The difficult relationship between two key US allies in Asia-Pacific has become a full-blown trade war, which is bound to have an impact on the global economy.
International norms, regimes, behaviour patterns and regional balances are unravelling across the world. The pace of historical transformation seems to have increased dramatically in this chaotic ‘age of transition’, characterised by a substantially weakening international liberal order.
The unleashing of trade wars between Washington and Beijing has created a global policy atmosphere in which the aggressive use of economic means to acquire relative advantage, is legitimised. The neoliberal consensus among the industrialised nations, which is based on trade liberalisation, financial integration, the promotion of Foreign Direct Investment flows and the avoidance of protectionism, has been broken.
Instead, there is the adoption of aggressive and selective forms of neo-mercantilist protectionism on the basis of strategic sectors, products, and even flagship companies have constituted ‘worst practices’ that will be followed by other developed countries.
The latest manifestation of the trade and technology wars is taking place between technological powerhouses in Asia-Pacific, namely Japan and South Korea.
Tensions that have been running high due to diverging interests in regional geopolitics and historical disputes going back to colonialism and World War II have rapidly escalated, triggering a regional trade and technology war.
The left-wing Korean administration under President Moon Jae-In has been playing to consolidate its domestic political constituency by keeping a spotlight on human rights abuses committed by the former colonial patron Japan, highlighting issues such as the historic use of forced labour and 'comfort' women.
In recent months, the situation has rapidly escalated as a turf war between two key regional US allies trying to adapt to the void created by the gradual withdrawal of Washington from the international stage.
Last year, the Korean High Court ordered that Japan’s largest steel producer Nippon Steel should pay a substantial compensation package to Korean workers who were employed as forced labour under the colonial administration.
The administration of conservative Japanese Prime Minister Shinzo Abe disputed the ruling as politically motivated, claiming that $500 million was already paid after the Normalization Treaty in 1965, which covered all compensation claims from Korea.
However, Abe did not stop at that and went a step further sending a strong message to his Korean counterparts which doubled as a message to his conservative base at home.
In July, he sanctioned a carefully-drafted economic sanction package including export restrictions for fluorinated polyimides, photo-resists, and hydrogen fluorides, three critical chemicals used in the production of high-tech semiconductors, memory chips and displays for consumer products by Korean electronics giants.
Japan’s dominant global position in the supply of these chemical intermediary goods gave them a strong bargaining position and finding alternative suppliers looked costly and time-consuming for the Korean producers.
In recent years, the deepening integration and emergence of regional production networks between Japanese and Korean economies have supported an effective division of labour between Japanese suppliers, known for their high quality, and Korean conglomerates such as Samsung, LG and SK Hynix, striving for international competitiveness in mobile phones, DRAM memories and other electronic devices.
But as bilateral relations started to deteriorate quickly—with South Korea cancelling an intelligence-sharing agreement which could jeopardise US strategy in Asia-Pacific, and Japan imposing new licenses for the export of critical chemicals—this economic architecture is looking very fragile.
Bureaucratic procedures to furnish licenses for the export of fluorinated polyimides, photo-resists, and hydrogen fluorides might take up to three months. Such a development might trigger substantial delays in the supply chains of electronics goods produced by Korean conglomerates, thus harming their international competitiveness.
More importantly, as Korean firms supply over 90 percent of all smartphone screens and 60 per cent of all memory chips in the global market, such delays are likely to have a negative impact on other global giants, like Apple or Huawei, that rely on those components.
Samsung and LG have already started looking for other suppliers in Europe, Taiwan, China and Canada to avoid a potential slowdown.
The brinkmanship may damage the Japanese economy which is struggling to find momentum as its conglomerates stand in the shadows of their more dynamic and competitive Korean counterparts. The loss of substantial sources of export revenue and marketing channels may also create serious structural problems for the Japanese private sector.
Nevertheless, Japan widened the frontline in trade wars and dropped Korea from the ‘White List’ of its favoured economic partners, as a result of which Japanese companies had to go through additional procedures to export around 800 strategic materials to Korea. This could trigger delays in exports needed by Korea’s high-tech economy.
The emerging political atmosphere is likely to encourage Korean companies to gradually reduce their dependence on Japanese components, thereby minimising the degree of economic interdependence between the two countries.
Seen from the prism of international competitiveness, trade and technology wars between Japan and Korea display similar dynamics to those running between the US and China. While Japanese companies still have a competitive lead on basic research and the production of capital and intermediate goods necessary for high-tech manufacturing; they are lagging behind their more dynamic Korean counterparts in the commercialisation of consumer goods, global marketing and branding strategies.
Korean electronics giants like Samsung and LG have overtaken Japanese multinationals like Sony, Panasonic and Toshiba in the international markets and compete for leadership against Apple and Huawei while using Japanese intermediary goods. This could become a matter of national pride for Japan.
Japan’s neo-mercantilist actions targeting Korean firms could be perceived as defensive measures designed to preserve its regional and international gravitas while delaying the loss of its competitive edge. It is too early to say whether this neo-protectionism will promote the competitive performance of Japanese industry or damage their position by triggering new global supply chains.
While the trade spat between the United States’ two closest allies escalated, observers who expected mediation from the US were left disappointed thanks to Trump’s reluctance to initiate stabilisation initiatives. Instead, China tried to fill the void by inviting the foreign ministers of both sides to Beijing for reconciliatory talks.
Rising tensions and nationalistic reactions in both domestic polities indicate that neither Japan nor Korea could immediately backtrack from their positions.
Sophisticated trade and technology wars both in the global environment and the regional sub-system in the Asia-Pacific could well constitute the ‘new normal’.
At a time when the global economy is struggling to maintain any momentum due to ongoing trade wars and declining consumer demand, the rift between Korea and Japan is bound to exert another structural blow to international trade flows, cost structures and supply chains.
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