Japan rules out relaxing curbs on hi-tech materials exported to South Korea saying no breach of WTO regulations

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Japan announced restrictions on materials used in smartphone displays and chips being exported to South Korea
In response, South Korean social media users have begun calling for a boycott of Japanese products

Japanese trade and industry minister Hiroshige Seko on Tuesday said Japan was “not thinking at all” of withdrawing restrictions on the country’s hi-tech export materials to South Korea but remained open to further talks, while also insisting the curbs did not violate World Trade Organisation rules.

The restrictions could have implications for global supply chains for semiconductors and computer displays but Seko said Japan could yet impose further restrictions, depending on South Korea’s conduct.

“We believe this really depends on South Korea’s response,” he said. “There is of course a possibility the current restrictions will tighten, but if export controls are firmly managed, things may also loosen. Both are possible.”

“We ended preferential treatment [given to South Korea]and now treat it the same as other countries. Is that a problem from the standpoint of the WTO?”
Japan announced curbs last week on hi-tech exports of materials used in smartphone displays and chips to South Korea amid a growing dispute over South Koreans forced to work for Japanese firms during World War Two.

The materials affected by the restrictions include fluorine polyamide needed to make flexible organic light-emitting diode displays, photoresist used to transfer a circuit pattern to a semiconductor substrate and etching gas essential for semiconductor fabrication process.

In response, South Korean social media users have begun calling for a boycott of Japanese products – including cars and beers. There has even been a push for South Koreans to shun Japan as a holiday destination.

The hashtag #BoycottJapan has been trending, with some users including a picture using Japan’s red rising sun icon as “O” in the word “No”. “NO, Boycott Japan: Don’t go, don’t buy,” it says.

South Korea is Japan’s third-largest export market, worth 5.79 trillion yen (US$53.4 billion) in trade last year. South Korean data underlines just how reliant on Japanese products the country has become, across a range of sectors.

South Korea, for example, imports from Japan more than 74 per cent of the equipment it requires to produce flat panel displays, as well as nearly 74 per cent of the nation’s concrete, 68 per cent of its toluene and more than 65 per cent of its paint and ink.

According to the Korea International Trade Association, more than 65 per cent of the nation’s limestone needs are met by Japan, along with 47 per cent of agricultural machinery, 43 per cent of adhesives, more than 40 per cent of plastic products and a similar amount of intermediate petrochemical goods.

Although South Korea ran an overall trade surplus of US$70.5 billion, it ran a deficit of US$24 billion with Japan. Government figures also show South Korea has never had a trade surplus with Japan since the two nations formally established trade ties in 1965.

The KITA figures show Korea is “heavily dependent” on no fewer than 16 products from Japan, the JoongAng newspaper reported, and choking off those imports would have serious implications.

“These two countries have supply chains that are extremely closely integrated and yes, most products that South Korea needs could be replaced but only over the longer term,” said Martin Schulz, senior economist for the Fujitsu Research Institute in Tokyo.

“Many of these are highly specialised products and Japan is currently the world leader in producing them, so finding a new source would take time and there are no guarantees the quality will be as good.

“These are items that have been crafted with extreme precision or chemical formulas that have been developed over many years and you just don’t go out and replicate that overnight.”

If Korean firms have to go to another advanced supplier of some of these products, such as Germany, costs will be far higher because of the distances involved in importing them.

Ties between Seoul and Tokyo have worsened since South Korea’s top court last year ordered Japanese companies to compensate groups of South Koreans for wartime forced labour.

The companies have refused to comply, with the Japanese government taking the position that the issue of compensation was “completely and finally” settled under a 1965 bilateral agreement.

Last month, South Korea said it had proposed to Japan to hold bilateral talks on the matter on the condition that companies from both countries chip in funds for the compensation, but Japan rebuffed the proposal.

Now, Japan’s refusal to even contemplate backing down is “straight out of President [Donald] Trump’s playbook,” said Jeff Kingston, director of Asian Studies at the Tokyo campus of Temple University.

“Trump uses trade as a cudgel to get his own way on political issues and that has inspired Abe to do the same,” he said. “Abe has never had much love for Korea and I don’t think that Japanese people in general like being hauled over the coals over matters of history, so Abe is on firm political ground with this decision.

“I think it’s clear that there is going to be some economic blowback on Japanese firms that will be affected by this policy but it appears that South Korea is going to get the worst of it.

“Japan has some wiggle room with these regulations and can decide the amount that can be exported, how soon and so on, but they are hoping to get South Korea to do something to intervene to annul the courts decisions on the forced labourers.

“Unfortunately, that is not possible, so both sides nationalism is aroused. Abe is showing no signs of conceding and Moon can’t do anything that would meet Japan’s desires. That means it is very difficult to see either side backing down and we could be in for a very ugly trade spat.”

Additional reporting by Bloomberg, Kyodo and Associated Press

An anchor with CNBC TV18 for almost 4 years. Also co-anchors prime-time market shows like Power Breakfast, Traders only, Markets Mid-day and NSE Closing Bell.