What's up with Japan and South Korea?

The two North Asian countries are in an economic brawl

As I sit in the airport for a few hours, what could be nerdier activity than deep-diving into an open brawl between Japan and South Korea?

It is a large bilateral trade disagreement between two nations that have traditionally made for strange bedfellows.

Japan, South Korea and China all rely heavily on one another, and yet, they have never found closure over World War II. They are allies, but they are not. They are friends, but they are not.

The three countries get into constant disagreements that undermine a trio that, if they managed to work better together, could be one of the most powerful corridors in the world.

To be clear, China is not involved in this particular fight, but the three nations make up a cursed triangle.

So let’s get into this most recent flare up.

The Basics

The tiff was started when Japan restricted exports on chemicals that are used to build semiconductors and flat screens. This hits right at the heart of South Korea, who have built one of the world’s strongest technology-focussed economies.

In Asia, the perception of South Korean technology is that it is a tough-to-penetrate economy, but possibly the best in the region. Seoul routinely ranks as the city with the world’s fastest internet and it boasts two of the most important global technology corporations (LG and Samsung).

Japan restricted the exports by citing national security concerns and said Korean officials had ‘mishandled’ the chemicals. They said the chemicals can be used for military purposes and seemed to suggest South Korea could resell it to North Korea.

South Korea thinks it is retaliation for renewed calls for Japan to pay reparations over crimes committed in World War II. Foreign policy experts seem to agree.

The Reparations

In 1965, the two countries signed the Treaty on Basic Relations Between Japan and South Korea which renewed normal diplomatic communications between the two countries.

As part of the deal, Japan agreed to facilitate US$800 million worth of economic reinvestment as a pseudo-apology for their atrocities. The most famous crime is the comfort women policy whereby Korean women were forced into prostitution for Japanese soldiers.

Over the decades, the Korean public has routinely asked for Japan to pay individual families (about 1 million people) reparations as an acknowledgement and apology for the comfort women policy.

Japan has consistently refused to pay reparations and say the US$800 million covers what they owe.

Why now?

Recently a South Korean court ruled that Nippon Steel (Japanese) used forced labour in World War II and ordered them to pay survivors US$89,000 each.

This follows a similar ruling against Mitsubishi Heavy Industries and a string of future cases that look to follow the trend.

Thus, experts think, Japan is restricting exports in retaliation.

Free Trade

It would not be global politics without mentioning the Trump administration. Trump has written the playbook for weaponising import/exports to gain political leverage and a lot of people think Japan is following this strategy.

Much like America’s strategy with China (and vis versa), the actual economic impact is minimal (economists say it will affect US$450 million worth of goods) but the two sides are stuck in an, “it’s the principal” argument.

The fight is less about the impact on South Korea (who can theoretically look elsewhere) but about Japan’s willingness to use free trade as a tool to win a political argument.

Unfortunately, both sides are so stubborn that it appears Korea will continue to move forward with reparations cases and Japan will increase its attacks on free trade.

South Korea is taking the case to the World Trade Organisation who seem willing to investigate if Japan has violated WTO regulations.

What’s Next?

Honestly, the two sides are so angry at one another that an escalation seems inevitable. At this point, even getting Japan and Korea to sit down for a meeting would be a major victory.

If the WTO rules in favor of Korea, it might force a truce (the best outcome). But, if it says this does not violate WTO regulations and is a bi-lateral spat, then this may drag on for awhile. Neither Abe (Japan) or Moon (Korea) can be seen as losing this political fight.

At the moment, the US seems unwilling to act as a mediator (being core allies to both nations). This is an unfortunate misstep given the need for the three countries to be on the same page if they hope to win the US-China trade war.