[Special Report 2] Putting Korean Companies on Edge
The Japanese government announced on July 1 that it would start to restrict the export of semiconductor and display materials to South Korea from July 4, causing many South Korean companies to be nervous.
“Japanese companies now must obtain a permission from the Japanese government to export resist, etching gas and hydrogen fluoride (fluorine polyimide?) to South Korea and the compulsory permission does not mean an immediate export ban,” said an industry expert, adding, “However, the announcement clearly shows that the supply of the chemical materials can be controlled at any time and South Korean companies are keeping a close eye.” Japan currently accounts for approximately 90 percent of the global supply of each of the three materials.
When it comes to resist, the problem is even more serious in that South Korean companies have no substitute. At present, only Japanese companies such as Shin-Etsu and Sumitomo can produce high-quality resist although their South Korean counterparts can supply low-quality resist. South Korean companies can produce no DRAM and NAND flash chips without resist supply from Japan.
At present, South Korean companies are extremely dependent on Japan when it comes to certain industrial items. Last year, they imported semiconductor manufacturing equipment worth a total of US$5.2 billion from Japan and the annual imports amounted to US$2.4 billion, US$1.9 billion and US$1.9 billion as for integrated circuit semiconductors, basic petrochemicals, and other precision chemical materials, respectively. Likewise, they imported US$1.2 billion of individual device semiconductors, US$1 billion of auto parts, US$0.9 billion of silicon wafers, and US$0.9 billion of optical device components. The items are related to the semiconductor, petrochemical, automobile and electronics industries, which are South Korea’s major export industries.
KCCI Chairman; ‘Politics Is Dragging down the Economy'
On July 3, Korea Chamber of Commerce and Industry Chairman Park Yong-man criticized the Moon Jae-in administration and lawmakers as being incompetent and irresponsible, saying that politics is dragging down the economy.
“South Korean enterprises are going through difficulties in the middle of the trade war between the United States and China, and yet the government and lawmakers are adding to the difficulties without reforming the labor market and abolishing unreasonable regulations,” he said, adding, “At present, Japan is getting even with us in a very elaborate way and based on inter-ministerial coordination, but we are busy blaming each other.”
It is said that the Japanese government selected three items subject to export restrictions against South Korea after examination of hundreds of semiconductor and display materials and months of studies on how to best strike South Korea while minimizing damage to Japanese companies. In contrast, the South Korean government’s current response is nothing but WTO litigation, which is deemed to lack effectiveness.
“I’m uncomfortable every time they mention economic crisis, and now is the time they should make more effort to minimize their interference with the economy,” he said.
On July 10, South Korean President Moon Jae-in also had an emergency meeting with business leaders and said that their role is essential in dealing with Japan’s export restrictions against South Korea. Some experts point out that the remarks are inappropriate in that the restrictions were triggered by political and diplomatic factors.
The meeting was attended by the owners and CEOs of 30 largest business groups. Samsung Electronics vice chairman Lee Jae-yong and Lotte Group chairman Shin Dong-bin were absent due to their business trips to Japan to solve the current crisis.
Japanese Major Media; 'Tokyo Misusing Trade for Political Purposes'
Japanese major newspapers are critical of the Tokyo government's retaliatory export restrictions against South Korea.
The Yomiuri Shimbun reported on July 3 that a number of Japanese companies are expressing concerns that the Japanese government’s export restrictions against South Korea would negatively affect themselves and the overall economic ties between the two countries.
The Yomiuri Shimbun pointed out that South Korea and Japan are engaged in horizontal trade, producing products by using each other’s components and materials, and the export restrictions can crack Japanese companies’ component supply networks.
“Organic Light Emitting Diodes (OLED) display production as well as semiconductor production can be hindered on the part of South Korean companies such as Samsung and LG, and then Panasonic and Sony can be affected as they are producing TVs by using LG’s OLED panels,” the newspaper reported, adding, “South Korean companies are important clients for Japanese semiconductor manufacturing equipment suppliers and, as such, a decrease in semiconductor production in South Korea will lead to a decline in the suppliers’ exports.”
