secretary Yoshihide Suga describes this announcement as “necessary” on “national security” grounds, many South Koreans believe that this is an act of retaliation.

What has happened so far?

In 2018, the South Korean Supreme Court ordered Japan’s biggest steelmaker, Nippon Steel – who used forced labour during World War II – to compensate its South Korean survivors. Japan argues that it has already made amends monetarily in the 1965 accord – something many South Korean civilians disagree with. Therefore, many experts believe that this tech trade war is more so about lingering resentment between the two countries rather than a matter of national security.

Figure 1: The Two Nations Continue to Escalate Long – Term Tensions Between One Another

On July 1st2019, Japan announced that it would be restricting exports on three chemicals – fluorinated polyimide, hydrogen fluoride and photoresists. Adding to the tension, Japan has hinted that South Korea does not adequately oversee the use of these chemicals and are supplying North Korea with materials which can be applied for military purposes. Furthermore, South Korea – the only Asian country listed as a preferred trading partner – on Japan’s “white list”has been dropped so that the nation is treated the same as other Asian countries and territories. Denouncing both the accusations and Japan’s actions, the South Korean government too are in the process of removing Japan from their own trade white lists, sparking global concerns of an all-out economic trade war between these two major tech economies.

Why should we be concerned?

The impact on these restrictions have already been felt by the semiconductor industry worldwide as South Korean companies Samsung and SK Hynix, are responsible for producing about 70% of world’s memory chips. These chips are essential for the creation of smartphones with companies like Apple and Huawei who are reliant upon these memory chips. Without these key materials, these memory chips cannot be produced and as shown in the pie chart below, South Korea import roughly 32% of these high – tech supplies from Japan.

Figure 2: Japan Makes Up a Concerning Percentage of South Korea’s High – Tech Supplies

To continue sourcing these materials from Japan will undoubtedly be more costly both money and time wise for these leading smartphone brands, in which a Samsung executive describes this “as one of the worst situations they have ever had”.

However, the effect of this impending trade war does not just affect the semiconductor industry but impacts national security globally. The dispute has the potential to upset negotiations between the United States and North Korea regarding ending North Korea’s nuclear weapons programs. The United States rely on both nations to present a united front as the US government attempts to pressure North Korea and prevent the alliance formed between Russia and China from strengthening. This trade war could mean a less secure east Asian partnership and hence, a rouge North Korea which will have major global consequences.

Winners and Losers

There are both expected and unexpected winners in this standoff with the clear losers being South Korean smartphone makers like Samsung and SK Hynix and smartphone users. The increasing difficulties to source certain materials and the expensive costs associated in doing so means that both smartphone makers and users will end up having to pay higher prices for the creation and use of these devices. Despite being a client of Samsung, tech giant Apple may however, be at an advantage in this looming trade war. As both a direct competitor and client of Samsung, Apple will indeed experience the effects of Japan’s export restrictions, but the magnitude of this strain will have more of an impact on Samsung compared to Apple who has alternative plans. According to Hernandez, there are talks that Apple has been negotiating with Chinese company, BOE Technology Group who may become Apple’s third provider of this technology, regardless of the escalating tensions between US and China. Contrary to this, Samsung will most likely have a difficult time sourcing alternative Chinese suppliers as BOE Technology is its direct competitor.

However, South Korea is not the only one at loss from Japan’s restriction of exports. This is apparent through the growing “boycott Japan” movement that are spreading across South Korea. South Korean customers, who previously crowded famous Japanese clothing stores such as Uniqlo, left the clothing store deserted as a form of the boycott movement. In addition, South Korean customers also stopped purchasing beer, cars, cosmetics that were made in Japan, and even cancelling holiday trips to Japan.

Tourism is feeling the brunt of the boycott, with South Koreans making up to 13% of Japan’s tourism. Furthermore, the cancellation of some exchange programs between the two nations has escalated South Koreans’ attempts to boycott Japan and its recent decisions.

Figure 3: Signs Protesting the Purchase and Use of Japanese Products Have Become Prevalent in South Korean Stores

What is going to happen?

The boycott movements, protests and anti-Japan sentiment are encouraged by South Korean politicians. This trend is led by Cho Kuk, a high ranking official and other politicians who believed that this trend would help boost their popularity ahead of the general elections next year. Cho Kuk mentioned that diplomacy would be the best solution for South Korea and Japan, but if legal and diplomatic battle is inevitable, Cho Kuk encouraged South Koreans to “fight and win”. In addition, the Democratic Party of South Korea have set up a committee to deal with the matter, called “The Special Committee on Japan’s Economic Invasion”,which has criticized Tokyo’s decision to restrict exports and liken it to “suicide bombing”. It seems that both countries will not back down from this trade war any time soon. It is clear that both countries suffer from losses but are so invested in this issue at this point that backing down would be politically damaging. At this point, there are no short term solution for this. If these two nations continue to fight a political battle whilst using national defence to mask their agenda, it is likely that these two major economies will find themselves in a lose – lose situation.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Stephanie Nguyen

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Jessica Elvina

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