(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. Japan’s trade curbs on
South Korea have so far been a case of “the bark was worse than the bite,” with only limited fallout for South Korea’s
economy, according to Citigroup Inc.Japan’s tighter scrutiny of exports of three key materials used in the chip industry and Tokyo’s removal of its neighbor from a list of trusted trading partners have had little impact on South Korea’s imports of industrial and capital goods, Citigroup economists Marie Kim and Jeeho Yoon wrote in a report Friday. The moves have, however, spurred South Korean efforts to reduce economic reliance on Japan, the analysts wrote.“Ironically, we feel that this tension rather brought in positive implication to the Korean economy, albeit small,” the economists wrote. Since
Japan began applying trade pressure, South Korea’s government has encouraged domestic production of key manufacturing items and boosted spending on research and development in the 2020 budget, according to the report.Meanwhile, South Korean boycotts have led to a plunge in sales of Japanese consumer goods in the country and a decrease in tourists to Japan, who may have decided to travel domestically instead, according to Citi.The spat between the two neighboring countries has its roots in a dispute over Japan’s colonial past. Tension escalated in July when Japan tightened export controls on chemicals used by South Korean companies to make chips and displays. Tokyo then removed South Korea from its list of trusted trading partners.South Korea responded by stripping Japan from its own list and announcing a planned withdrawal from an intelligence-sharing pact. With the intel pact set to expire on Nov. 23, the two countries’ defense chiefs discussed a potential extension at an “in principle” level, Yonhap News reported over the weekend.Last month, South Korean exports to Japan fell 14%, while imports from Japan slid 23%. South Korea’s trade ministry attributed the declines to industrial factors rather than trade curbs.“Japan could toughen the export regulation at any time and this ‘limbo’ situation could last for a while without a concrete resolution,” Citi’s economists wrote.(Updates to add details on status of intelligence pact)To contact the reporter on this story: Jiyeun Lee in Hong Kong at jlee1029@bloomberg.netTo contact the editor responsible for this story: Paul Jackson at pjackson53@bloomberg.netFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.