July 25, 2019

Japan May Soon Gain a Powerful Trade Weapon Against South Korea
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. Japan could soon gain a powerful new trade weapon against its neighbor South Korea.Tokyo set Wednesday as the deadline for public comments on whether to remove South Korea from a so-called “white list” of trusted export destinations, a bureaucratic process intended to stymie weapons proliferation. Such a move could restrict exports on hundreds of items to South Korea, hamstringing the country’s giant tech sector and potentially the production of a swathe of the world’s most popular gadgets.A dispute between two of Asia’s largest economies escalated this month when Japan slapped curbs on the export to South Korea of three materials vital to semiconductor and display manufacturing. That came after tensions flared over whether Japan has sufficiently compensated Koreans who suffered under Japan’s 1910-45 occupation of the peninsula.Stripping South Korea of its white-list designation could deal a further blow to Samsung Electronics Co and SK Hynix Inc. The move could affect 97% of Japanese imports, though any disruption should prove short-lived, economists at Goldman Sachs Group Inc. said this week. Specifically, South Korean firms would need to get individual approvals from the Japanese government for exports of 857 non-sensitive products out of 1,120 Japanese strategic materials.The other 263 products are sensitive materials for which Japan already requires approval, Park So-yeon, an analyst at Korea Investment & Securities, said in a note Wednesday. Although it isn’t clear which items will be most affected by white-list removal, promising sectors such as semiconductors as well as new energy vehicles might be impacted once blanket approval for products from chemicals to machinery are removed, analysts say.Chip Firms Face CrunchJapan accounts for about 32% or roughly $3.8 billion of South Korea’s chip manufacturing equipment imports. The larger nation yields about 83% or $422 million of its smaller neighbor’s display manufacturing gear imports, according to Lee Joo-wan, research fellow at Hana Institute of Finance.Japanese Prime Minister Shinzo Abe’s government said it’s making the moves because it found evidence that South Korea has not offered proper management of sensitive materials -- a charge the government of President Moon Jae-in has denied. Their fight has played well at home for both leaders, with Moon and Abe enjoying climbs in support for their tough stands.U.S. technology companies, however, urged Japan and South Korea to cool tensions, saying too much was at stake globally.“Non-transparent and unilateral changes in export control policies can cause supply chain disruptions, delays in shipments, and ultimately long-term harm to the companies that operate within and beyond your borders and the workers they employ,” five of America’s largest tech industry groups wrote in a joint letter to the trade ministers of Japan and South Korea.Still, economists at Goldman Sachs and Bank of America Merrill Lynch see little chance of tensions developing into a full-fledged trade war.“We do not believe that such a de-listing would necessarily lead to large, sustained disruptions in Japan-Korea trade activities, due to mutual trade dependence,” Goldman economists wrote in their note.Colonial ClaimsSouth Korea on Wednesday appealed to Japan to keep it on the list. It would hurt economic ties, the trade ministry said in a statement, as Seoul sought to convince the World Trade Organization’s general council that Japan is violating its rules -- a charge Tokyo denies.South Korean deputy trade minister Kim Seung-ho told the WTO on Wednesday that Japan’s trade restrictions were being deployed as a political tool to prevent forced-labor victims from asking Japanese companies for compensation stemming from forced-labor practices during World War II, according to an official with knowledge of the remarks, who asked not to be identified because the discussions were private.Japanese Ambassador to the WTO, Junichi Ihara, rejected Kim’s claim. He said Tokyo’s trade restrictions were a national-security matter and were not appropriate for discussion at the WTO.Resolving the export-curbs issue is difficult because it’s become entangled with a dispute over South Korean court rulings, ordering the seizure of Japanese corporate assets to compensate Koreans forced to work in colonial-era factories and mines. Tokyo has put pressure on Seoul to accept an arbitration process stipulated in a 1965 treaty that set up basic relations to settle the so-called conscripted labor issue.Japan’s decision to remove a country from the white list lies with its cabinet. But before that takes place, the Ministry of Economy, Trade and Industry will assess the public comments received and compile a set of responses. An actual decision is expected in August but in theory, Japan could decide as early as this week.The period for accepting public comments on removing South Korea was 24 days, as opposed to most cases where the window is around 30 days. That suggests the cabinet decision may come sooner rather than later. Once a decision is made, the amendment to the relevant law is publicized and comes into force 21 days after its publication.Japan could arguably end up hurting its own economy. A Japanese government official has said that removing South Korea from the white list would mean domestic exporters lose access to general bulk licenses for exporting goods. They would still be able to access special bulk licenses, instead of applying for individual approvals, that require inspection from Japan’s economic ministry, the official said.Tokyo still had questions about South Korea’s general weapons export screening system, Economy Minister Hiroshige Seko said, giving no clear indication on when Japan might make its next move after the deadline for comments closed.“We will put the public comments received in order, and disclose them at the appropriate time,” he told reporters in Tokyo Wednesday.(Corrects wording in 13th paragraph to reflect South Korean official’s remarks about forced-labor victims asking Japanese companies for compensation.)(Updates with WTO appeal starting in 13th paragraph.)\--With assistance from Yuko Takeo and Bryce Baschuk.To contact the reporter on this story: Sohee Kim in Seoul at skim847@bloomberg.netTo contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Jon Herskovitz, Edwin ChanFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
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