Japan tightens controls on export to South Korea 5 things to know

Global economy awaits fallout from Tokyo's blow to Samsung and other makers

Economy 17:41 09.07.2019

Japan tightened controls on the export of semiconductor materials to South Korea on July 4. The move could hit the country's tech industry and economy hard, as memory chips account for a fifth of South Korea's exports. The global economy is also bracing for the effects, with a slowdown looming in the production of smartphones, displays and many other devices that rely on South Korean electronics, writes Asian Nikkei Review.

Here are five things you should know about Japan's controls:

Why Japan imposed the controls

Tokyo cited problems with South Korea's export controls, suggesting that semiconductor materials bound for the South have been diverted to North Korea, which may have used them in nuclear and missile development programs. Tokyo, however, has yet to produce any evidence.

Others see the move as retaliation for a spate of South Korean court rulings that allow assets of Japanese companies to be seized and used to compensate Koreans who had to work for the Japanese during World War II. Tokyo holds that the rulings run contrary to a 1965 treaty that normalized diplomatic relations between the two countries and settled the wartime labor issue.

Why the dispute matters

Under the new policy, government approval is required before exporting key materials to South Korea -- namely fluorinated polyimide, which is used in smartphone displays, as well as resists and hydrogen fluoride, which are used to make semiconductors. This could choke the South Korean semiconductor industry, as Japan controls 92% of the global resist supply and 94% of fluorinated polyimide, according to the Japan External Trade Organization. Without these, Samsung Electronics and other South Korean makers will be unable to produce not only DRAM chips, but also microprocessors and organic light-emitting diode panels found in smartphones.

Samsung and SK Hynix control about 70% of global DRAM production, while the former accounts for around 90% of OLED display production.

Japan is also set to remove South Korea from its "white list" of countries exempt from trade restrictions next month, which could place more items like machine tools and semiconductor-making equipment under tighter controls. Hidehiko Mukoyama, Korea analyst at the Japan Research Institute in Tokyo, warns that this could seriously damage the Korean semiconductor industry.

How businesses are responding

Companies are scrambling to deal with the controls, as Japanese suppliers also stand to lose from the loss of a major export market. On Sunday, Samsung Electronics Vice Chairman Lee Jae-yong -- de facto head of the Samsung group -- reportedly went to Japan for talks with suppliers about ways to mitigate the impact of the controls.

One possible solution would be to shift production overseas, with Taiwan being a likely destination. But there may be problems with this, as Japanese companies are not allowed to supply materials that would eventually end up in South Korean products.

How long the curbs remain

Tokyo has not disclosed the duration of the controls, but some experts think they could be lifted sometime after Japan's upper house elections on July 21 and before further export controls are scheduled to go into effect on Aug. 1. Some think Japanese Prime Minister Shinzo Abe imposed the curbs to show voters his tough stance toward South Korea. Once elections are out of the way, he could sit down for talks with South Korean President Moon Jae-in.

Some analysts saw a ray of hope on Monday, when Moon called for "a sincere discussion between the two countries," reversing his hands-off approach to bilateral relations.

For now, few are holding their breath. Tokyo insists that the new curbs are a national security issue and not subject to discussion. The trade ministries of the two countries are expected to share information, but no breakthrough is expected. Meanwhile, nationalist sentiment is simmering in both countries, making it difficult for the two governments to back down.

But risks to the strong business ties between the two countries should eventually convince Tokyo and Seoul to start talking. The Japan Business Federation issued a statement on Monday, saying that it is "extremely concerned" about the rapid deterioration in relations.

Why the dispute is not like Trump's trade war

Many people see parallels between Abe and U.S. President Donald Trump in their use of trade sanctions to notch diplomatic wins. The concern is that Japan may not be getting what it really wants: concessions on the wartime labor issue. Instead, it could be forcing Seoul to harden its stance.

Is Japan prepared to fight a prolonged trade war with its neighbor? Japan Research Institute's Hidehiko Mukoyama does not think so, saying that unlike Trump, Abe is not ready to take things that far.