Insight: Will Japan, South Korea Tensions Trigger a New Trade War?

JAKARTA (TheInsiderStories) – The escalating trade tensions between Japan and South Korea have added downside risks for the APAC trade outlook, even as the US-China trade war and downturn in global electronics sector new orders have hit East Asian exports already.

The tensions between the two countries are intensifying after Prime Minister Sinzo Abe administration imposed new restrictions on exports that could hit President Moon Jae-in country’ tech industry. The action triggered South Korea to boycott Japanese goods.

The recent tensions between the two countries stem from more than six decades. Dispute that were more triggered by the problems of forced labor during the war were considered to affect investment and loans by Japanese institutions. In the worst case scenario, Japanese lenders can refuse to roll over debt maturity or stop providing new loans.

South Korea is heavily reliant on imports of Japanese intermediate parts and materials for its manufacturing industry, having recorded a bilateral trade deficit in parts and materials with Japan amounting to US$15.1 billion in 2018, around three-quarters of the total bilateral trade deficit.

The vulnerability of South Korea’ manufacturing supply chain to Japanese intermediate goods, notably for electronics components and chemicals products. Any protracted disruption of Japanese exports of the key materials to South Korea could disrupt the global electronics supply chain, since the country is a dominant global producer of memory components used in many electronics products.

South Korea’ SK Hynix and Samsung Electronics supplied 61 percent of memory components in 2018 that are used in a variety of electronics systems. South Korean exports of memory chips reached $127 billion in 2018, with China and the US being key markets.

If supply constraints arise in South Korean memory chip production, the price of memory components could significantly increase due to the inability of the other memory suppliers to meet global demand.

Consequently, some United States (US) electronics firms, which have large production hubs in either the US and China, are vulnerable to supply shortages of South Korean memory chips, given the importance of South Korea as a supplier of chips to both China and the US.

The escalating trade frictions between Japan and South Korea could also impede the progress of negotiations for a trilateral free trade agreement between China, Japan and South Korea, which was agreed to accelerate the pace of negotiations in 2018.

With Japan and South Korea also important players in other Asia-Pacific economic and trade co-operation frameworks, including in the Regional Comprehensive Economic Partnership trade negotiations among 16 APAC nations, the bilateral dispute could also have a negative impact on other regional trade liberalization initiatives.

Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit sees in the medium term, these Japanese government export controls on South Korea are likely to trigger trade diversion effects, as South Korean firms try to reconfigure their global supply chains to reduce their dependency on Japanese inputs and seek alternative supply sources for critical products.

He rated this could be damaging in the medium to long term to Japanese exporters, as South Korea may eventually substantially reduce its reliance on imports of Japanese parts and materials for its manufacturing supply chain.

by Linda Silaen, Email: