Japan, South Korea Flash Point Still Menaces Global Economy As 2019 Melts Into 2020

“In the current difficult security situation in East Asia, relations between Japan and South Korea are extremely important. South Korea is an important neighbor”, Shinzo Abe told reporters today after a meeting with South Korean President Moon Jae-in at a trilateral hosted by China.

“Our relationship is one that cannot be made distant, even if there is temporarily an uncomfortable issue”, Moon apparently told his Japanese counterpart.

The two countries remain at odds. An age-old conflict tied to conscripted labor and “comfort women” spiraled out of control earlier this year, dead-ending in the most acute bilateral crisis in decades and threatening to undermine Washington’s efforts to present a united front against North Korea. Now that Donald Trump’s honeymoon with Kim is over and Pyongyang is back to making bombastic military threats, it’s seen as advisable that Tokyo and Seoul get back on the same page.

A resolution to the dispute is also key to ensuring the tiff doesn’t continue to exacerbate the trade situation and threaten to further upend the global technology supply chain.

Over the summer, Tokyo decided to force Japanese businesses to obtain licenses to export hydrogen fluoride, fluorinated polyimide, and photoresist to customers in South Korea. The delays associated with obtaining those licenses were bad news for a fast-moving industry. Effectively, Japan was looking to cripple South Korea’s technology export machine by curtailing access to crucial chemical inputs for memory chips and displays at the heart of everything from iPhones to laptops.

Abe also removed South Korea from an export white list, deepening the trade spat between America’s two staunchest regional allies.

As documented in these pages extensively over the summer, this came at a decidedly inopportune time for South Korea, which has struggled mightily in the face of global trade frictions. Exports have fallen for a dozen consecutive months, and the Bank of Korea has delivered a trio of rate cuts in a bid to bolster the economy and stave off deflation.

This week, there was good news in the first 20 days exports numbers for December. Shipments fell just 2%, potentially opening the door to a better result for the full month than markets are used to suffering, but semi exports still fell 16.7% YoY.

It’s been a dastardly run for the country’s semi industry.

South Korea’s Finance ministry has called the country’s $22.4 billion trade deficit with Japan in inputs for semiconductor and display production a “structural vulnerability that threatens national security and manufacturing competitiveness”.

This has prompted South Korea to work towards developing its own domestic supply chains. As Bloomberg wrote earlier this month, “a presidential advisory committee is working on a broader plan that could include loosening labor and environmental rules [while] stock prices of several South Korean suppliers to the semiconductor industry, including Soulbrain Co. and Ram Technology Co., have surged in anticipation”.

If you read all of this and get the impression that it’s not necessarily a good thing for countries to be forced inward due to what, at the end of the day, is just another example of politics inserting itself in markets to the detriment of supply chain management and, ultimately, global trade and commerce, you’d be correct.

This is yet another flash point that speaks to the pernicious tendency of old disputes and nationalism to serve as hurdles to interconnectedness and cooperation, and it comes to the detriment of the global economy.

If you’re wondering whether the public understands this or whether, as is the case in America and also in Europe, voters are predisposed to getting swept up in the nationalistic fervor, we’ll leave you with the following from a Bloomberg piece out Tuesday:

An opinion poll published this week by Japan’s Nikkei newspaper found 70% of respondents said there was no need to hurry to improve ties with South Korea. A poll by Seoul-based Realmeter published in late November showed South Korean participation in a boycott of Japanese goods had increased to 72% from 66% two months earlier.


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