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South Korea – Japan Trade War


South Korea – Japan Trade War

Written by: Rafindra Djuned Pusponegoro


Introduction

While the global economy is striving to minimize the damages inflicted by the trade war between the United States and China, yet another trade war is brewing in the east: a trade war between two Asian economic giants South Korea and Japan.

In late 2018, South Korea’s Supreme Court passed a rule which states that several Japanese companies must give compensation to a group of South Koreans, or rather their descendants, for forcing these South Koreans to work in Japanese labor camps during the Japanese occupation of the Korean peninsula from 1910 to 1945. Japan states that all of these claims for “war reparations” have been settled in a treaty signed by both countries in 1965; however, the SK Supreme Court disagrees and President Moon Jae-in’s government says that Japan has no right to order the SK Supreme Court to reverse the ruling. Frustrated by the decisions of South Korea, Japan decided to put pressure onto president Moon’s government by increasing restrictions on the exporting of several high-tech goods to South Korea in July. It also no longer recognizes South Korea as a trusted trade partner since August 2019. South Korea retaliated by imposing their own trade barriers.


Let us explore the trade restrictions in further detail. Initially, Japan imposed restrictions on the export of three chemicals – fluorinated polyamides, hydrogen fluoride and photoresists. Japan would export these chemicals to South Korea which are crucial for the production of semiconductors in South Korea. The new regulations imposed by the Japanese government state that Japanese suppliers must obtain a permit from the government before they are able to export their raw materials to South Korea. The new process has an “examination” period which lasts 90 days, further increasing the time it takes for these raw materials to be exported.


Semiconductors are a key component in many electrical devices such as smartphones. They are also a vital component in the production of DRAMS. DRAMS are vital in the production and optimization of advanced technology such as AI, robotics, and the Internet of Things. Producers expect the growth of the use of semiconductor chips in AI, DRAMS and flash memory to be five times the growth of other goods in the semiconductor industry. Without DRAMS and a high storage capacity, new technology such as AI simulations and the calculation of missile flight paths would be impossible.

Halting the production of semiconductors would immensely damage the South Korean economy as a large portion of their economy is made up of the industry for technological goods. South Korea, in response, proceeded to boycott Japanese beer and clothing brands such as Uniqlo, which is very popular in SK. They even revoked Japan’s status as a trusted trade partner and would potentially go so far as creating a new “low-tier trade partner” category for Japan, further preventing Japan from the benefits of trading with South Korea. And, due to this exchange of economic sanctions, a trade war has begun.

Currently, the trade war seems to be a loss for both sides. However, it is arguable that the trade war has taken a larger toll on South Korea, particularly South Korea’s tech companies, especially in the production of semiconductors and DRAMS, the domestic and international market for semiconductors, and the global economy.


As mentioned before, Japan limited the export of crucial chemicals used in the production of semiconductors to South Korea, harming SK’s production sector as well. The sales for semiconductors make up 92% of South Korea’s export growth, and a decrease in the production of semiconductors will significantly impact the government revenue of South Korea. Semiconductor prices have already been cut to half since 2018, further damaging South Korea’s exports, as producers do not see an incentive to produce and export since their revenue will also be cut.


With Japan and South Korea, being the two tech giants, the global supply of smartphones and other electronic devices would be damaged, stemming from a decrease in the production of semiconductors. Samsung and SK Hynix, two Korean tech companies, produce over 60% of the world’s supply for memory chips. Their production of memory chips has already been disrupted due to Japan export restrictions, and these disruptions may lead to further delays in the global supply chains for technological products. Other MNCs such as Apple and Huawei may be affected as well, since they also buy semiconductors from South Korea.


Japan has an advantage over South Korea however, as South Korea is merely Japan’s third largest trade partner, only importing 6% of Japan’s total exports. Japan’s first largest trade partner is China receiving 21% of Japan’s total exports followed by the US receiving over 15%. The three chemicals Japan restricted exports to South Korea make up a small product line for only a few companies in Japan. Moreover, Japan is still able to absorb export disruptions, since exports only account for around 18% of Japan’s total GDP.

