China Mediates the Japan-South Korea Trade Dispute

6 min read.

Credit: Nikkei Asian Review

China and South Korea share similar historical ties to Japan, dating back to World War Two when the two East Asian nations were occupied by Japan. For South Korea, the bad blood runs deeper, as it had been a colony of the Japanese Empire since the Japan–Korea Treaty of 1910 annexed the Korean Peninsula. 

Today, the three countries are bound by economic ties. China is the top trading partner for both Japan and South Korea despite a recent slowdown in the Chinese economy and China’s trade standoff with the United States (US). In 2019, Japan’s exports to China totalled USD 134.68 billion while South Korea’s exports to China amounted to USD 173.57 billion. The three East Asian economies have been in talks to create a regional free trade agreement although any conclusive outcome remains elusive, as regional tension mounts. 

The Japan-South Korea Trade War

South Korea has been Japan’s third largest trade partner since 2001. In 2018, before the trade war erupted between the two neighbors, bilateral trade between South Korea and Japan had reached USD 88.95 billion.

In late 2018, wartime grievances resurfaced when South Korea’s Supreme Court ordered two Japanese firms — Mitsubishi Heavy Industries and Nippon Steel — to compensate the families of South Koreans who were forced into labor during Japan’s colonization of the Korean Peninsula from 1910 to 1945. Following this, the Daegu District Court’s branch office in Pohang seized the assets of Nippon Steel in the city.

The Japanese government strongly backed the firms’ refusal to pay, citing that all compensation issues had been settled with the 1965 treaty that normalized diplomatic relations between the two governments. Under the treaty, South Korea had received more than USD800 million in economic aid and loans from Japan. However, it had used the money for national development as the country recovered from the 1950-53 Korean War, instead of paying individual victims. Furthermore, the South Korean Supreme Court ruled that the 1965 treaty could not prevent individuals from seeking compensation for forced labor.

The dispute led Tokyo to impose trade restrictions on three chemical materials in July 2019, which were widely used in electronics manufacturing. Japanese firms must now apply for licenses for each of the chemicals when selling to South Korea, a process that could take up to 90 days.

Japanese firms account for about 80 percent of the global market share of these chemicals, leaving the Koreans with few other alternatives. As they are vital to the production of semiconductors, Japan’s new rules could cause unprecedented delays in the delivery of electronic components and products downstream, including smartphones, as two of the largest Korean suppliers, Samsung Electronics and South Korea Hynix, collectively make 60 percent of the world’s memory chips.

A month later, Tokyo removed South Korea from its “white list”, which comprises trade partners that Japan deems trustworthy. This would impose tedious procedures on the export of 800 “strategic materials” to South Korea, potentially creating weeks, or even months in delays. 

Seoul lodged a complaint with the World Trade Organization (WTO) in September 2019 over these export controls. It also threatened to pull out of the General Security of Military Information Agreement (GSOMIA), one that is heavily invested in by the US, to preserve regional peace and stability through the cooperation and partnership between Japan and South Korea in areas of national security.

Response from the US and China

The 8th China-Japan-South Korea trilateral leaders’ meeting in Chengdu on 24 December 2019
Credit: CNBC

Despite Japan and South Korea being its two closest Asian allies, the US has been less than responsive to mediation pleas from Seoul, while US National Security Adviser John Bolton has made it clear that Washington does not intend to mediate the dispute between Seoul and Tokyo, according to a Japanese government source.

Kristine Lee, a research associate for the Asia-Pacific Security Program at the Center for a New American Security, believes that “the status or health of the East Asian alliance tends to go through cyclical periods of tension”, and is optimistic that “we always tend to come back from them”.

Other experts stress the importance of Washington’s intervention to prevent a complete fallout between two of Asia’s most vibrant democracies, as it would weaken the US’ influence in the region, especially against North Korea and China. This is especially crucial when Washington has withdrawn from the Trans-Pacific Partnership (TPP) in 2017, with the leadership being taken over by Japan. The TPP has been likened to a “NATO-like economic power play against mainland China”. 

Against this backdrop, the US has allegedly convinced South Korea to remain in the GSOMIA. The deadline for Seoul to inform Tokyo of its intention to withdraw from the security pact passed in late August 2020. The deadline for the liquidation of Nippon Steel’s assets also passed without incident that month, as the Japanese firm continued to appeal against the seizure.

China, on the other hand, has openly offered to mediate, signalling its rising might within the region. The Japan-South Korea dispute comes in the midst of an intensifying trade war between China and the US. It is now more crucial than ever, that Beijing expands its trade cooperation with Tokyo and Seoul, as it will likely rely more on high tech products and components from its neighbors, with the US tightening control over the sale of technology products to China.

Implications on Businesses

Credit: IndustryWeek

While South Korea mulls over a tit-for-tat restriction on the export of “sensitive strategic goods” to Japan, such as those related to making weapons or key machinery, the conflict has already adversely affected businesses, from tourism to automotive and consumer goods, in both Japan and South Korea. The tension between Tokyo and Seoul adds to the woes of a pandemic battered world striving to restart severely weakened economies, as businesses also navigate the uncertainties posed by an accelerating US-China trade war.

Tokyo’s export controls threaten to disrupt the global supply chain for semiconductors since Samsung is the largest supplier in the semiconductor industry. In 2018, it accounted for 44 percent of the global sales of dynamic random-access memory chips (DRAM) and 35 percent of NAND flash, two of the most commonly used chips for smartphones.

Several major South Korean manufacturers partner local factories in China, to which they re-export the chemicals imported from Japan. South Korea’s trade spat with Japan disrupts this supply route with few viable alternatives, severely impacting major Chinese technology companies, including Huawei and ZTE, as the restricted materials are used in a broad range of consumer electronic products.

To circumvent the sanctions, South Korean businesses have switched to importing from the overseas plants of Japanese suppliers, or are looking to source from alternative suppliers in the US, Canada, Europe, Taiwan or China, as a short term solution. An official at the Korea Semiconductor Industry Association warns that “even if Japanese restrictions were to revert to what they were before July 2019, companies that have decided to use something else are not going to switch back”.

In the long run, Seoul will be assisting companies to produce up to 338 strategic materials by granting KRW 2 trillion (USD 1.67 billion) per year in additional research and development funds. For instance, South Korea aims to produce homemade etching gas that can meet 70 percent of demand from domestic chipmakers by 2023.

Korean and Japanese components will be a vital source for Chinese companies if 

China’s tension with the US persists. To reduce its dependence on the US, China is also climbing up the manufacturing value chain, albeit putting it in direct competition with its neighbors. The “Made in China 2025” initiative aims to make China a dominant force in global high tech manufacturing to effectively compete in advanced industries globally. A prolonged Japan-South Korea trade war might give Chinese businesses the opportunity to gain market share in a range of specialized sectors, although China’s current technical capacity is still below that of South Korea and Japan. 

Mediating the dispute between the region’s two most technologically advanced nations might be the catalyst for China to establish stronger diplomatic ties, as well as trade and technological exchanges, with its neighbors. Whether as new suppliers to Korean chipmakers, buyers of key components from South Korea and Japan, or regional partners in high tech research and development, China’s deeper engagement with Japan and South Korea will drive new relationship dynamics among the three countries.