As trade war counts down, Seoul offers olive branch to Tokyo

Amid product boycotts and furious rhetoric aimed at Japan, a South Korean government official told foreign reporters this afternoon that Seoul is open to bilateral or trilateral dialog over Tokyo’s recently announced export restrictions.

However, the official slammed the ostensible grounds for Tokyo’s restrictions on exports to Korea of chemicals essential in the manufacturing of semiconductors, outlined the damage the step could cause to the global economy, and strongly warned Japan against escalating the dispute.

The United States, which has thus far been silent on the chasm opening up between its two key allies in strategically critical Northeast Asia, looks poised to step in.

The issue was ignited when Tokyo announced in the first week of July that it was implementing a new, 90-day approval process for exports to South Korea of three key chemicals essential in the manufacturing of semiconductors – Korea’s flagship industrial sector. That move was immediately perceived in Korea as “retaliation” against action taken by Korea’s Supreme Court in January to seize assets from Japanese firms to compensate wartime forced laborers.

Tokyo, already exasperated by a range of moves taken by Seoul’s Moon Jae-in administration, insists the issue of forced labor was addressed in a laboriously negotiated 1965 diplomatic normalization treaty, which was accompanied by hundreds of millions of dollars in grants and soft loans.

The Japanese action has sparked a stern verbal response from President Jae-in Moon, indignant editorials and product boycotts. Some retailers are posting signs saying “No Japanese products sold here;” some pubs are reportedly selling Japanese Asahi lager at KRW1 million ($846) per glass – an impossible price.

Meanwhile, the clock ticks. Asia Times has learned that Korean firms have less than 90 days supply of the critical chemicals in stock.

Plea for dialog

Despite the near-hysterical national atmosphere, the official – who, in an apparent nod to Japanese sensitivities, took care to mention the hopeful outlook for Japan’s new “Reiwa” era and praised the excellence of the country’s industry and some of its prior statesmen – was pragmatic.

“We are open to constructive suggestions,” the government official, an impressive briefer who has worked at both Samsung and the WTO, said. “The preferred mode is to solve this issue through dialog.”

Given the relatively modest amounts of compensation the court judgment encompasses, he said, “It makes eminent sense to solve this problem in an amicable and constructive manner.”

Regarding Tokyo’s position that the January court move undermines the 1965 treaty, the official cited firewalls between the executive, legislative and judicial branches of government. “The ‘separation of power’ doctrine is up there with god and county, and Korea as a democratic nation, cannot discard a Supreme Court ruling,” he said. “We have to live with the Supreme Court decision.”

He hedged on the issue of third-party arbitration – as called for in a clause in the 1965 treaty which Japan has requested be honored, and which Korea had earlier declined. While saying he took a “neutral stance on the issue,” he added that he “is not hostile to it.”

Citing his pre-governmental experience as a lawyer, the official explained that arbitration processes tend to be time consuming, and often end with compromises that are unsatisfactory to both parties.

For similar reasons, he questioned the efficacy of a Korean complaint to the WTO – a move widely mooted in Seoul – given the time that body would likely take to reach a decision.

Moreover, it is not clear that Seoul could prevail in any WTO case, given that Japan has cited “national security” as grounds for its action.

Japan’s move certainly looks like a sniper shot aimed at the heart of the Korea economy. Semiconductors make up 25% of Korean exports, the official noted, while Samsung, Korea’s biggest chip maker, represents some 21% of Seoul’s stock market value.

It has not been made public what supply of the chemicals key manufacturers Samsung and SK Hynix hold in stock. Analysts are also divided over how easy or difficult it would be for the two to diversify their supply of the materials. However, a source familiar with the industry told Asia Times that the Korean companies have less than 90-days supply of the chemicals.

How the Japanese restrictions will work in practice should soon become known. Applications for the chemical exports have already been filed, another South Korean government official confirmed, though he did not know the exact date of the application.

This indicates that, within less than 90 days, it will be clear how the export approval process works. Timing is critical: A source familiar with the industry told Asia Times that the Korean companies have less than 90-days supply of the essential chemicals, indicating how urgent a solution is.

If it turns out that the export process is merely delayed, the current sturm und drang may evaporate. (Though a climb-down by Moon, who has been making robust statements over the issue, might prove tricky.) If Korea’s worst fears are realized – ie the export approval process proves to be cover for an actual export ban – the situation looks set for a dramatic downward spiral.

Possible solution, stern warning

While making clear his preference for a swift solution through dialog, the official also lambasted Japan for its lack of commitment for the free trade regime it had preached at the Osaka G20. He also homed in on what looks like the Achilles heel of Tokyo’s action: Its ostensible grounds for imposing the onerous new export process.

Citing Japanese statements alleging that some of the chemicals might have ended up in North Korea, the official said: “We have an extremely tight export regime control – probably  more restrictive than the Japanese version.” He added that Korea is a signatory to four related international agreements.

He also offered an exit ramp for both parties.

“Our thought is, ‘Let’s take it to the UN Sanctions Committee to see whether or not we are in violation’,” he said. “We will be more than happy for the UN Sanctions Committee to scrutinize all alleged violations. If it turns out that we are in full compliance with these export control regimes, I guess there is no ground for maintaining these measures.”

But if the measures remain in place, and if Korea’s chip output does, indeed, slow down or sputter out, companies across the world, as well as “billions” of consumers of electronic products would be impacted, he warned.

Ominously, worse could lie ahead. Tokyo has signaled that, next month, it may remove Korea from a “white list” of preferred export destinations. That could potentially delay the shipment of over 1,000 items to Korea – well beyond the three chemicals already subject to new processes.

“That would be a very, very significant act,” the official said. “If that happens, it will cause a tremendous amount of problems and will definitely put a strain on [Korean-Japanese-US] trilateral cooperation.” He added: “I hope we don’t get to that point.”

He declined to respond to a question regarding whether Seoul was mulling retaliation against Tokyo. That would be tall order against an economy three times its own size – but Korean firms are also suppliers to Japanese firms, offering some potential leverage.

Time for US mediation?

In the past, the Barack Obama administration has mediated when the two countries – deeply divided over historical and historiographical issues – have knocked heads.

Asked if a US intervention might be workable, the official said: “That formula worked before, so when the US called for a trilateral meeting to take place in Tokyo for high level officials’ meeting, we said ‘Yes,’ but Japan said ‘No’.”

He confirmed that while he had met a visiting US official on Wednesday morning for wide-ranging discussions, he had not requested mediation. Last week, US Ambassador to Korea Harry Harris had said that the time was not right for US mediation

However, perceptions in Washington may have shifted.

The Asia Times has learned from sources in both Asia and the United States that American pundits hold the Moon administration to blame for the fraying Seoul-Tokyo ties with a series of provocative acts, including its unilateral abrogation of a 2015 agreement on “comfort women,” and a Korean destroyer’s apparent target radar lock-on of a Japanese reconnaissance aircraft.

However, some of those pundits are also dubious about the stated grounds for Japan’s action, and fret over the impact the Tokyo-initiated dispute could have on trilateral security cooperation in the region.

Given this, there are signs that Washington might proactively parachute into the dispute between its two Northeast Asian allies. According to reports from Washington that have not yet been confirmed, Asia National Security Advisor Matthew Pottinger will deploy to the region by this weekend to ease the crisis.