Korean Economy News
Korea with limited options to counteract Japan`s export curbs

Lim Sung-hyun and Kim Hyo-jin

Despite the likelihood of Japan ratcheting up its economic retaliation beyond the core material shipments bound for South Korea, Seoul has few options for counterattack as a tit-for-tat move could devastate the reciprocal value chain between the two neighboring countries that are the second and fourth largest economies in the region, experts observe.

Korea’s Ministry of Trade, Industry and Energy said Monday it would study all “necessary actions” including filing a complaint with the World Trade Organization (WTO) to counter Japan’s de facto trade embargo.

Starting Thursday, Tokyo plans to curb Korea-bound shipments of three materials used for chip and display production, in what is viewed as retaliation for the recent Korean court decisions on wartime labor reparations. The restrictions would effectively remove Korea from Japan’s fast-track list for these three items as Japanese exporters would have to seek approval for every shipment bound for Korea, a process that would take about 90 days.

Japanese names are responsible for nearly 100 percent of global supplies of fluorinated polymides, used in display manufacturing, and photoresists, necessary for chip-making. They also produce 70 percent of global hydrogen fluorides used to clean chips.

Samsung Electronics and SK Hynix, the world’s two largest memory chipmakers, and LG Display, the largest display maker, entirely rely on Japanese supplies.

The Japanese media reported that Tokyo has mulled sanctions from May amid the diplomatic standoff with Seoul, which has taken a noninterference stance on court rulings under the separation of powers principle. Since late last year, Korea’s Supreme Court has delivered rulings in favor of Korean plaintiffs demanding individual reparation, separate from the inter-government settlement and bundled compensations for wartime and colonial aggressions in the 1965 basic treaty that normalized diplomatic relations.

The WTO lawsuit cannot offer relief to companies as the review is a lengthy process that could drag on for months or sometimes years, experts said.

Tit-for-tat escalations are also not in Korea’s best interests given its lopsided trade relationship with Japan. Korea could strike back by restricting chip exports to Japan but this could flare up into a full-out trade war, a situation that Korea clearly wants to avoid.

Since the 1965 treaty that normalized bilateral ties, Korea has never been able to post a surplus in trading with Japan. Its trade deficit with the country reached $24.1 billion last year. Most of the imports from Japan are key materials and component parts that go into producing a bulk of Korea’s mainstay export items, including semiconductors, petrochemicals, automobiles and electronic devices.

This severely hamstrings Korea’s ability to take counteractions, as Japan could just as easily hit back with trade restrictions on Korea’s other major industries.

Korea’s top import item from Japan last year was semiconductor manufacturing equipment at $5.2 billion, followed by integrated circuits at $2.4 billion and fine chemical materials at $1.9 billion. Discrete semiconductor imports accounted for $1.2 billion, auto parts $1.0 billion, silicon wafers $900 million and optical instrument parts $900 million.    

Japan’s measures are likely to go into effect next month after officials make the necessary regulatory changes. In the meantime, Seoul intends to mobilize all diplomatic channels to minimize the impact on domestic industries.

Meanwhile, Japanese media reported that unless the forced labor issue is settled, Tokyo intends to move onto other retaliatory measures, including restrictions in visa issuance, money transfer and even tariff hikes.

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