Japan and South Korea Feud, but Breaking Up Is Hard

Japan and South Korea Feud, but Breaking Up Is Hard

SEOUL, South Korea — As tensions between Tokyo and Seoul have surged in recent months, South Koreans have shown their anger with their wallets. Japanese beer is going unsold. Shoppers are avoiding Uniqlo. An animated Japanese children’s movie called “Butt Detective,” whose protagonist has a predictably posterior-shaped head, bombed in South Korean theaters.

On Wednesday, Japan widened the wedge between the two Asian economic powerhouses even further. It formally removed South Korea from a “white list” of countries to which it extends preferential trade status.

But it will take more than new rules and consumer boycotts to drive apart the two American allies, at least when it comes to business. The two countries have become deeply intertwined over the decades, with a trade relationship now worth about $85 billion a year. Japan in particular holds considerable power as a main supplier of essential raw materials and components to South Korea’s high-tech economic machine.

Until that changes, a process that could take many years, the two countries have little choice but to stick together. Any serious attempt to break trade ties “would be a disaster,” said Rory Green, an economist specializing in South Korea and China at London-based analyst TS Lombard.

“It’s something they’d have to look at doing over a number of years, slowly decoupling these heavily interlocked supply chains,” he said. “It’s not something that could happen painlessly.”’

A South Korean company called Sejin Tech, for example, builds intricate machines with over 1,300 parts for packaging foods like soup and kimchi. While many of the components it uses are made in South Korea, some can be sourced only from Japanese companies.

Japan’s recent moves “have woken us up and created a momentum to teach us that Korean companies, including mine, rely too much on Japan’s industrial technologies,” said Lee Gahp-hyun Sejin Tech’s chief executive.

“Perhaps Korean manufacturers including myself could have tried harder to develop our own Korea-made products to replace imports from Japan,” he added. “But businesses, especially small businesses, weren’t prepared for a situation like the political strife between Korea and Japan affecting them.”

Many in South Korea are coming to terms with how much they depend on Japan.

That realization began sinking in last month, when Japan announced that it would tighten restrictions on the sale to South Korea of three chemicals used to make high-end computer chips and digital displays. Japan said it was concerned that importers had improperly handled the products, which have potential military applications, though officials have not offered proof. Seoul painted the moves as an attack, motivated by disagreements over the historical legacy of Japan’s occupation of the Korean Peninsula before and during World War II.

One of those chemicals, known as photoresist, is critical for top-of-the-line products produced by Samsung Electronics, the giant South Korean maker of chips and gadgets, among others. Japan controls around 90 percent of the world’s supply. Getting permission to import the chemical could take up to three months, companies were told, sparking panic about the potential impact on global supply chains.

In the end, it was about a month before Tokyo issued the first approvals. But the implications were clear, said Yuichi Takayasu, a professor of economics at Japan’s Daito Bunka University.

Seoul “understood that if imports from Japan were to stop, they would no longer be able to make semiconductors,” he said. “Just aiming at that Achilles’ heel is a big threat to South Korea.”

South Korea’s removal from Tokyo’s white list is also intended to send a message rather than cause economic harm, Mr. Takayasu said. “It has a symbolic meaning. South Korea hates being downgraded.”

The change covers virtually all Japanese exports to South Korea other than food, clothes and products made from wood.

Its focus is on a list of more than 1,000 goods and technologies that could be used to produce weapons of mass destruction. That includes chemicals that can be used to make nerve gas or enrich uranium, and also a long list of products essential to South Korea’s tech industry, from precision machine tools to advanced carbon fibers, some of which would be difficult, if not impossible, to source from other countries.

The Japanese government has emphasized it would use its authority only to ensure that exports end up in the right hands and are used for their intended purpose. For most buyers, the effect will “be at the level of a little increase in paperwork,” said Makoto Abe, a senior researcher at the Japan External Trade Organization, a trade promotion group affiliated with the Japanese government.

This time around, South Korean businesses are less concerned than after the first round of restrictions in July, according to Sanjeev Rana, a Korea technology analyst at Hong Kong-based brokerage CLSA. Still, he said, when the white list was announced earlier this month, companies began stockpiling critical supplies.

Some South Korean consumers have responded with boycotts and setting up websites that suggest local alternatives to Japanese products, and they say they have no plans to stop.

Clients have begun asking him why Japanese buyers would “want to import from Korea now with all the new restrictions? Japanese customers could replace your items with imports from Taiwan.”

At the moment, neither country can bear much economic pain. Japanese exports worldwide have been steadily dropping since December on cooling global demand. South Korea’s sales abroad have fallen even more precipitously as an anemic smartphone market has left chips to stack up in the country’s warehouses.

South Korean companies are worried about getting cut off. While large companies have the experience and resources to sort out the issues, smaller firms may not even be aware of what products are affected.

Data from Japan’s economy ministry shows that between 2007 and 2011, more than 96 percent of “illegal exports” were the result of misunderstanding or simple failure to comply with regulations. Less than 4 percent were intentional violations.

Trade promotion agencies, trade associations and chambers of commerce in South Korea are advising companies on how to deal with the new restrictions, including finding suppliers outside of Japan and producing components locally.

Japanese companies will nevertheless remain a strong presence in South Korea. In Gumi, an industrial city around 150 miles from Seoul, a Japanese company called Toray built plants that make advanced materials for lithium ion batteries.

“Korea and Japan are bound to each other,” said Shim Kyu-jeong, an economic researcher at the city’s chamber of commerce.

“We cannot imagine the Gumi Industrial Park without Japanese companies.”

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