July 11, 2019 / 2:39 AM / 2 months ago

Breakingviews - Tokyo and Seoul can ill afford a standoff

South Korea's President Moon Jae-in is greeted by Japan's Prime Minister Shinzo Abe prior to their meeting at Abe's official residence in Tokyo, Japan May 9, 2018. Kazuhiro Nogi/Pool via Reuters

HONG KONG (Reuters Breakingviews) - A standoff between Tokyo and Seoul points to mutually assured damage. President Moon Jae-in could take aim at Japanese machinery, equipment and goods as payback for export curbs targeting South Korea’s vital chip industry. That casts a shadow over $85 billion of bilateral trade at a time when both economies are already under significant pressure. 

South Korea is mulling a tit-for-tat response. Tensions between the neighbours have been simmering since Seoul’s Supreme Court last year ordered two Japanese companies to pay individual reparations to forced wartime labourers. The ruling was blasted by Tokyo, which claims the issue was settled in a 1965 treaty. Evidently exasperated, Prime Minister Shinzo Abe hit back with new rules requiring companies to apply for licenses whenever they want to ship certain materials to South Korea.

    Moon’s options to take revenge are limited. Domestic companies, including the $255 billion Samsung Electronics, rely heavily on Japanese gear, materials and chemicals and they export back much less. The imbalance has resulted in South Korea’s persistent trade deficit with Japan, topping $24 billion last year. So any measures risk hurting the local chip and tech sectors, but also the ire of the World Trade Organization.

    Even so, Seoul is determined. Speaking to executives from the country’s top 30 conglomerates on Wednesday, Moon pledged to increase spending to help firms source parts and materials domestically. Details are scarce but, over the long term, suppliers could lose market share if companies like Samsung, the world’s top chips and handset maker, buy elsewhere: Japanese exporters shipped $24 billion worth of capital equipment to South Korea in 2018, customs data show. 

    Any escalation will pile on the pressure, however. Both economies are grappling with slowing global demand and the U.S.-China trade war. In July, South Korea slashed its export projections for the year, from growth of 3.1% to a 5% decline. Earlier this week, Japan reported a worse-than-expected drop in core machinery orders, an indicator of capital spending in the next six to nine months. Rushing into a second trade war looks reckless.

Breakingviews

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