“You will get it wrong if you view this only as a trade war.” Those were ominous words from Japanese Finance Minister Taro Aso, and arguably the most honest take yet on the Tokyo-Seoul trade war. This, as Aso put it over the weekend, “is turning into various phenomena beyond a mere” dispute about the shipping and arrival of goods. Consider it the economic equivalent of a blood feud that’s about to take the global economy along for the ride.
The ride is just beginning. The question, of course, is how big of a ride, how long, and how damaging it might be for global growth and stability. The honest take – to match Aso’s – is that economists have never before seen a Japan-Korea dustup like this on which to base risk assessments.
Welcome to a new trade war
Deep backdrop matters, too. Japan and South Korea are coming to economic blows – unprecedented ones – as Donald Trump and Xi Jinping brawl in the background. And those hits are growing in intensity. On Friday, US President Trump announced 10% taxes on another $300 billion worth of Chinese goods, on top of the $250 billion he’s already taxing at 25%.
Prime Minister Shinzo Abe chose that same day – last Thursday – to confirm his decision to scratch South Korea from Japan’s “whitelist” of favored economic partners. President Moon Jae-in called it a “selfish, destructive act that will cripple the global supply chain and wreak havoc on the global economy.” Korea responded within hours, striking Japan from its own list.
The fallout in Korea already has analysts revising profits outlooks for names like Samsung Electrics and SK Hynix. Korea has watched exports and gross domestic product slide as the US tariffs bite into Chin’s its No 1 trade partner. Abe’s Trump-like assault on Korea’s export engine will hurt, too. When the Bank of Korea surprised markets last month with an interest-rate cut, it cited Japan’s earlier move to tighten restrictions on exports of materials for making chips and smartphone displays.
It’s harder to discern the damage South Korea’s intensifying #BoycottJapan movement might do to Abe’s economy. It could be bigger than economists think.
What is the damage spectrum?
South Korea is Japan’s third-biggest trading partner on a country-to-country basis, though trade with China and the United States are far more vital to Japan’s all-important export engine. Overseas shipments from Japan to the US are two and a half times as big as Korea’s US$53 billion annually.
But it’s the cumulative effect that matters. Trump is already taxing imports of steel (25%), aluminum (10%) and soon virtually everything sent from China. His White House is also clamping down on side avenues via which Seoul can limit damage – such as exporting metals via Vietnam. Trump is threatening 456% duties on Hanoi.
Trump’s efforts to tackle China already have Japanese exports down for a seventh straight month (and probably an eighth when July data are released). The 6.7% drop in June was a China-slowdown story. China, after all, grew at the slowest annualized pace in 27 years between January and March – 6.2%.
Now you have Korean outlets of some of Japan’s top retail names facing intensifying boycott troubles. Uniqlo, Muji, Daiso, 7-Eleven and other Japan Inc retailers are suffering dwindling shopper-traffic numbers.
We’re not necessarily talking about recession-causing blows here: after all, much of the economic relationship is B2B, not B2C; the latter is more visible and easier to boycott. And within Asia, South Korea is only fourth-biggest supplier of foreign direct investment into Abe’s economy, trailing Taiwan. That suggests that an air of hype could be seeping into debates about how much Korea can hurt Japan.
But again, context matters. A new Reuters poll has Japanese gross domestic product growing at annualized 0.4% at best in the second quarter. With so little room for error, any lost business, or trade, is an economic own-goal. Case in point: a growing backlash against Japanese beer, clothing, anime, J-pop, gaming companies, films and, of course, travel. Carriers from Korean Air to Asiana are reducing Japan-bound flights or turning up smaller planes to service routes to its neighbor. That goes, too, for smaller operators like Jeju Air, Air Busan Eastar Jet and T’way Air.
One reason actions by these smaller carriers potent trouble is where they hit. Since 2012 the yen’s 30% drop enlivened Japanese tourism, an industry Tokyo long neglected. A key push has been getting more foreigners to visit Japan’s less-frequented cities to spread the wealth beyond Tokyo. Many of the routes on which Korea’s low-budget carriers are scaling back involve southwestern cities such as Kumamoto and Oita.
