Trade wars appear to be becoming the norm rather than exceptions, and the new conflict between Japan and South Korea is set to worsen the effects of the US-China trade war
Despite being neighbours and military allies of the US, Japan and South Korea—Asia’s economic powerhouses with strong export-oriented and globally-integrated economies—have had rocky bilateral ties. The strains are inherited from the uncomfortable history of the region during the early decades of the previous century, leading up to the Second World War. The Japanese control of the Korean peninsula, the subsequent ‘forced’ Korean contribution to the Japanese Imperial Army and its pursuits during the Second World War have left indelible impressions on both the countries.
It was several years after the Korean independence in 1945, and the separation of the Korean peninsula into North (the Democratic People’s Republic of Korea) and South (Republic of Korea), that Japan and South Korea connected diplomatically in 1965. Sour ties with the Soviet Union-controlled North Korea, and military alliance with the US, were political glues binding the countries. A more powerful bonding force was robust economic exchanges. Both Japan and South Korea, along with Taiwan and Hong Kong, were shining examples of the ‘Flying Geese’ economic paradigm of labour-intensive, export-oriented industrialisation. As Asian entrants into the elite group of advanced first-world economies, both have achieved high industrial sophistication and remarkable development of economic, financial and regulatory institutions, while having a large presence in the global lists of top business corporations.
Trade has intricately bound Japanese and South Korean economies. South Korea is one of Japan’s main export destination for goods as well as commercial services. The goods trade relationship is largely inclined towards South Korea being a major importer of Japanese products, while on commercial services the relation is more balanced, with both serving as major sources of export and import for each other. It’s on goods trade, though, that both the countries have got into a spat, and that is now assuming alarming proportions.
Following the South Korean Supreme Court’s ruling last year directing Japanese companies to pay compensation for forced Korean labour during the Second World War, Japan has begun taking trade actions against the country. The first of these comprised imposition of stricter screening for Japanese export of some chemicals—essential in the production of smartphones and semiconductors—to South Korea. Following these controls, announced on July 4, 2019, earlier this month, the Japanese cabinet approved removal of South Korea from the ‘White List’ of countries maintained by Japan. The White List includes countries to which Japanese exporters can export items that can also be used in the manufacture of weapons, without rigorous scrutiny. Removing South Korea from the White List implies that Japanese exports of such items to the country will henceforth be subject to case-by-case detailed screening for eliminating possibilities of potential military end-use. Japan has justified the tighter export controls on national security grounds. By doing so, it joins the US and Russia, who, in recent years, have similarly justified unilateral trade actions.
The ruling by the World Trade Organisation (WTO), earlier this year, on the use of national security for trade actions—in the context of the Russia-Ukraine dispute—was somewhat ambiguous. While clarifying that it is empowered to review such actions, it also specified that countries are best judges of circumstances pertaining to national security. Thus, while South Korea may complain against Japan at the WTO, the possibility of obtaining an effective response is limited.
There are further reports of South Korea looking to retaliate by removing Japan from its own ‘White List’ of trusted trade partners. It might also withdraw from a military intelligence sharing arrangement it has with Japan, in connection with both the countries’ maintenance of American military bases.
The Japan-South Korea trade conflict demonstrates the increasing lack of ‘trust’ amongst countries in world trade. The White Lists maintained by both the countries enable extension of preferences to others primarily on the basis of ‘trust’ that sensitive exports won’t be diverted to unsanctioned uses. Once trust dissolves, and is replaced by cynical scrutiny, trade relations no longer remain the same. For Japan and Korea, trade was a way of overcoming the misgivings and lack of trust produced by history. Unfortunately, the same history has come back to haunt trade relations, and is looking set to create irreparable damage.
There are multiple implications of the Japan-South Korea trade war. The first of these is the inevitable adverse impact on the functioning of global supply chains embedded out of Japan and South Korea. Functioning of several of these would be adversely affected by export controls and tighter retaliation. The second impact is on regional and global trade prospects, which would have to brace for further contraction and slowdown. The third, and probably much less noticed impact, is on the prospects of the ongoing trade negotiations, most notably the Regional Comprehensive Economic Partnership (RCEP). The RCEP is at a greatly advanced stage, and the Japan-South Korea trade spat at this juncture is particularly bad news. Both the countries are important actors in the RCEP process. A trust deficit between the two might have the ‘herd’ effect of spilling on to the rest of the group. In one respect, though, India should be enjoying a quiet laugh at the development: for once, at least, the region would find it difficult to label it the ‘spoiler’ at the RCEP. Having said that, it is a clear that trade wars are here to stay, and more such skirmishes might be in the offing. Future trade negotiations need to prepare for such wars.
Author is Research lead (Trade & Economic Policy), Institute of South Asian Studies, National University of Singapore. Views are personal.