The global tech industry could be hostage to Asian history

History wars

A trade dispute between Japan and South Korea has Trumpian echoes

The global tech industry could be hostage to Asian history

Tje Economist

Jul 18th 2019

TAKE JUST about any trade fight today, and President Donald Trump’s America is at the centre of it: with Europe over cars and aeroplanes; with foreign producers of steel; with China over, well, everything. But a brawl now under way in Asia, 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.

Tensions between Japan and South Korea go back centuries. Japan’s colonisation of Korea between 1910 and 1945 is still resented. Japan believes a 1965 agreement resolved claims by South Korea over forced labour. It is incensed that South Korea’s supreme court last year ordered Japanese firms to compensate victims (see Banyan). Amid a widening rift, Japan took its most serious action on July 4th when it began restricting exports to South Korea of three specialised chemicals used to make semiconductors and smartphones.

The stakes are high. Japan accounts for as much as 90% of global production of these chemicals. It exported nearly $400m-worth of them to South Korea last year. That may not sound like much, but their importance is outsized. They are needed to make memory chips, which are essential to all sorts of electronic devices. And South Korean firms are the world’s dominant manufacturers of memory chips. If Japan were to choke off exports, the pain would ripple through global tech supply chains.

Japan has also hinted that it might start requiring case-by-case licences for the sale to South Korea of some 850 products with military uses. South Korean firms have called for boycotts of Japanese goods. The two countries, whose trade relationship, worth over $80bn a year, is larger than that between France and Britain, need to step back from the brink.

Japan’s decision to limit exports is economically shortsighted, as it should know since it has itself been on the other side of such controls. When China restricted exports of rare-earth minerals in 2011, Japan responded by investing in its own mines. China’s market share dropped. Already, the South Korean government is discussing plans to foster the domestic chemicals production. Japan insists that South Korean companies will, once approved, still be able to buy its chemicals, but the threat of an embargo, once issued, cannot be easily dispelled.

The broader geopolitical context makes Japan’s self-harm even more reckless. Regional supply chains are already under assault. South Korean and Japanese companies are scrambling to find alternatives to China as a manufacturing base to avoid American tariffs. Mr Trump has threatened both countries with import duties on their cars.

Ultimately, it is up to South Korea and Japan to repair relations. But America’s waning interest in diplomacy does not help. And Mr Trump is normalising the use of trade weapons in political spats. His tactics teach others how to find an excuse for these actions: by citing national security. Japanese media have suggested that South Korea has allowed the shipment of sensitive chemicals to North Korea, a far-fetched claim but one that could feature in a defence of its export restrictions. Under a different president, America would be doing more to bind together Japan and South Korea, two indispensable allies. Barack Obama pushed the Trans-Pacific Partnership that included Japan, and that South Korea was expected to join eventually. one of Mr Trump’s first acts was to ditch that deal.

It is not too late to defuse the situation. The commercial damage has been limited so far. Japan is aware that, notwithstanding America’s current tactics, export controls look bad; it is thus susceptible to pressure from other trading partners. The two countries will discuss their disagreement at the World Trade Organisation later this month. This is shaping up to be a test of whether the global trading system can, despite great strains, still soothe tensions—or whether it is being supplanted by a new, meaner order, in which supply chains are weaponised and commerce is purely an extension of politics.■

This article appeared in the Leaders section of the print edition under the headline "History wars"