On the other hand, South Korea is not as lucky. Over 44% of South Korea’s GDP comes from exports, so a trade disruption will do considerable damage. Even though Japanese trade only makes up 7.5% of overall trade, goods imported from Japan are utilized in sectors vital for industrial production.


Korea Boycotts Japanese Imports

On Japan’s side, consumer products seem to be taking the brunt of the trade war. The export restrictions imposed in July caused consumers in South Korea to boycott Japanese products such as television, alcohol, electronics and retail goods. The Japanese companies operating in these markets will inevitably face problems. However, Japanese chemical companies which export to South Korea export a broad, diverse array of goods and will still perform well. But as long as the trade war continues to hinder the production of chips in South Korea, the Japanese chemical companies could start suffering losses as well. If the trade war were to continue till July 2020, South Korean tourists may boycott the 2020 Tokyo Olympic Games as well. However, this may be overcome due to the rise of visits from Chinese tourists. Chinese tourists arriving in Japan have increased by 15% since January 2019, which makes up for the nearly 14% decrease of South Korean tourists within that same period.


Japan’s decision to curb their exports to South Korea are in an effort to reclaim their dominance as the leading producer of technological products in the global market and to regain their share of the segment of the industry in the production of memory chips. It is also worth noting that Japan is implementing similar trade restrictions to Donald Trump’s policies in the US-China trade war, particularly his bans on Huawei products. Japan temporarily approving exports are similar to the policies which temporarily allow US semiconductor producer Micron to export its’ products to Huawei. In the 90s, Japan surpassed the US in global market shares in the semiconductor industry, and in the early 21st century losing the lead to South Korea.


In 1986, Japan signed the US-Japan Semiconductor Agreement, which led to Japan to stop selling DRAMs in bulk in markets worldwide and increase its’ prices. As a result, their DRAMS could not remain competitive. The US wanted to use the agreement to regain their control of the global semiconductor industry; however, it assisted South Korean tech giants SK Hynix and Samsung to prosper in the production of their own DRAMS.


South Korea’s Solution

However, Japan’s curb on exports to South Korea may actually be beneficial to South Korea’s semiconductor industry. According to Nomura Securities Research Center head Chung Chang-won, even though production has been partly stopped, the domestic semiconductor industry has an immense stock of completed products so companies may still be able to earn profits. This links to the concept of elasticity in demand and supply, and how it is controlled by price mechanisms. He stated that “chips have flexible prices depending on supply and demand as they are core material in the digital age.” As stocks continue to decrease and are not replenished due to halted production, prices will increase, due to low supply. And, since the chips are essential in the market for tech, consumers will still purchase them anyway, even if the prices increase. So, in other words, the demand for the chips is rather inelastic.


Chung Chang-won also said that in regards to the future, it is unlikely that Japan will completely ban the exports of the three materials to South Korea, since South Korea holds a market share of 75% in the global DRAM market, and this will lead to the prices of memory chips rising exponentially if the South Korean semiconductor industry were to stop production.


With the imposed restrictions, South Korea will have to look for alternative ways to obtain the resources it needs for production. Without the imports from Japan, producers were concerned they might have to resort to shutting down their factories. Semiconductor manufacturing could be stopped because Japan monopolizes the market for hydrogen fluoride and EUV photoresists, which are essential for semiconductor production.

Samsung and SK Hynix have resorted to selling products stored in their inventories and also tweaking their manufacturing processes to produce more efficiently by either using the minimum amount of materials required or recycling used products. They have also succeeded in finding substitutes and alternative suppliers to the three chemicals Japan used to import prior to the restrictions.


