Japan’s anachronistic economic retaliation

The Japanese government announced on Monday that it will strengthen regulations on exports to Korea of three core materials for TV and smartphones starting from Thursday. It also said that Japan's Foreign Exchange and Foreign Trade Act will no longer include Korea among “white nations” with some special treatments. Tokyo cited that the measure was taken as any desirable solution was not found regarding the compensation for forced laborers before the G20 Summit was held in Osaka; and as mutual trust was severely damaged between the two nations.

The three core materials whose exports to be regulated by the Japan government are polyimide, resists and high-purity hydrogen fluoride. As Japan occupies 70 to 90 percent of the three materials in the global market, it will be inevitable for Samsung Electronics and SK Hynix to be hard hit for some time. It comes as a great shock to the Korean semiconductor industry that Japan has purposely blown a critical blow to Korea. An unexpected hurdle put up by Japan has suddenly got in the way of Korean exporters while exports reduced by 13.5 percent in June compared to last year’s figure, making Korean export grow negatively for the last seven consecutive months. Considering that semiconductors account for more than 20 percent of Korean exports, it only represents great damage to the Korean industry overall. Korean exporters find their hands tied as they are highly dependent on Japanese materials.

The thing is that such regulations on the export to South Korea will not only affect Korea but also serve as a shot in Japan’s foot. It may lead Japan to lose one of its stable export destinations as Korean companies are to trade less with Japan over the longer term. Japan will not be free of criticism that as the hosting country of last week’s G20 Summit it violates the principle of free trade in that it unilaterally takes advantage of trade regulation amid conflict with its trade partner. Some criticize that the Abe administration uses a shameful trick to win the Upper House election scheduled on July 21 as it attempted to bash Korea to increase approval ratings.

It is likely that the Korean government will also come under fire for doing nothing about its worsening relationship with its neighboring country while showing such a poor sense of irresponsibility. The Korean government held a meeting on Monday to find countermeasures, saying that it will strictly respond by filing a lawsuit with the World Trade Organization. However, the Korean government may find it hard to earn trust by merely saying that it will be nimble to respond as Japan has warned it of a stronger export regulation on hydrogen fluoride, a main material for semiconductor fabrication, since the beginning of the year. South Korean Foreign Affairs Minister Kang Kyung-wha said last Tuesday that Korea will take counteractive measures against Japan’s retaliation. Seoul and Tokyo should not drive themselves into an endless chicken game but rather have strategic discussion to find a solution to restore their relationship.