Japan Removes South Korea From Trusted Export List

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South Korea and Japan stepped up their fight over trade, leaving little room for a quick way out in the dispute that threatens to damage security ties and global supply lines.

South Korean President Moon Jae-in called Japan “reckless” in a national address Friday and his country planned to cross its neighbor off a preferred-trade list. The move came hours after Japanese Prime Minister Shinzo Abe's cabinet removed South Korea from its list of trusted export destinations.

U.S. Secretary of State Michael Pompeo met his counterparts from both countries Friday, but the dispute, which simmered for months as the Trump administration sat on the sidelines, looks set to worsen amid protests, boycotts and economic warnings.

“By bringing economic sanctions, they've really escalated it to another level,” said Robert Dujarric, director of the Institute of Contemporary Asian Studies, Temple University, Japan. “This isn't going to make South Korea cave in. If anything, it heightens South Korean nationalism. It makes it harder to de-escalate and harder to have a ‘united front' against China.”

The standoff, rooted in resentment over Japan's 1910-1945 occupation of the Korean Peninsula, is turning into one of the worst crises in often fraught bilateral ties since a 1965 treaty normalized relations. It could damage the Asian neighbors' ability to work together and with the U.S. to counter renewed threats from North Korea, as well as China's growing military prowess.

Trump Needs Them to Be Friends, But Japan and South Korea Feud

President Moon said Japan's move was clearly intended to block his country's growth and ignored U.S. calls to intervene. He described it as retaliation for the South Korean Supreme Court's rulings holding Japanese companies liable to compensate victims of labor conscription during the colonial period. Japan has denied this, while saying the rulings undermined trust.

“I unequivocally warn that the Japanese government will be entirely held accountable for what will unfold going forward,” Moon said in comments at an emergency cabinet meeting. “It is a selfish, destructive act that will cripple the global supply chain and wreak havoc on the global economy.”

The fight didn't seem to rile markets. South Korea's benchmark stock index, Kospi, fell 1% on the day, while Japan's Nikkei 225 dropped 2.1% at close. That compares with the 1.4% decline in the MSCI Asia Pacific Index as of 6:41 pm Seoul time.

Protests in Seoul

Protesters took to the streets outside the Japanese embassy in Seoul shortly after Tokyo announced the move and more rallies are on tap for the weekend. Tokyo has said its neighbor is lax on management of sensitive materials and that its move is a matter of national security. Seoul denies the claim of improper controls.

Trade Minister Hiroshige Seko told reporters that Japan didn't intend the move to affect relations with South Korea and Tokyo has thoroughly explained to the U.S. and other relevant countries its revised rules for handling exports to South Korea. “This is a revision of the way we manage export controls based on the fact that there are some inadequacies in South Korea's export control system,” Seko told reporters. The measure takes effect Aug. 28.

Japanese officials have argued that the changes wouldn't have much long-term effect on legitimate exports. But the matter has been seen by Seoul as having major implications for its already struggling economy.

Economists at Goldman Sachs Group Inc. and Bank of America Merrill Lynch have also said any disruptions from Japan's tighter export regulations are likely to be short-lived.

The move will directly affect 159 items that South Korea imports, Finance Minister Hong Nam-ki said in a briefing. South Korea's technology industry is highly dependent on Japanese suppliers, such as scrap steel, medical equipment, plastics and some chemical products, according to SK Securities.

Growing Tension

Five of America's largest tech industry groups have written a joint letter to the trade ministers of Japan and South Korea seeking to cool tensions. The trade spat threatens global production and too much was at stake, the groups said. A senior U.S. official in Washington said this week the Trump administration was urging the two sides to reach a “standstill agreement” to give themselves room to negotiate.

Opinion polling shows that Abe and Moon have each won support at home for taking
a tough stand on the matter, despite the risks to the broader relationship.. South Korea is considering whether to end a military information-sharing agreement, a government official said, even as North Korea fires off a series of missiles. The deadline for notifying Japan of such a decision comes Aug. 24.

“This will make North Korea happy,” said Corey Wallace, a researcher at Freie Universitat Berlin. “It's one more diplomatic seam they can pick at as they attempt to progress their nuclear and missile programs and, based on this, try to extract as many concessions from regional states as possible.”

--With assistance from Sohee Kim, Yuko Takeo, Seyoon Kim, Emi Nobuhiro, Jihye Lee, Hooyeon Kim and Heejin Kim.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net;Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Jon Herskovitz, Henry Hoenig

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