A man walks past the logo of Samsung Electronics outside the Samsung building in Seoul on January 31. Samsung would be one Korean company to suffer from a Japanese cutoff of semiconductor materials. Photo:AFP / Jung Yeon-je

Seoul will take countermeasures in response to a Japanese government plan that will tighten regulations on exports to South Korea of essential materials used in semiconductors and displays.

The Japanese plan, announced Monday, apparently is a retaliatory measure against a court ruling requiring compensation for Korean victims of forced labor.

In October, the South Korean Supreme Court ordered Nippon Steel and Sumitomo Metal Corp. to compensate four Koreans who were forced into labor during Japan’s 1910-45 colonial rule. The Abe government immediately protested the ruling, insisting that individual compensation claims to forced labor during colonial rule were settled under the treaty that Seoul and Tokyo normalized diplomatic relations.

The Korean government said it would take countermeasures, including a World Trade Organization complaint. Although, for now, the government seems ready to fight back, some observers think it may seek a diplomatic solution after going through a cooling-off period.

Japan’s Ministry of Economy, Trade, and Industry on Monday tightened export regulations for the Japanese chip and display material manufacturers to obtain approval from the Japanese government when they export to Korea fluoride polyimide, which is used in smartphone displays; etching gas, for semiconductor cleaning; and resist, used to make semiconductor substrates. The Japanese government explained that the reason behind the move was that the trust relationship between the two countries had been significantly damaged.

Korean Trade, Industry and Energy Minister Sung Yun-mo said that the Japanese government’s export restriction measures are “economic retaliation” against the Korean Supreme Court ruling. He added that the export restriction measures not only breach the principles of WTO but also run squarely counter to an agreement made in the G20 Summit Declaration chaired by Japan last week to “build a free, fair, non-discriminatory, predictable and stable trade and investment environment and market opening.”

“In the future, we will take necessary steps under international and domestic laws, including the WTO complaint,” he said.

The government was busy holding a series of emergency meetings. It had a minister-level meeting presided over by Finance Minister Hong Nam-ki and a meeting with semiconductor and display makers.

A Korean official said the government would monitor the situaiton for the time being, as Japan has not immediately halted exports of materials used in manufacturing semiconductors and displays.

The semiconductor industry is also refraining from elaborating for the time being.

Diplomatic solutions is  best to avoid industrial damage

According to industry officials, the three materials that Japan has restricted are essential for the production of organic light-emitting diode (OLED) displays and semiconductors, with Japanese companies having a 70-90 percent global market share.

South Korean companies such as Samsung Electronics, SK Hynix and LG Display are highly dependent on Japanese products. Industry officials said it is not in a situation where production is impossible right now as Korean firms have secured some materials inventory alongside a large inventory of semiconductors.

Japan did not ban exports outright but decided to undergo an expert review that takes about 90 days, giving hope that production may be possible even after the current materials inventory is exhausted.

“We are relatively less dependent on Japanese products for hydrogen fluoride as it is produced in Korea,” an industry representative said. However, “resister is 90 percent dependent on Japanese products.”

The official said inventory secured by the industry “is slightly  less than the three months that many media reports mentioned.” In other words, if the Japanese delay the review of exports, there could be production disruptions around August and September.

Some observers say that although the government has taken a tough stance for now by mentioning a WTO complaint, it should wait to act because strong confrontation does not help national interests.

In a telephone conversation with Asia Times, a former senior government official said, “We may file a complaint with the WTO, but it is best to take a cooling-off period for the time being and then seek a diplomatic solution.” The former official added, “We need to push for a summit to normalize soured South Korea-Japan relations.”

The government also said it would take Japan’s move as an opportunity to enhance the competitiveness of the parts and materials industry.

“We have been pushing for diversification of import lines, expansion of domestic production facilities and localization of core parts and materials in preparation for Japan’s economic retaliation,” trade minister Sung said. “We will make every effort to provide support to minimize damage to our companies, and use it as an opportunity to enhance the competitiveness of our parts, materials, and equipment.”

A government official said that Japan’s move would speed up the localization of semiconductor materials in South Korea, which will eventually hurt Japanese companies as well. He also said that Japan’s move might raise chip prices, bringing about concerns over a possible disruption in production of memory chips.

Japan’s deputy chief cabinet secretary Yasutoshi Nishimura told a regular briefing that his country’s move was “in accordance with international export regulations and World Trade Organization rules.”

Japan has rejected South Korean court rulings that Japanese firms compensate victims of wartime forced labor, proposing that the issue be put to arbitration under an agreement signed by the two countries when they normalized ties.

South Korea countered with a proposal for local and Japanese firms to set up a voluntary compensation fund, which Tokyo flatly rejected as “unacceptable.”

When relations were normalized, Tokyo agreed to a reparations package of grants and cheap loans for victims of various wartime policies, which it says resolved all outstanding claims.

–With additional reporting by AFP–

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