Even the Sankei Shimbun, a far-right newspaper, criticized the Japanese government for the possible repercussions of the restrictions. “Approximately 80 percent of South Korea’s memory chip shipments head for China and Hong Kong and only 10 percent or so head for Japan, and yet Japanese companies doing business in China will be affected if South Korea’s memory chip supply to China is affected,” Japan Research Institute senior researcher Hidehiko Mukoyama said via the newspaper.
“The most basic principle of the WTO agreements is MFN treatment, that is, a measure favorable for one member country must be equally applied to each of the other members, and complex export procedures applied only to South Korea can be a violation of the MFN treatment clause,” said Waseda University professor Yuka Fukunaga, continuing, “Non-tariff limitations on export and import volumes are prohibited according to GATT 1994 and there is a possibility that the Japanese government’s measure is in violation of the rule.”
The Asahi Shimbun said in its July 3 editorial that the Japanese government is misusing trade for political purposes and has to immediately stop attempting to distort the principle of free trade. “Japan advocated free, fair and non-discriminatory trade at the recent G20 summit in Osaka as the chair of the summit, and yet the Japanese government ignored its own declaration in just two days,” it said, adding, “The restrictions will undermine the credibility of Japan in international trade discussions down the road.”
Likewise, the Tokyo Shimbun mentioned in its editorial that the forced labor issue has to be addressed based on diplomatic negotiations and the Japanese government would be well advised not to add to the tension with the export restrictions. “The Japanese and South Korean economies are interdependent and based on free trade principles, which the government is violating, and its measure will backfire by causing more and more South Korean companies to escape from Japan,” the editorial said, adding, “China limited the export of rare earth elements and Japan criticized China during their Senkaku Islands disputes, and export restrictions are not that effective in dealing with political and diplomatic issues.”
International Community; ‘Japan's Restrictions Adversely Affecting Global Value Chains'
The international community also is criticizing the Japanese government for its export restrictions targeting South Korea. Industry groups and think tanks in the United States and major global media outlets, which were cautious about mentioning the issue for its relation to history, are urging the Japanese government to withdraw the restrictions adversely affecting the global economy.
The American Enterprise Institute (AEI), which is a Washington, D.C.-based conservative think tank, recently released a column titled Japan, Back Off on Korea: Samsung and Hynix are Not Huawei. AEI scholar Claude Barfield, a former consultant to the Office of the United States Trade Representative, pointed out in the column that Japan has chosen a dangerous and destructive mode of retaliation, one that is likely to greatly disrupt global electronic supply chains and bolster China’s push for 5G wireless dominance.
Earlier, six groups in the electronics industry, including the U.S. Semiconductor Industry Association (SIA) and the Semiconductor Equipment and Materials International (SEMI), sent a letter to the South Korean and Japanese governments, saying that the latter’s export restrictions are a non-transparent and unilateral change in policy. IHS Markit senior economist Rajiv Biswas said in his recent report that the restrictions are adding to the difficulties of Asian exporters already suffering from the U.S.-China trade war and a global IT market slump, will cause a contagion effect, and will affect both the United States and China, which rely on components from South Korea.
The Foreign Policy magazine said that the bilateral economic relations of South Korea and Japan will be damaged by Japan’s action, which is highly likely to have an adverse impact on the global smartphone industry and so on. Bloomberg defined Japan’s export curbs as a political retaliation and called for an immediate withdrawal.
“The South Korean and Japanese economies are closely intertwined with each other and, as such, Japan’s action will lead to mutually assured destruction,” said the Economist Intelligence Unit (EIU) of the U.K. Economist Group, continuing, “South Korea is an important export destination for Japanese semiconductor material suppliers and the suppliers will have a hard time finding a new customer.”