Even before Friday’s “whitelist” action, Abe’s chief cabinet secretary, Yoshihide Suga, said Tokyo would “closely watch the impact on Japanese firms” as it tightens the screws on Korea Inc. One big risk for Japanese exporters, says analyst Eo Gyu-jin of eBEST Investment & Securities, is that “Korean companies contribute to a considerable share of their earnings,” particularly in industrial components.
Moreover, Samsung, SK Hynix and LG Display are pivotal to the global supply chain for DRAM and NAND flash memory drives. They also are key suppliers of smartphone displays and other IT components. Tokyo risks not just corporate blowback at home, but irking other countries as Korea-sourced components become more expensive and scarcer.
But the bilateral blows Abe is landing on South Korea aren’t about economics or business. They are about political calculation. Abe’s coziness with Trump and openness to negotiating with North Korea has right-wingers in a whirl. This constituency, vital to Abe’s Liberal Democratic Party, had been agitating for action against Seoul, particularly since last year’s Supreme Court rulings.
Late last year, judges in Seoul ordered Japanese companies, including Mitsubishi Heavy Industries, to pay reparations to Korean laborers who had been forced to work for them during World War II. That issue had been dealt with in a 1965 deal that opened the way for Japanese firms to do business in South Korea, and had held since.
That decision compounded already seething anger over Moon scrapping his predecessor’s 2015 deal with Abe on Korean women forced to work in wartime Japanese brothels.
There is ample blame to go around. Moon is but the latest South Korean leader to find political solace in fanning anti-Japan sentiment. But in retaliating against Moon, Abe is falling into the trap of “weaponized interdependence.”
The reference here is to the work of US-based researchers Henry Farrell and Abraham Newman on how global economic networks shape state coercion. It explores have international supply chains – including those linking Japan and Korea – are devolving from arrangements of efficiency into “choke points” governments can use to “take advantage” of trade partners.
Here, think the Trump administration’s holding China’s Huawei hostage or going after ZTE, which also relies on US semiconductor technology. This gives rise to what Farrell and Newman call “network inequality,” a threat that “is changing the way the world economy works.”
Count the ways, too, that things could get messy when you consider that roughly 80,000 Koreans draw paychecks from Japanese companies in South Korea. Might Japan be courting worker slowdowns or strikes in Korea? Or at the very least, recruitment woes.
Compounding the risks in Northeast Asia, both Abe and Moon have domestic incentives to escalate this weaponization dynamic.
Political pleasures of economic pain
Abe’s one real achievement – the longest expansion since the 1980s – is now getting trumped. Wages have fallen for five straight months, inflation is less than halfway to the 2% target and possible recession looms.
Lashing out at Korea to change the subject is a tried-and-true Liberal Democratic Party strategy. But this is the first time such impulses have gone truly economic – with tangible policies that turn rhetoric into policy. Hence the challenges figuring out the damage to come.
Moon, meanwhile, has lost control of his economic-change narrative. He faces slowing growth, 10%-plus youth unemployment and endless strife (from both sides of the argument) over his minimum-wage hikes. At the same time, his national export engine faces dual impacts – from Trump’s intensifying trade war and Abe’s turn of the economic vice. To make matters worse, Moon’s flagship presidential policy – his hopes for détente with Pyongyang – are being dashed as Trump enables Kim Jong Un’s worst instincts.
In this situation, dialing up anti-Japan emotion has its political uses. When Moon speaks in terms of “we will never again lose to Japan” – a reference to the 1910-1945 colonization of the peninsula – as he told his cabinet on Friday, you know the fight is on. But what if it lasts well into 2020? Or beyond?
And in South Korea, the fight is as much from the ground up as the top-down. Whereas China’s boycotts are government decrees, Korea-versus-Japan is more of a bottom-up movement. It is sustains, it could inflict pain on Abe’s economy. Japan and Korea are already both off balance amid global events.
The trouble for Asia watchers is twofold. One, this brawl is only just getting started. And two, there are few precedents to turn to: Although Seoul and Tokyo have engaged in historical-diplomatic battles for decades, the transition of their combat to the economic space is dangerously new.
Where it goes next, in terms of GDP growth and supply-chain disruptions, is anyone’s guess.