Japan and South Korea are two of the most important economies in the Asian region. South Korea has a population of more than 51 million people while Japan has more than 120M people. The two economies have a GDP of $4.7 trillion and $1.5 trillion respectively. They are two of the closest American allies in the region and are known for their huge manufacturing industries. In South Korea, the most notable companies are Samsung, LG, and Hyundai while in Japan, the most popular companies are Toyota, Mitsubishi, and SoftBank. The two countries are also close trading partners.
In recent months, investors have focused on the trade war between the US and China. As this has been going on, South Korea and Japan have been having their own trade war. Most investors are calling it the mini trade war. What is the Japan and South Korean trade war about? This article will explain.
On July 1, Japan announced that it would curtail exports to South Korea of important components that are used in the manufacture of high-tech equipment. Specifically, Japan said that Japanese companies will not sell to South Korean companies three components that are so important in the manufacture of semiconductors and flat screens. These are some of the most important components in the manufacture of advanced technology.
The Japanese move was targeted and aimed to hit South Korea hard. This is because the country is the biggest manufacture of computer chips while Japan is the biggest supplier of the materials used to manufacture them. To try to address the issue, senior officials of the two countries held a six-hour meeting that was so acrimonious that nothing of value came from it. The participants seemed to disagree on everything.
The origin of the crisis is hard to explain. Japan has said that the reason for the new restrictions is national security concerns. On this, the country has said that South Korean officials don’t adequately oversee the end use of those chemicals. It has also said that some of those chemicals have been shared with North Koreans. Obviously, South Korea has rejected these claims. In reality, the real cause of the crisis is the fact that of a recent South Korean court case that ruled that Nippon Steel used forced labor during the second world war. It ordered the firm to pay survivors more than $89k each. Nippon is Japan’s largest steelmaker. Similar cases on a number of Japanese companies are being heard and Japan has warned that it could increase the pressure on South Korea if it implemented those cases.
At present, there is no immediate problems because most South Korean companies like Samsung had already stockpiled on these chemicals. However, if the conflict continues to escalate, there could be real economic consequences. Already, South Korea has moved to the World Trade Organization (WTO) but it could take years before the case is heard.
Today, Japan released its trade data that showed exports and imports declined by 6.7% and 5.2% respectively. At the same time, the South Korean central bank slashed interest rates by 25 basis points to 1.50%.