Since July 1, 2019, the tension between South Korea and Japan has escalated quickly and two countries are currently amidst a trade war with each other. What seems to be the dispute over export and security issues is, in fact, a decades-long dispute over reparations and apologies (or the lack of thereof) from Japan to South Korea after the World War II. What has happened between Japan and South Korea and how will this trade war influence the economy?
On-the-surface reasons for economic war
On July 1, Japan has announced putting a restriction on the export of three chemicals that are crucial in the production of semiconductors and flat screens used in smartphones and other high-tech devices. This move was backed up by claims that exported materials are being applied outside the above-mentioned field and can be utilized for military purposes. There was even a suggestion that North Korea might have access to those chemicals. South Korea has conducted the investigation and found no evidence supporting such claims.
The economic trade between Japan and South Korea lasted for more than 50 years, reaching USD 82 billion in value as of 2017.
Under-the-surface reasons
Experts believe that Japan has restricted exports in response to South Korea court’s decision ordering a USD 98,000 reparation to be paid by Nippon Steel to each survivor of forced labor during Japan’s colonial rule over Korean Peninsula. According to rulings of the South Korean Supreme Court, such companies as Nippon Steel, Panasonic, Nissan, and several other giant Japanese corporations, have built their prosperity forcing Korean people into what many claims to be non-paid forced labor in Japanese factories.
This issue was supposed to be settled by the 1965 Treaty. According to it, Japan paid about USD 300 million to South Korea in aid marking the beginning of the economic relationship between the countries. Yet, it seems that barely any of that money was paid to the victims. Instead, South Korea used the money to accelerate its industrialization.
Nevertheless, the economic trade between Japan and South Korea seemed to be going fine for more than 50 years, reaching USD 82 bln in value as of 2017. However, recent revisions of the 1965 Treaty by South Korean commission have found that its clauses do not cover “illegal acts against humanity”, claiming that Japan still has to pay reparations to Korean workers. Japan, in turn, insists that it has both apologized and paid their dues many years ago.
The opinions have split. South Korea wants more apologies and reparations. Japan believes that Korea undermines international agreements by pressing their charges again. Japan has long warned South Korea that if it implements the court decision to pursue more reparations from Japan, Japan will impose economic measures. And so did it happen on July 1, 2019.
Last week both sides met to discuss the situation. However, they never reached any consensus. Eventually, South Korea announces that it plans to submit a complaint to the World Trade Organization accusing Japan in unfair trade practices.
What are the potential consequences?
While the world gets ready to embrace the G5 revolution in smartphones, the trade war between Japan and South Korea can disrupt this process. South Korea is the biggest producer of chips used in smartphones, and Japan is the biggest supplier of materials to produce those chips. So far, South Korea has enough supply to continue producing chips.
Yet, South Korea is dependent on Japan to a large extent. Nevertheless, Hong Nam-ki, the Finance Minister of South Korea, stated that Korea is “working on comprehensive plans to reduce the country’s dependence on Japan’s materials, components and equipment industries.” President Moon believes that “eventually, it will be the Japanese economy that will be damaged more.”
"Otsumami" - a bite size snack:
Following the export restrictions, South Korea aims to end its dependency on Japanese supplies.
