Japan-South Korea Export Control Dispute

August 2019 - Taylor Evans

On 2 August 2019, the Japanese Ministry of Economy, Trade, and Industry (METI) announced the removal of South Korea (ROK) from its export control whitelist, which goes into effect on 28 August. The change in South Korea’s status bars it from preferential trade treatment and means transactions will receive additional licensing scrutiny. South Korea plans to respond by removing Japan from its “white list” in September. The growing export control spat adds uncertainty to an already tense East Asia region and highlights the trend of smaller nations using export control and sanctions to benefit their foreign policies at the expense of industry.

What Does This Mean for Business?

South Korea will no longer be listed in Appendix Table III of Japan’s Export Trade Control Order, which permits preferential trade treatment. It will be moved to Group B. As such, exports to South Korea will not be eligible for authorization of General Bulk Export Licenses, and exports and technology transfers to South Korea from Japan will be subject to a catch-all provision, allowing the Japanese government to suspend any export they wish for national security purposes. Furthermore, exports to South Korea of hydrogen fluoride gas, fluorinated polyimide, and photoresists will be restricted initially, and there are plans to expand restrictions to dozens of other products.

Japan produces most of the world’s supply of hydrogen fluoride gas, fluorinated polyimide, and photoresists and thus has significant leverage over South Korean companies regarding their sale and distribution. The export of these chemicals is vital to the manufacture of semiconductors and display panels, and restrictions would have a detrimental effect on firms heavily reliant on Japanese suppliers such as Samsung and LG. As Lindsay Maizland of the Council on Foreign Relations explains “experts estimate that these companies have one to three months of stockpiled materials. If the trade dispute lingers, the global tech industry could feel the sting, since South Korean companies produce more than half of the world’s semiconductors and more than 90 percent of smartphone screens.” This will have dramatic implications for global smartphone sales, memory manufacturing, and CPU fabrication.

What Caused This Spat?

Japan cites a lack of comprehensive South Korean export control policies as its justification for the removal. METI contends that this has resulted in states such as Iran, North Korea, and Syria receiving unauthorized export-controlled goods. Another source of tension is South Korea’s demand that Japanese firms pay reparations for Koreans’ inducement into forced labor and the sexual mistreatment of Korean women during World War II. Finally, the Japanese economy is performing at its weakest since 2010. The removal of South Korea could be an attempt to insulate Japanese firms from regional and global threats. In other words, the spat is a mix of unresolved historical resentments, security concerns and protectionism for Japanese electronics companies.

How Will South Korea Respond?

The South Korean government is responding in a tit-for-tat fashion by announcing on 12 August the decision to drop Japan from its own 29-country “white list” in September. However, South Korea is upping the ante, and plans to create a new downgraded trade designation specifically for Japan. As Reuters reports, Industry Minister Sung Yun-mo said the new category for Japan would reflect that it does not run its system according to “international export control principles.” South Korean exports to Japan will now face a similarly lengthy licensing process.

President Moon has warned Korean firms to prepare for a “prolonged trade dispute” and to attempt to either produce the restricted materials themselves or diversify their supply chains. This was reinforced by the South Korean Finance Minister’s comment that Seoul is “working on comprehensive plans to reduce the country’s dependence on Japan’s materials, components and equipment industries.”

How Will This Impact Companies with a Global Footprint?

For most multinational companies – except those heavily reliant on the South Korean and Japanese markets – the initial impact of this spat will be minimal. However, this case portends a growing international trend of smaller nations taking a tip from Trump’s playbook and using tit-for-tat export control and sanctions to further their foreign policy goals. While mutual pressure may push Japan and South Korea back to the negotiating table in the short term, the historical dimension underlying the spat may portend longer terms effects. Firms and their compliance staff should be following closely the escalations between the neighboring states and should be prepared to build in longer wait times for licenses and, ultimately, more diversified supply chains in case this spat turns into a larger trade war.