Samsung Electronics has been cooperating with ENF Technology to utilize hydrogen fluoride imported from China in its’ manufacturing processes. SK Hynix and LG have announced that they will now only use hydrogen fluoride supplied by South Korean companies. The South Korean hydrogen fluoride industry seeks to localize hydrogen fluoride production. Plants will soon be built to supply liquefied hydrogen fluoride to SK Hynix and Samsung


Conclusion

All in all, the root cause of the trade war seems to be South Korea’s grudge for Japan’s wartime atrocities incited upon the Korean peninsula during the WW2 era. But in this case, particularly forcing Koreans to work in Japanese labor camps during the occupation of Korea. The South Korean Supreme Court passed the bill which states that numerous Japanese companies are to give compensation to South Korean families for forcing them to work in Japanese labor camps. Japan retaliated by slapping trade restrictions on the export of three chemicals vital to the production of DRAMS and semiconductors, which are components necessary to produce most of our technological devices. These trade restrictions require Japanese companies to have a permit from the government before exporting their raw materials and a 90-day “examination period”, prolonging the time required to export the raw materials. Furthermore, Japan removed South Korea from a whitelist of trade partners.


In response, South Koreans have begun to stop purchasing Japanese products, particularly Uniqlo, a famous Japanese clothing brand and Japanese beer, which will damage the revenues of the Japanese companies. And, South Korea has also rescinded Japan’s status as a trusted trade partner.

In order to obtain the necessary resources needed to produce semiconductors, South Korean companies have become self-sustaining. They have begun to dig into their inventories and even producing more efficiently to minimize the amount of raw materials used up in the production process. They have also begun to find new suppliers for the raw materials they needed.


Currently, it does not seem trade tensions between the two countries are going to dissipate. The grudge South Korea bears for Japan’s atrocities during the war era are still deeply rooted within its government and people. With technology being such crucial gears in the global economy, and the two leading countries in technological advancement halting production and trade of semiconductors, it will have detrimental effects on the global supply chain for semiconductors and the world’s technological progress.


References

Kim, C. (2019, August 9). The escalating trade war between South Korea and Japan, explained. Retrieved October 30, 2019, from https://www.vox.com/world/2019/8/9/20758025/trade-war-south-korea-japan


Bremmer, I. (2019, October 3). The Japan-South Korea Trade War Is Worrying for the World. Retrieved October 30, 2019, from https://time.com/5691631/japan-south-korea-trade-war/


Johnson, K. (2019, July 15). Why Are Japan and South Korea at Each Other's Throats? Retrieved October 30, 2019, from https://foreignpolicy.com/2019/07/15/why-are-japan-and-south-korea-in-a-trade-fight-moon-abe-chips-wwii/


Japan trade dispute adds to 'perfect storm' facing South Korean economy. (2019, August 26). Retrieved November 10, 2019, from https://www.scmp.com/economy/global-economy/article/3023957/south-koreas-economy-facing-perfect-storm-japan-trade


YenNee_Lee. (2019, July 23). The Japan-South Korea dispute could push up the price of your next smartphone. Retrieved November 10, 2019, from https://www.cnbc.com/2019/07/23/japan-south-korea-dispute-impact-on-semiconductor-supply-chain-prices.html


Eun-jin, K. (2019, July 15). Japan's Export Curbs Can Help S. Korea's Semiconductor Industry. Retrieved November 13, 2019, from http://www.businesskorea.co.kr/news/articleView.html?idxno=33884


South Korea's Semiconductor Industry Turns Japanese Government's Regulation into an Opportunity. Retrieved November 20, 2019, from http://english.etnews.com/20191008200002


Stratfor Worldview. (2019, November 30). The South Korean-Japanese Trade War Has Just Begun. Retrieved December 10, 2019, from https://nationalinterest.org/blog/buzz/south-korean-japanese-trade-war-has-just-begun-99842


Park, J. (2019, September 30). Semiconductor tech war underlies the Japan–South Korea trade dispute. Retrieved December 10, 2019, from https://www.eastasiaforum.org/2019/09/24/semiconductor-tech-war-underlies-the-japan-south-korea-trade-dispute/

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