Japan trade surplus shrinking to JPY590 billion (US$5.5 billion) in June 2019, from a year ago surplus of JPY728 billion caused of weak global demand and United States - China trade war - Photo by AP

JAKARTA (TheInsiderStories)Japan’s government announced on Monday (07/1) that it will restrict the export of fluorinated polyimide, resist and hydrogen fluoride, which is used for semiconductor and display production, and their relevant technologies to South Korea amid the row with Seoul over wartime labor.

The new rules, which take effect July 4, come after South Korean courts ordered Japanese firms to compensate people forced into wartime labor, an issue Japan says was resolved when the countries resumed diplomatic relations decades ago.

This means exporters will now have to apply for permission for each batch they want to export to South Korea, a process that takes around 90 days each time, local media reported.

Rajiv Biswas, APAC chief economist at IHS Markit said the Japanese trade measures taken against South Korea will add to global trade tensions at a time when Asia’s export sector is already facing strong headwinds from the United States (US)-China trade negotiations as well as the slowdown in global electronics sector new orders.

The latest IHS Markit Global Electronics PMI Survey for May 2019 showed the sixth consecutive monthly contraction in the global electronics sector new orders, which has already hit South Korea’s electronics export sector hard.

The increased use of trade sanctions as a policy tool by several large economies has been one of the factors contributing to a significant slowdown in world trade and weakening new export orders during the past twelve months.

Len Jelinek, executive director of semiconductor research at IHS Markit adds two chemicals targeted in the tightening of export controls – resist polymers and hydrogen fluoride – are essential to the manufacture of semiconductors. Resists are used as coatings in all of the photolithography steps required to establish individual circuit patterns, while hydrogen fluoride is used as part of the process to delineate the circuits.

A reduction or elimination in the availability of these materials will significantly impede the production of memory and other semiconductor chips, impacting major semiconductor manufacturers including Samsung Electronics and SK Hynix.

Japan is the world leader in the manufacturing of resist polymers and any constraints to the material supply chain will have significant negative consequences not only to semiconductor manufacturers but to the chemical companies producing the resist polymers. Because of the volumes of chemicals required within the semiconductor manufacturing process, it is unlikely that the major chip suppliers will be able to find suitable quantities from suppliers outside of Japan.

According to Tadashi Uno, display research director at IHS Markit, the impacts of this action to display manufacturing will be minimal. Polyimide employed in the manufacture of LCD displays contains less than 10 percent fluorine, and polyimide materials with less than 10 percent fluorine are not listed as restricted currently.

An end-product that could be affected, however, is the Samsung Galaxy Fold smartphone. The display of the Samsung Galaxy Fold – now in pre-order status in the US – is produced utilizing fluorinated polyimide film from Sumitomo Chemical, which is a Japanese electronic materials firm. South Korea-based Kolon Industries could act as an alternative supplier for the Samsung foldable smartphone display.

Japan is a major supplier of materials used to make the computer chips that run most devices, including smartphones and laptop computers. Other exports affected by the decision include components for making semiconductors, as well as pharmaceuticals and polymers, including nylon and Teflon.

LG Display, the South Korean company that is one of the world’s biggest display makers, said it was not affected by the Japanese trade restrictions, but Samsung and SK Hynix said they were assessing the potential impact.

Relations between the two countries have soured since South Korea’s top court in October ordered Nippon Steel & Sumitomo Metal Corp to pay 100 million won (US$88,000) each to four plaintiffs forced to work for the company when Japan colonized the Korean Peninsula during 1910-45.

The company refused, siding with Japan’s long-held position that all colonial-era compensation issues were settled by a 1965 treaty that restored diplomatic relations between the two governments.

The South Korean Supreme Court ordered the seizure of local assets of the company after it refused to pay the compensation.

Mitsubishi Heavy Industries has also refused an order by the South Korean Supreme Court to financially compensate 10 Koreans for forced labor during colonial times.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com