Trouble is mounting for global free trade. Last month, a report from World Trade Organization (WTO) director-general Roberto Azevêdo revealed that, from mid-October 2018 to mid-May this year, member nations had applied 38 new trade-restrictive measures – from tariff rises and/or impositions to import bans, special safeguards, import taxes and export duties.
The report puts the total trade impacted by those measures at around $339.5bn – 44% higher than the average sum recorded since the first report on this topic emerged from the WTO in October 2012.
Azevêdo said: “The message of the report before us is very serious. These actions have real economic effects, and the alarm bells are already sounding. It is essential that we tackle the tensions that are leading to higher trade barriers, greater uncertainty and lower economic and trade growth.”
By any measure, the most visible trade dispute since US President Donald Trump took office in January 2017 has been the metronomic tit for tat between the US and China – although Trump has also begun to turn his attention to Europe.
Under these strained and volatile circumstances, the world needs a trade war between the economies of Japan and South Korea like a hole in the head. And yet… here we are.
The friction goes back a long way. From 1910 to 1945, Japan had colonised the Korean peninsula – a period characterised by human rights abuses of the native population, including forced labour.
Following two decades of continued acrimony in the wake of World War II, officials from each side met in Tokyo on 22 June 1965 to sign the Treaty on Basic Relations Between Japan and the Republic of Korea: a document that formalised the nations’ intent to pursue peaceful ties from that day on.
Marrying the relatively smooth political and commercial relationship between the two countries with the colonial past has proved troublesome. In 2005, four South Koreans filed a lawsuit against Japan’s Nippon Steel and Sumitomo Metal Corp (NSSM), alleging that the firm owed them $83,000 (100 million South Korean won) for work they performed against their will during the era of Japanese rule. Their case made grinding progress through the South Korean legal system, and on 30 October last year, the Seoul Supreme Court ruled in favour of the plaintiffs.
Only one of them – 94-year-old Lee Chun-shik – survived to witness the ruling. According to his testimony, he had endured two and a half years of unpaid hard labour at a Japanese steel mill in the city of Kamaishi.
Throughout the case, NSSM had argued that the Treaty of 1965 had effectively wiped the slate clean of further obligations to Korea, and that any bid for backdated compensation was therefore null and void.
However, following the Supreme Court’s ruling, the plaintiffs’ attorney Kim Sae-eun stressed: “The court saw that any anti-humanitarian, illegal acts made during the war were not part of the Treaty. It sets a milestone for other compensation lawsuits filed by Koreans against Japanese entities.”
The Japanese government did not share Kim’s view.
In response to the ruling, Japan made it clear that, in the wake of the 1965 Treaty, it had already paid out $300m in aid and $500m in loans to South Korea – funds that enabled the recipient nation to transform itself into a modern, industrial economy.
Japan also pointed out that South Korea had never directed any of the funds to the coffers of those who had served as labourers during the colonial era.
To drive its annoyance home, the Japanese government announced on 1 July that domestic firms would have to apply for special licences to export three key materials to South Korea that are of vital importance to its technology sector.
Japan’s measure covers the chemicals fluorinated polyimide and hydrogen fluoride, plus any material classified as a photoresist. All three resources are used in South Korea for the production of smartphone displays and semiconductor chips.
The requirement for Japanese exporters to apply for licences in order to send the materials to South Korea means that major chipmakers – including Samsung and SK Hynix – could face delays of up to 90 days in getting hold of resources critical to maintaining output.
With Japan producing anything from 70% to 90% of the now-restricted materials, South Korea’s dependence upon them as an importer has been significant.
According to the Korea Economic Research Institute, if the volume of relevant supplies from Japan were to reduce by just 30%, it could force South Korea’s GDP to drop by 2.2% – equivalent to $35bn.
Following Japan’s announcement, South Korean President Moon Jae-in quickly weighed in with a sense of the big picture, saying that the restrictions “have sparked concerns over feared production disruptions at our companies, which would in turn threaten the global supply networks”.
He added: “Such moves – putting restrictions on private companies’ mutually beneficial transactions for political purposes – cause concern not only to South Korea, but to the whole world.”
Moon stressed that Seoul would prefer to reach a “diplomatic settlement” to the crisis, pointing out that a deterioration into tit-for-tat measures would work in neither country’s favour.
A damning 21 July editorial from Bloomberg argued that Japanese premier Shinzo Abe had undermined his own reputation as “a leader who had, till now, won well-deserved plaudits for strengthening the global trading order”.
It stressed: “The damage could go well beyond Abe’s reputation. Japanese suppliers will lose market share – and their reputation for reliability – if some of their biggest customers are forced to look elsewhere.” On an even more serious note, it added: “Mounting tensions risk undermining security ties.”
So what does this crisis say about the condition of global trade in the Trump era? A Los Angeles Times analysis points out that there are pre-Trump examples of such flare-ups, noting: “When Norway awarded a Nobel Prize to a dissident Chinese author in 2010, Beijing responded by clamping down on imports of Norwegian salmon. It punished the Philippines in 2012 with similar tactics over a territorial dispute that had nothing to do with trade.”
However, another take from The Economist warned that the spat between Japan and South Korea “has the potential to be as damaging as much of what Mr Trump has stirred up. It is also a sign that his model of abusing economic partners is spreading”.
At present, the chances of Japan and South Korea finding common ground are vanishingly small. For example, on 2 August it emerged that Japan had decided to remove South Korea from its ‘white list’ of trusted trade partners.
Moon reacted furiously to what he saw as a “selfish act”, telling a televised cabinet meeting that responsibility for what happens next “lies squarely with the Japanese government”.
He warned: “Though Japan is an economic powerhouse, if it were to damage our economy, we likewise have countermeasures to implement in kind.”
Matt Packer is a freelance business, finance and leadership journalist