Japan risks harm to world trade

By Troy Stangarone

When I started this column a year ago, I touched upon the importance of international trade rules for South Korea's economic future.

While we still often think of trade in terms of lowering tariff barriers, the rules and norms that allow goods and services to flow freely and predictably are increasingly important. Unfortunately, adherence to those rules have grown weaker over the past year and the current standoff with Japan is symptomatic of a worrying trend.

With some exceptions states have largely refrained from using national security exemptions to restrict trade in recent decades, but over the past year national security has increasingly been viewed as a way to impose tariffs or restrict trade in the pursuit of other objectives.

Regrettably, the United States which has led the way in developing the current rules-based system that allowed more nations to prosper than at perhaps any time in human history has been leading the way in utilizing questionable national security rationales to achieve other objectives. Not surprisingly, Japan is learning from the United States.

Japan's decision to restrict critical exports needed for South Korea's electronics industry bears a striking resemblance to the U.S. decision to place Huawei on the Entity List over security concerns related to its development of 5G networks. Even the rationales for the decisions are muddled by the messaging from both the United States and Japan.

When the U.S. decision on Huawei was first put in place, U.S. firms sought to find legal ways to continue to supply the Chinese firm given its importance to their business.

In the case of Micron, the strongest competitor for memory chip production to Samsung and SK hynix, Huawei accounted for 13 percent of Micron's revenue in the first and second quarter. Huawei was also a significant purchaser from other less well known U.S. tech firms such as Inphi and Qorvo.

While the Trump administration has since relaxed some of the restrictions on Huawei, its founder Ren Zhengfei has indicated that the U.S. action has further incentivized its own efforts to lessen its dependence on U.S. firms. In the short-run, U.S. firms may see benefits but in the long-run will face greater Chinese competition.

In the case of Samsung, SK hynix, and LG Display, a similar dynamic is at play with efforts to find ways for their Japanese counterparts to continue to supply them, but also a strong incentive to lessen their dependence on Japanese suppliers.

There is also a national security dimension. Samsung is the world's fourth-largest suppliers of network equipment and has significantly invested in 5G. In light of U.S. security concerns over Huawei, a concern that Japan shares, it is surprising that Tokyo would take an action that might damage one of the few firms that could help build out secure 5G networks globally.

Japan's decision isn't merely confined to the dispute between Seoul and Tokyo. In an interconnected world, these moves reverberate out, especially in the highly interconnected electronics industry.

Many of the world's electronics supply chains run the East and Southeast Asia and semiconductors are a key component. Because of South Korea's dominate position in the memory chip sector, it tends to be the largest or next largest source of semiconductors for countries in the region.

Any disruption in supply due to Japan's action means that countries further down the supply chain will feel the effects of a chip shortage in their production and could see a commensurate effect on economic growth.

In the short and perhaps medium term, Japan will be able to apply economic pressure on South Korea. But over time, South Korean firms will seek more dependable suppliers just as Huawei has indicated that it needs to become more dependent on Chinese suppliers.

A reduction of interdependence will likely insulate firms from these types of pressures in the future, but at the cost of efficiencies that have developed over time as supply chains expanded. This could lead to increased costs and implications for South Korea's own economic future.

Throughout its economic development, one of South Korea's greatest economic strengths has been its openness to international trade, but as Japan's actions have brought to the forefront how interconnectedness can be used against South Korea. Turning its back on international trade will only make South Korea poorer, but it likely will need to foster domestic growth to counter the current international uncertainties.

In the long run, the international system may be able to accommodate the damage that has been done to international trade rules, but the more they are eroded the more difficult it will be to return to a point where national security exemptions are only used for national security.

Despite the current tensions, strengthening the WTO and ensuring that these tactics are used less frequently is a common interest that South Korea and Japan share.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.