Japan’s Trade War Is as Futile as Trump’s

Japan and South Korea’s long-standing diplomatic dispute about the legacy of imperial Japan’s colonization of South Korea is not new. But Tokyo’s recent decision to turn trade issues with South Korea into a weapon in the history wars is a radical escalation. Japanese Prime Minister Shinzo Abe’s trade measures against South Korea are reminiscent of U.S. President Donald Trump’s trade war: unclear and self-contradictory while potentially harming both the international and domestic economy in the process.

Japan’s opening salvo in the trade war, ironically, came just two days after the conclusion of a successful G-20 summit in Osaka in which Abe declared: “A free and open economy is the foundation of global peace and prosperity.” Tokyo announced changes in its rules on export approvals for three critical chemicals used in high-end display and semiconductor manufacturing: fluorinated polyimide, photoresists, and hydrogen fluoride. South Korean high-tech manufacturers rely significantly on Japanese companies to supply these chemicals. With the new measures, Japan’s exporters need to apply for a license for each sale, which may take up to 90 days. Tokyo also indicated that it may remove South Korea from the “white list” that gives exemptions from export licensing.

Tokyo sought to downplay the significance of these measures by deeming them technical changes in the export licensing scheme. However, in an era of just-in-time manufacturing, it is likely that any delay in exporting Japanese chemicals is likely to hinder the supply chain. The Korean manufacturers import from Japan between 40 and 80 percent of the three chemicals at issue and reportedly have less than three months’ supply at hand. This could potentially cause, for example, a global shortage in semiconductors used in everyday gadgets, as Korea’s Samsung Electronics and SK Hynix collectively produce approximately 70 percent of DRAM and 40 percent of NAND flash memory used worldwide—technologies critical to products including smartphones and medical electronics.

It is not clear what Japan seeks to achieve with these measures. Initially, it appeared that the trade restrictions were in retaliation for a South Korean Supreme Court opinion ordering compensation for Korean workers who were forced to work in factories and mines run by Japanese corporations during World War II, often under brutal conditions. Japanese officials have claimed that the actions were not related to the ongoing disputes and that they were in line with trading rules under the World Trade Organization.

Japanese chief government spokesman Yoshihide Suga, a senior and influential figure within the government, said on July 2 that the export controls were for “national security reasons” and were not in retaliation for the Korean court cases. He did, however, dangle the notion that there was slightly more behind the scenes, saying that South Korea “did not offer a satisfactory solution over the issue of former workers on the Korean Peninsula before the Group of 20 summit and we cannot help but to say the relationship of trust has been severely damaged.”

Then the media began running stories that the actual issue was South Korea shipping to other countries Japanese materials that could be used for producing weapons of mass destruction (WMD) if they reached North Korea. No evidence was provided for such a claim, other than one Japanese lawmaker ominously warning that some chemical exports were “unaccounted for.” And it seems possible that Japanese officials were feeding such stories to the press. Later, Abe returned to the wartime issues. “South Korea, with its handling of the former Korean wartime laborers issues, clearly demonstrated that it is a country that does not keep promises. Naturally, we have to assume it also fails to keep promises on export controls,” Abe said July 7 on a Fuji Television talk show.

The shiftiness of the official line became particularly apparent on July 12, when, during trade talks, Japanese officials claimed that South Korean officials did not request the measures be rescinded—despite the fact that South Korean President Moon Jae-in publicly demanded Tokyo to rescind the trade restrictions on July 8. The Korean representatives immediately disputed Japan’s account, adding that Japanese representatives at the meeting had further walked back the purported national security concerns.

All this has come as a shock to South Koreans. Since the two countries normalized relations in 1965, both South Korea and Japan have taken great care to separate economic cooperation from their raft of historical disputes. This was also true with the Moon administration in 2017, which has always followed the “two-track” strategy toward Japan that placed the historical issues on its own track apart from economic and security cooperation. As a result, South Koreans see the use of trade relations to put pressure on the historical issues as a radical escalation. The suggestion from Japan that South Korea is assisting North Korea’s WMD production with Japanese materials fueled even more anger. Moon denounced the measures strongly, calling Tokyo’s measures “a serious challenge to our government” in remarks on July 15.

But despite Tokyo’s attempt to create a high-tech spigot that it can turn on and off when it wants to put pressure on South Korea, it is unclear how much pressure Japan’s trade restrictions are actually generating for South Korea’s manufacturers.

Japan’s actions are an unexpected boon for the semiconductor manufacturers, as there is currently a significant market glut of semiconductors to a point that, before the conflict erupted, manufacturers were losing money for each unit they produced. As Jeong Chang-won at Nomura Securities explained: “Because South Korean semiconductor manufacturers have a significant level of inventory of finished products, reducing production in the short term is a positive for semiconductor prices,” adding that “there wouldn’t be a significant problem even if they stopped producing entirely for about two months, and they would be able to fetch a better price.” The share prices for both semiconductor giants, Samsung Electronics and SK Hynix, rose significantly since Tokyo announced its trade restriction.

As with all trade wars, the economic casualties are already piling up—in this case, mostly on the Japanese side. Share prices for the Japanese chemical suppliers have crashed, with no relief in sight. Japan did not achieve its dominant market position in high-tech materials only through superior technology; it also did so by growing alongside the South Korean companies, which formed a trusted relationship with the Japanese companies and integrated Japan’s materials in the manufacturing process. Once that trust is eroded and the supplies from Japan are subject to political whim, there is little reason for South Korea’s manufacturers to design future processes with Japan’s materials in mind.

The shift in the supply chain is already happening. Both Samsung Electronics and SK Hynix, which had anticipated Japan’s trade restrictions, recently began using hydrogen fluoride produced by a South Korean company to produce semiconductors. LG Display, which uses hydrogen fluoride from Japan, is also testing domestic products for its new manufacturing process. Samsung’s acting chairman, Lee Jae-yong, on returning from a visit to Japan, directed his executives to prepare a “contingency plan” for all businesses of Samsung Electronics—not only semiconductors but also smartphones, televisions, and home appliances. Meanwhile, the South Korean government issued an emergency budget of nearly $1 billion for domestic production of these materials, with additional subsidies likely to come. China, Taiwan, and even Russia (which also produces high-quality hydrogen fluoride) are jockeying to take Japan’s place in South Korean manufacturing. Once the supply chain has shifted, it is difficult for the chain to come back to include Japan, as it requires massive capital investment to configure a line of production.

The post hoc nature of Japan’s baseless claim about South Korea’s diverting strategic materials to North Korea indicates that Tokyo’s measures were not a deeply considered plan but a reckless fit of pique against the Korean Supreme Court’s decision on wartime slave labor. That means a democratic Japan is directing trade restrictions at South Korea, a liberal democracy and ally, in order to defend imperial Japan’s use of slave labor during World War II. In doing so, Japan is decoupling its economy from South Korea, pushing Korean companies to partner up with China and Russia. This harms not only the bilateral relationship between Japan and South Korea but also the trilateral alliance among the United States, Japan, and South Korea—the cornerstone of the United States’ Pacific order. In a critical region facing security challenges posed by China and North Korea, weakening the trilateral alliance is the last thing the world needs.

William Sposato contributed to this story.