Japan insists that all claims arising from its colonial rule were settled by the signing of a 1965 normalisation treaty that provided Seoul with US$800 million in economic aid and loans.

Why Japan-South Korea ‘trade war’ is good news for China

What’s the fallout?

The complicated web of supply chains involved in the production of popular tech products means that escalating trade tensions between the East Asian neighbours could lead to higher prices for customers globally, according to analysts.

“Japan’s decision to place export restrictions on South Korea will ripple out to other countries,” said Troy Stangarone at the Korea Economic Institute in Washington. “The downside to the type of weaponised interdependence that Japan is using to coerce South Korea is that … there will be collateral damage as interdependent links are disrupted.”

Bernstein, an investment management and research firm, reported on Monday that prices of dynamic random-access memory chips, of which South Korea is the world’s largest producer, had risen 12 per cent in less than a week.

South Korea’s chipmaking sector accounts for 25 per cent of exports, while Samsung alone represents 21 per cent of the country’s stock market, according to the South Korean government, which has accused Japan of trying to damage its export-led economy.

But Lloyd Chan of Oxford Economics is more sanguine.

“We do not expect tensions to escalate to such an extent that they harm businesses significantly, particularly when the ongoing US-China trade conflict is already weighing on the trade outlook,” he said.

“Korea and Japan should have enough economic incentives to minimise the potential fallout.

In the meantime, major firms such as Samsung and SK Hynix have began looking to mainland China, Taiwan and local producers to make up the shortfall in key materials.

Sundi Aiyer, managing director of supply chain and operations advisory Aiyer Group, said the spat would serve as a “wake-up call” to South Korean manufacturers who were dependent on Japanese suppliers.

“This might mean that Korean companies will seek more reliable supply sources from alternative markets such as China or Taiwan, which could, in turn, use the opportunity to build up their own capabilities,” he said.

Why can’t Japan and South Korea get along?

Despite sharing a mutual ally in the United States and a common security threat in North Korea, the two countries remain bitterly divided over a raft of outstanding historical and territorial issues.

Moon warns Japan against taking trade fight into ‘dead-end street’

“For the Republic of Korea [South Korea], their modern identity is rooted in the Japanese colonial experience and subsequent division of the peninsula,” said Stephen Nagy, a senior associate professor at International Christian University in Tokyo. “For Japan, their post-WWII identity is rooted in their experience of being the only nation to experience the atomic bomb, their pacifist constitution and their post-WWII behaviour in the region and on the international stage.

“Both identities are not recognised by each other and as such bilateral frustrations, nationalism and selective historical understandings continue to divide what should be natural allies in the region,” he said.

Brad Glosserman, deputy director of the Centre for Rule Making Strategies at Tama University in Tokyo, said that historical and territorial disputes were often exploited for domestic political gain in both countries.

Will the US come to the rescue?

During previous spats between South Korea and Japan, the US, which hosts key military bases in both countries, has tried to get its mutual allies talking to iron out their differences. Abe and former South Korean president Park Geun-hye met for the first time in 2014, more than a year after the leaders had entered office, after then-US president Barack Obama brought them together on the sidelines of a nuclear security summit at The Hague.

Although the US State Department last week said it would work to “strengthen our relationships between and among all three countries,” David Stilwell, assistant secretary of state for East Asian and Pacific Affairs, on Friday said that Washington did not plan to intervene.

Analysts say President Trump’s suspicion of traditional alliances and Pyongyang’s improved relations with the US and South Korea mean that Washington is likely to take a hands-off approach to the growing rift between its allies.

So what will happen next?

For now, there looks to be no end in sight to the spat. In July 2020, South Korea revived a complaint it filed with the World Trade Organisation last year over Japan’s trade restrictions, after describing them as “politically motivated.” Tokyo has tried to block the WTO inquiry, saying its measures fall under a national security exemption.

Moon warned Japan that its trade restrictions had “shattered credibility” for cooperation in manufacturing and would hurt its economy more than South Korea’s in the end.

3 in 4 Japanese distrust South Koreans – and the feeling’s mutual

Meanwhile, the sides face a number of deadlines and politically-charged milestones that could raise tensions further, including the July 18 deadline for South Korea to accept a third-party arbitrator in the forced-labour dispute; Japan’s July 21 upper house election, that critics argue has given Abe a political incentive to keep the dispute alive; and the July 24 deadline for public feedback on Tokyo’s plans to remove South Korea from its trade “white list” paving the way for customs restrictions on 40 new categories of South Korean products. On August 15, South Korea will celebrate National Liberation Day, which marks the end of Japanese rule over the peninsula.

Shin Kak-soo, former South Korean ambassador to Japan, believes the only way out is for the Korean government to “suggest a viable solution to resolve the forced labour issue”.

If not, he said: “There is a likelihood of further measures by Japan that will rapidly lead to a downward spiral, being fanned by strong nationalism in both countries.”

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