Business | ANALYSIS

No exit in sight from worst Japan-South Korea dispute in decades

by Isabel Reynolds and Jihye Lee

Bloomberg

Japan and South Korea say they’re willing to meet over Tokyo’s move to tighten regulations on vital tech exports to its neighbor, but neither has much political incentive to climb down from one of their worst economic disputes in decades.

Decades of mistrust make it difficult for Prime Minister Shinzo Abe and South Korean President Moon Jae-in to retreat from their budding trade feud. A series of looming deadlines, including the Upper House election on July 21, are only raising the political pressure on both men, who can’t afford to look weak dealing with disagreements rooted in Japan’s 1910-45 occupation of the Korean Peninsula.

On Wednesday, Moon, who was elected in 2017 on a promise to reconsider his predecessor’s moves to ease historical spats with Japan, warned business leaders in Seoul of a “prolonged” battle. At an election debate last week, Abe accused South Korea of reneging on its promises.

“The leaders on both sides are incompatible with any sort of political rapprochement,” said Jonathan Berkshire Miller, a senior fellow with the Japan Institute of International Affairs in Tokyo who specializes in Northeast Asian security issues. “The sense on Moon here is negative and Abe is obviously persona non grata in South Korea.”

The flare-up stems from a series of South Korean court decisions ordering the seizure of Japanese corporate assets as compensation for Koreans conscripted to work in factories and mines during the colonial era. The issue escalated from a regional diplomatic spat to a global trade worry last week after Abe’s government moved to be more stringent regarding the export of specialty materials vital to South Korea’s technology sector.

The measures could slow production by chipmakers such as Samsung Electronics Co. and SK Hynix, squeeze the South Korean economy and disrupt supply chains dependent on their memory chips and components. If left unchecked, analysts have warned of open economic warfare between the two key U.S. allies, something they have avoided since Japan withdrew from the peninsula.

Japan is also considering removing South Korea from a list of trusted export markets, a move that could affect a broader swath of products. Moon can’t afford any more slippage on the economic front after being dealt a blow earlier this year when South Korea’sgross domestic product in the first quarter shrank the most in a decade.

But the path to compromise has only grown more complicated. South Korea has for weeks resisted Japan’s demands for third-country arbitration to settle the wartime labor issues, arguing that such workers have a right to pursue their claims in court.

Meanwhile, Abe says the export controls stem from concerns about South Korea’s control over the sensitive materials and are not related to the wartime labor dispute, putting any negotiations on separate tracks. Economy minister Hiroshige Seko said Tuesday that he was open to a South Korean request to meet and discuss the move, but stressed that the government would only explain its position and not negotiate.

Speculation that the materials could have fallen into the hands of North Korea, where they could be used to make weapons, have added fuel to the fire. Moon — sensitive to any suggestion that he’s failing to uphold the U.S.-led economic blockade on Pyongyang — dismissed the idea as “groundless.”

“It is imperative for both countries and people to cool down from heated exchanges of emotional responses and to look at their important ties in a much broader perspective,” said Shin Kak-soo, who served as South Korea’s ambassador to Japan from 2011 to 2013. Shin called on the U.S. to exercise “subtle influence on its two important allies in Northeast Asia,” urging Seoul to suggest a solution to the wartime labor dispute and Tokyo to refrain from implementing the export measures.

The Trump administration, which has so far said little publicly on the dispute, could have an opportunity to weigh in as new Assistant Secretary of State for East Asian and Pacific Affairs David Stilwell arrives Thursday in Tokyo.

Absent some U.S. intervention, both sides face a number of deadlines and politically charged milestones that could raise tensions:

July 15: Mitsubishi Heavy Industries Ltd.’s deadline to respond to a formal request for talks with Korean former forced laborers, according to Jiji News.

July 18: Japan’s deadline for South Korea to meet its demand for a third-party arbitrator in the forced-labor dispute.

July 21: Japan’s Upper House election.

July 24: Public comment period ends on Japan’s plan to remove South Korea from a list of trusted “white countries,” potentially allowing broader export checks.

Aug. 15: South Korea celebrates independence from Japan

“Neither side can solve this issue,” said Kunihiko Miyake, a former diplomat, now a visiting professor at Ritsumeikan University in Kyoto. The turning point won’t come until businesses and financial markets issue a strong message, Miyake said, adding, “That’s when either side or both sides will reconsider.”