In recent days, South Korea and Japan have struck conciliatory notes that indicate they hope to calm the trade and bilateral tensions that have built up over the last six months. At the time, Japan’s decision to place export controls on certain items exported to South Korea was seen as having the potential for significant economic disruption. However, the economic damage from the dispute, while damaging for some actors, has been largely contained.
The trade tensions began with Japan’s decision in July to place national security restrictions on the export of three critical chemicals for the production of semiconductors and subsequent removal of South Korea from its “white list” of trusted partners. These decisions introduced a degree of uncertainty into South Korea’s economic relationship with Japan that had not existed since the normalization of relations in 1965.
The restrictions sparked concerns because hydrogen fluoride, fluorinated polyimide, and photoresists are all critical to the production of semiconductors, South Korea’s top export industry, and largely only produced by Japanese companies. South Korean companies would have few alternatives if Japan were to completely cut off exports under the new national security restrictions.
South Korea’s inability to acquire key chemicals vital for the production of semiconductors would not only damage the country’s semiconductor industry, but also potentially affect producers of smartphones and other consumer electronics around the world. The impacts could even reverberate in the automotive industry, where electronic and digital components now account for 40 percent of inputs; Samsung produces automotive chips for companies such as Audi.
South Korea responded to Tokyo’s actions by removing Japan from its own “white list.” Tensions would ultimately spill over into national security space as Seoul decided to allow its intelligence sharing agreement with Japan to lapse before changing course at the last minute.
Despite the tensions, the overall economic relationship seems to not have been significantly affected based on recently released trade data for 2019. For the year, South Korean exports to Japan were down 6.9 percent, while imports from Japan were down 12.9 percent. However, both exports to and imports from Japan were already on a declining trend in the first half of 2019, before the tit-for-tat trade restrictions.
The decline in exports to Japan last year was significantly less than the 20.9 percent decline in 2015, while the decline in imports is in line with the 14.7 percent decline the same year. Both the overall trend from 2019 and the relative decline compared to 2015 suggest that current dispute has only had a minor impact in the overall trade relationship. In fact, some trade areas continued to grow: South Korean exports of lithium-ion batteries to Japan, for example, were up 73.2 percent.
This is partially because both sides took steps to contain the dispute early on. After deciding that it would not renew its intelligence pact with Japan, South Korea announced at the last moment that it would remain in the agreement as long as talks over the export controls were ongoing. Japan announced its first export license for one of the restricted chemicals in August and by October had approved at least one shipment of each chemical. In December, Japan also provided a three year bulk permit for the export of photoresists.
As a result, the economic pain has been concentrated, rather than spread across South Korea and Japan’s trade relationship.
Among the three chemicals that Japan placed national security restrictions on, hydrogen fluoride seems to be the only one where the restrictions have had a significant impact. Imports of hydrogen fluoride came to a halt during the initial three months after the restrictions were put in place, and fell from $33.7 million in the first half of 2019 to only $1.6 million in the second half once exports resumed. In contrast, South Korean imports of photoresists, while down 10.2 percent from last year, didn’t see a significant decline in the second half relative to the first half. Imports of fluorinated polyimides were up, including in the second half of 2019.
A more surprising feature of the trade tensions was the South Korean public’s response in the form of boycotts on Japanese products and travel to Japan. This too has had mixed outcomes.
One of the more prominent items to be boycotted is Japanese beer. Japanese beer has consistently been the most popular imported beer in South Korea and accounted for a quarter of all South Korean beer imports in 2018. However, as a result of the boycotts, imports of Japanese beer are down 49.2 percent in 2019 and have essentially stopped since August.
While Japanese fashion retailer Uniqlo has faced boycotts and seen its situation in South Korea continue to deteriorate, trends in the trade data do not indicate an overall decline in imports of shirts and blouses from Japan as a result of the boycott. While this may be reflective of China accounting for roughly half of Uniqlo’s production, there does not seem to be any significant shift in South Korea’s imports of clothing overall.
The story is more mixed for the automobile sector. Sales of Toyota automobiles were down 36.7 percent for the year, while Nissan saw a decrease of 39.7 percent. Their luxury brands, Lexus and Infiniti, saw declines of less than 10 percent. However, Toyota sales were already down 23.4 percent through the first half of 2019, while Nissan sales were down 25.4 percent. For Toyota and Nissan the boycotts worsened what was already a declining trend. On the surface, Honda seems to have avoided the boycott and saw its sales rise by 10 percent last year, but through June its sales had been up 94.4 percent, suggesting its growth in the second half of the year saw a steep drop-off.
Tourism has also been impacted. South Korea traditionally has been the second largest source of tourists for Japan, accounting for nearly a quarter of all visitors to Japan. While full data for 2019 is not yet available, the number of South Koreans traveling to Japan will likely reveal a decline by at least 50 percent in the second half of 2019.
It’s less clear, however, whether the dispute is beginning to affect Japanese outbound tourism to South Korea. For most of 2019 there had been steady growth of 20 percent or more each month through July, but that began declining in August and turned negative in October. There was strong growth in Japanese tourists in 2018, so this could be a trend worth watching.
In the long run the dispute could result in a partial decoupling between South Korea and Japan in the tech industry. Samsung and other companies have begun to look to Korean producers to replace supplies from Japan, while the South Korean government is investing in the domestic production of semiconductor materials. Foreign firms are also taking advantage of the dispute. The U.S. chemical firm DuPont is expected to invest $28 million in two existing factories in South Korea and to build a new factory to make photoresists that can be used in the production of semiconductors.
Significant damage from Japan and South Korea’s trade dispute has been avoided so far, but that could change if the situation were to return to an escalatory cycle. If the South Korean Supreme Court were to begin liquidating assets that it has seized from Japanese companies, Japan could decide to take additional steps. South Korea has already indicated that its delay in withdrawing from its intelligence sharing agreement with Japan will not be permanent if there is not progress on the trade issues. But for the moment what damage there has been from the dispute has largely been limited.