In a decision that could worsen already tense relations between Seoul and Tokyo, a South Korean court is expected to decide this week on whether to order that assets belonging to Nippon Steel Corp. be sold off to honor a 2018 Supreme Court judgment on wartime labor that ordered the Japanese firm to compensate four Koreans. Here’s a look at the background for the decision and its possible impact.

What is the Korean court expected to decide and why?

The Daegu District Court will rule on the sale of the assets, which include roughly 81,000 shares of Nippon Steel (which changed its name from Nippon Steel & Sumitomo Metal Corp. in April 2019) seized via its joint venture with Korean steel-maker Posco. The shares were seized by the court last year.

This was triggered by an October 2018 decision by the South Korean Supreme Court that ordered NSSMC to pay 400 million won (about ¥40 million at the time) in total to four plaintiffs who sought compensation for what they said was forced labor performed during the war at Japan Iron & Steel Co., Nippon Steel’s predecessor, when Korea was under Japanese colonial rule. Nippon Steel refused to pay, prompting the plaintiffs to go after its assets.

In June, the Daegu District Court began the legal process of serving Nippon Steel with documents related to the sale. That process will be completed by Tuesday. Afterward, the court can give the OK to the plaintiffs for a sale. The court also sent the relevant papers to the Japanese Foreign Ministry, but they were returned.

What is Japan’s view on this case and the wartime labor issue in general?

Nippon Steel ignored the 2018 Supreme Court order because of the Japanese government’s position that all compensation claims regarding Japan’s colonial rule from 1910 to 1945 were settled finally and completely by the 1965 treaty that established diplomatic relations between Japan and South Korea. Tokyo’s position is that this means individual compensation claims against Japan were also settled in 1965.

Therefore, Japan says, the South Korean Supreme Court’s decisions are a violation of the 1965 treaty and international law. The court ruled against Nippon Steel in October 2018, and issued two rulings in November 2018 against Mitsubishi Heavy Industries.

The first ruling against MHI ordered it to pay 400 million won (about ¥40 million then) to the families of five Koreans who worked at its Hiroshima plant during the war. It also ordered MHI to pay up to 150 million won each to five plaintiffs who said they were forced to work at an MHI plant in Nagoya without pay.

What happened after the 2018 rulings?

Japan and South Korea became involved in a trade dispute in the second half of 2019. Japan’s government said South Korea had not complied with export control security regulations and had ignored its request for bilateral trade dialogue. But the court decisions of 2018 loomed in the background.

Then, on Aug. 2 last year, South Korea was removed from the government’s “whitelist” of countries that enjoy Japan’s most-favored trade status. In the name of security, Japan placed stricter export controls on materials used to make high-tech products, especially semiconductors, due, Tokyo said, to the possibility they could be weaponized.

The decision angered South Korea, which is reliant on its chipmaking industry. Seoul threatened to end a military-intelligence sharing agreement with Japan that same month and then complained to the World Trade Organization in September about the export controls. It relented and kept the intel pact in place after pressure from the United States, then halted the WTO action in November after Japan agreed to resume talks on the trade dispute.

But subsequent efforts to resolve the dispute went nowhere. In June, South Korea announced it would petition the WTO again. In the last week of July, the WTO announced it would grant South Korea’s request to establish a dispute settlement panel, opening a new chapter in the saga.

What is South Korea’s view on the wartime labor issue?

South Korea’s position is that the 1965 treaty didn’t settle individual claims. The government of President Moon Jae-in says a victim-centered approach to the lawsuits is an internationally recognized legal principle as well.

Therefore, Moon says, the government’s position on the wartime labor suits is that decisions should reflect the desires of the victims and their families. That attitude has encouraged many Koreans to sue. There were at least 1,300 plaintiffs seeking compensation for wartime labor from nearly 70 Japanese firms in 20 lawsuits as of July 2019, and the number appears to be growing.

What might happen if Nippon Steel’s assets are sold?

Though both sides say they will work to solve the issue, bilateral relations will almost certainly worsen as the Japanese government will likely retaliate in some form. In June, Foreign Minister Toshimitsu Motegi reportedly told South Korean Foreign Minister Kang Kyung-wha that selling the assets would result in serious repercussions. Chief Cabinet Secretary Yoshihide Suga also warned of serious consequences.

The government has not said what, if any, measures it might take against South Korea, although some Japanese media reports have suggested the possibility of further tariffs on Korean products.

Japan reportedly suggested the wartime labor dispute be tried by a third party, such as the International Court of Justice, under the United Nations. For that to happen, however, both parties must agree to submit to arbitration and South Korea has yet to do so. But selling the Nippon Steel assets would likely trigger a repeat of those calls by the Japanese government.

South Korea, meanwhile, has been attempting to gain international sympathy on the issue from the point of human rights and has said it will mobilize other Asian countries to pressure Japan. Those lobbying efforts are likely to continue, and expand, if a bilateral solution can’t be found.

How is the dispute viewed by the United States?

While the U.S. government has not taken a side, it has said it will do what it can to help resolve the dispute and other political and economic tensions between its two allies. With about a combined 80,000 U.S. troops stationed in Japan and South Korea, however, the U.S. fears bad relations between the two countries will negatively impact trilateral military and diplomatic cooperation in the region, especially against China and North Korea. But some U.S. experts have offered suggestions for addressing the wartime labor dispute within the larger framework of historical disagreements between Japan and South Korea.

Last year, former Office of the Secretary of Defense adviser James L. Schoff co-authored a piece with Paul K. Lee for the Carnegie Endowment for International Peace. Schoff was responsible for strategic planning and policy development for relations with Japan and the Republic of Korea from 2010 to 2012 during the administration of President Barack Obama, and could play a role in shaping policy if Joe Biden, Obama’s vice president, wins the presidential election in November.

To solve the impasse, Schoff and Lee recommend the U.S. support Japan’s efforts to solve the wartime labor issue via bilateral consultations, while also encouraging Japan’s political leaders to support domestic grassroots efforts aimed at promoting greater empathy toward Korea’s colonial experience, which would hopefully lead to real reconciliation.

In the short-term, however, frosty relations between Tokyo and Seoul are expected to continue, and likely worsen if, after Aug. 4, the Nippon Steel assets are sold.

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