Japan-South Korea Dispute Could Have Broad Impacts, Including on US, Panelists Say

The dispute stems from Japan’s July 1 announcement that it was restricting export licenses to South Korea for chemicals commonly used in smart chips and other high-tech goods. Soon after, South Korea announced it was raising a dispute with the World Trade Organization, and Japan eventually said it planned to remove South Korea from its whitelist of trusted trading partners (see 1908020023).

While panelists said the move could significantly hurt Japanese exporters because they provide South Korea the bulk of the chemicals needed for chips -- fluorinated polyimide, photoresists and hydrogen fluoride -- there is an even larger, overarching concern surrounding the move. Not only did Japan restrict export licenses for certain chemicals to South Korea, it also restricted the trade of about 1,000 other goods, the panelists said. The potential effects of that move, which becomes official Aug. 28, are still unclear.

“I think the immediate impact, and even to a degree the longer impact, will be hard to judge,” Riley Walters, the Heritage Foundation’s Asia economy and technology policy analyst, said during the panel.

In its July 1 announcement, Japan said it was concerned about South Korea’s export control regime and its trust in South Korea’s controls had been “significantly undermined.” If Japan’s national security concerns with South Korea’s export controls are legitimate, the U.S. should be concerned as well, Walters said. “There should probably be more of a drive for the U.S. to get involved in that regard,” he said.

Walters and Bruce Klingner, the foundation’s senior research fellow for Northeast Asia, released a report Aug. 7 saying the Commerce Department should “hold a working-level meeting” with the two nations to ”brief Japanese and South Koreans on future changes to U.S. export-control regulations.”

But Walters also said that meeting would be difficult. “How much time does [the Bureau of Industry and Security] have to actually meet with these officials, given all the other jobs they have to take care of?” he said.

While the move was intended to punish South Korea, Japanese companies might suffer the most, said Yuki Tatsumi, director of the Japan program and co-director of the East Asia program at The Stimson Center. “These regulations, first and foremost, impact Japanese companies who try to do export business with South Korea,” she said.

The dispute boils down to disagreements between the two governments’ export control authorities, Tatsumi said. She said the only way the dispute will be solved is if the two sides talk, which they have been reluctant to do. “If a bilateral setting is too hard, maybe it needs to happen in a trilateral setting,” she said, suggesting that the U.S. can mediate. “But the two countries need to begin to talk.”

While Japanese companies will be hurt by the move, it will also have long-term consequences for South Korea and some of its companies. Walters said Japan’s decision to remove South Korea from the whitelist “could cause South Korea up to $27 billion in lost exports” and is already hurting Samsung, one of the country’s largest chip producers. The company “is already seeing significant profit losses,” Walters said.

South Korea was initially shocked by the move, said Scott Snyder, director of U.S.-Korea policy program for the Council on Foreign Relations. “South Koreans were aghast because they not only considered Japan's criticism of South Korea's export regime unfounded,” Snyder said, “but they perceived that Japan was deliberately making false accusations to undermine the international credibility of the South Korean regime.”

As a result, South Korea will likely be forced to source the chemicals needed for smart chips, as well as other goods, from alternative trading partners, the panelists said. The country could turn to Russia, Walters said, which has already offered to supply the chemicals.

And because Japan’s removal of South Korea from its preferential trading list involved Cabinet approval and a complicated and lengthy policy change, South Korea likely has no hope of reversing Japan’s decision before it takes effect in late August, Walters said. “I think the whitelist issue might be too little, too late,” he said. “It’s been decided.”

The U.S. will continue to help Japan and South Korea resolve its trade dispute, including in potential negotiations between the two sides, said Marc Knapper, the State Department’s deputy assistant secretary for Korea and Japan, speaking as a keynoter before the Heritage Foundation panel. Knapper said each country “bears responsibility” for the dispute and each will “suffer consequences” if their trade relations fall apart. “We believe some soul searching is in order about political decisions that have damaged bilateral trust in recent months,” Knapper said.

Knapper urged both countries' leaders to negotiate with “calm, confident words” and said that the U.S. believes the two can “find space for creative solutions.” He said the U.S. is invested in ensuring America, South Korea and Japan have strong relationships. “The United States will continue engaging on this issue and stand ready to facilitate dialogue between our two allies,” he said.