An escalation of the trade war between Japan and South Korea will have a greater ripple effect than is priced in the markets, as it could disrupt the technology supply chain starting with China, S&P Global Ratings has warned.

While there may be isolated winners in the stock market, an ongoing dispute will have global implications, boosting production costs for technology components or cutting output, said Shaun Roache, the chief Asia-Pacific economist at S&P Global Ratings.

If Japan stops granting export licenses, South Korea would have to either curtail production or pay a "much higher price" to secure crucial materials, a move that will impact China, he said.