South Korea and Japan's Flap Could Hit Trump’s Plans on China

(Bloomberg) -- A South Korean court is set to start liquidating assets of a Japanese company to compensate Koreans conscripted to work during colonial occupation, straining ties between two key U.S. partners just as the Trump administration needs their help in countering China.

A district court in the eastern city of Pohang will start a process on Tuesday to seize shares valued at about $356,000 that Japan's Nippon Steel Corp. has in a joint venture with South Korean steelmaker Posco. No money is expected to move immediately, however, as the liquidation process requires months to realize due to procedural formalities.

Nippon Steel will immediately appeal the notice to seize its assets, spokesman Tsuyoshi Yoshizumi said Tuesday. If it does not appeal within a week, the order is set to become effective and that would likely inflame tensions as Japan has said the order is unlawful.

The two countries have seen threats to their enmeshed economies and their joint security efforts following South Korea's Supreme Court ruling in 2018 that Nippon Steel and Mitsubishi Heavy Industries Ltd. were liable to compensate for forced labor during the 1910-1945 colonial period.

The renewed acrimony could prove troublesome for Donald Trump, as his administration has stepped up its pressure campaign against China, seeking help from allies to contain Beijing's push into the South China Sea and block Chinese technology on the grounds of posing security risks.

Japan's chief government spokesman, Yoshihide Suga, said any seizure of assets would cause serious problems. He also said at a new briefing in Tokyo on Tuesday that Japan wants South Korea to find an early solution on the issue of conscripted workers.

Tokyo has vowed to strike back if the liquidation takes place, with the Nikkei newspaper speculating some of the steps could include an end to visa-free travel, stepping up export controls or a seizure of some South Korean assets. Seoul has said it has already reviewed possible countermeasures in response.

Japan has said all claims were completely and finally settled by a 1965 treaty that established basic relations, while Seoul believes some conscripted workers were not properly compensated for their emotional pain and suffering.

The Trump administration has been reluctant to step in and ease tensions. But last year it pressured Seoul to make a last-minute pivot to save an intelligence sharing pact with Tokyo designed to demonstrate the neighbors' ability to cooperate independently from Washington to counter shared threats including China and North Korea.

Troublesome

The renewed tensions could also hurt the U.S. on the economic front. The Trump administration has talked about bringing supply chains home from China, and even publicly floated the need for a group of friendly nations in Asia that could help produce essential goods, seeking assistance from the likes of Japan, South Korea and others.

The tension between Tokyo and Seoul, however, could benefit China, according to Zhao Tong, Senior Fellow at Carnegie‑Tsinghua Center in Beijing.

“The growing gap between Japan and South Korea may help China maintain a good relationship with South Korea due to their shared historical grievances toward Japan and can help ensure that a U.S.-ROK-Japan trilateral security alliance will never become real,” Zhao said, referring to South Korea by its formal name.

Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in have found support at home for taking a hard line against their neighbor. With both facing slides in their domestic support rate, making unpopular concessions to ease the tensions could lead to an even deeper fall.

Apart from the court cases over colonial-era labor, Japan and South Korea are squaring off at the World Trade Organization over Tokyo's decision to restrict exports of electronics components vital for South Korea's tech sector.

©2020 Bloomberg L.P.