China could emerge victorious in the South Korea-Japan trade war, as the trade tussle intensifies and the fortunes of the two battling countries look bleak.

South Korea has revealed plans to invest nearly US$6.5bn in research and development to reduce dependency on Japanese imports after it was removed from Japan’s ‘white list’ of countries with favourable trade status on Friday.

“We want to turn the crisis into an opportunity for the materials, parts and equipment industry,” South Korea’s industry minister, Sung Yun-mo, said at a press briefing on Monday, according to reports.

Taking effect on August 28, the removal means that South Korea will no longer have easy access to Japanese imports. While not an outright ban, South Korean companies may face delays in obtaining goods, possibly spurring production cuts and impacting the country’s high-tech manufacturing industry.

“In this situation, China will emerge as a beneficiary. China will drive a wedge between Japan and South Korea,” Brad Glosserman, deputy director at the Tama University Center for Rule Making Strategies tells GTR.


Two losers and a winner

 China could be the winner of this trade squabble for several reasons; Korea will reroute supply chains, some of which will go through China, and if Seoul and Tokyo are at odds, Japan and Korea’s ability to influence Beijing as strategic allies is reduced, says Glosserman.

“A Chinese-dominated regional order will provide less freedom to countries and Beijing will provide less diplomatic space. If that is correct, then it’s in both Seoul and Tokyo’s long-term interest to work together to balance against Beijing. Their tensions make that unlikely and difficult,” he says.

He explains South Korea will already be looking elsewhere for its supply chain needs, to Russia and China, and that Japan’s image as a reliable supplier to South Korea has been irrevocably damaged.

Glosserman, who is also a senior advisor for Pacific Forum, a policy research institute focused on the Asia Pacific region, adds: “The Japanese are long-term losers. They made this move out of sheer frustration. South Korea will make alternative arrangements to the detriment of Japanese companies.

“South Korea is losing as well, they have been guided by emotional domestic politics rather than strategic trade decisions. There is also short-term damage to the companies that are going to be struggling to find alternative sources of supply in South Korea.”

International trade systems and global supply chains are very adaptable. There will be delays in export decisions, but Japanese suppliers should be able to find other countries to export to, with Asia likely to absorb that capacity.


When and why did it kick off?

The trade war kicked off in July after Japan’s Prime Minister Shinzo Abe decided to tighten controls on exports of three chemicals (fluorinated polyimide, photoresists and hydrogen fluoride) to South Korea, citing security reasons. These chemicals are vital for making semiconductors, which are used in the manufacture of smartphones and computers.

Korea depends on semiconductors, with Oxford Economics estimating that if current trade tensions led to a 10% fall in semiconductor production, the impact on exports could see Korea’s GDP growth slow to an average 1.6% per year in 2019-20, versus the current growth forecast of 2.1%.

“The initial trigger was a court decision last year by South Korea that argued Japanese firms should pay compensation for forced wartime labour [during its occupation of the Korean peninsula from 1910 to 1945]. The Japanese defence was that the 1965 treaty between Japan and Korea resolved this,” says Glosserman.

Now, Japanese firms need to get approval for the sale of materials to South Korea, piling pressure on South Korea to resolve the legacy dispute.


Tallying up tensions

At present, Japan’s GDP sits at US$4.9tn, more than three times that of South Korea’s (US$1.5tn). But, if both countries continue to engage in tit-for-tat measures; growth could slow, global supply chains could be disrupted, and Korea’s manufacturing sector could take a major blow.

Glosserman adds: “Japan is providing several products which are vital to South Korean companies, the monetary value of which is not huge, but you are threatening the supply chain of some very important products.”

Glosserman says he has been meeting US government officials about the trade feud. “Historically, the US has been the mediator, or the force that has brought Japan and Korea together. But the US does not have the energy or initiative to do this right now, so what will happen is this is probably going to get worse for a while before it gets better.

“The tension between South Korea and Japan is a problem. You have politicians in South Korea that are eager to exploit tensions for their own domestic purposes. In some ways, the Japanese are not at fault, but they are also in no position to backdown,” he concludes.