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Greetings from Tokyo. We should now be in the run-up to the Tokyo Olympics, but they were postponed until next year because of Covid-19, and it looks touch-and-go whether they will take place at all. That is not least because of Japan’s severe border controls — if nobody can get into the country, there will not be much sport taking place.
Today’s note looks at a different kind of international contest: Japanese bickering with South Korea over trade. The two countries have just renewed hostilities at the World Trade Organization in Geneva over export controls — but the situation may not be as bleak as it first appears. Our chart of the day looks at China’s best bet at reducing its dependence on foreign-made chips, while Policy Watch examines the latest in the UK-EU trade talks, which have gone all metaphorical with talk of tigers in tanks and pigs in pokes.
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Trade wrangling, or trade hostility?
It is the latest sign of a return to normality: after three months of quiet as everybody wrestled with Covid-19, Japan and South Korea are back to wrangling about trade. Earlier this month, Seoul said it would reactivate its World Trade Organization complaint about the controls on technology exports that Tokyo imposed last July. What has been going on?
At the root of the current tensions is a 2018 ruling by South Korea’s Supreme Court awarding damages against Japanese companies for forced labour during the second world war. Japan believes that all such claims were settled in a 1965 treaty. Last July, Japan slapped controls on three chemicals vital to South Korea’s semiconductor industry: fluorinated polyimide, photoresists and hydrogen fluoride etching gas.
The putative reason for Japan’s action was defects in South Korea’s own export control system and the risk that the chemicals could be diverted to a third country for military use. Seoul objected and brought a complaint at the WTO. Separately, it threatened to withdraw from an intelligence-sharing agreement, but after pressure from the US the two countries reached a truce in November.
Since then, according to Japanese officials, there have been two marathon summit meetings on the export control issue, lasting 10 hours or more. At the second of those meetings — held by video conference in March — the Korean side presented revisions to its Foreign Trade Act that go a long way to answering any substantive concerns that Tokyo may have.
Na Seung-sik, from South Korea’s trade ministry, insists Seoul’s export controls are ‘functioning normally and effectively’ © Kang Jong-min/Newsis/AP
From Seoul’s point of view, Japan now has no excuse to continue the export controls. “Our government in the past six months sincerely engaged in dialogue and provided thorough and sufficient explanations so that the Japanese side could understand South Korea’s export controls are functioning normally and effectively,” said Na Seung-sik, an official from South Korea’s trade ministry, according to a briefing reported by the Associated Press.
Japanese officials say they merely want to see how the law is implemented in practice and that, in the meantime, the controls have had no impact on the supply of chemicals to South Korea. “The law is in the right direction but will the implementation reach the necessary level?” said one. “There might be some confusion over paperwork on export controls but there hasn’t been any negative impact in practice.”
The lawyers in Geneva are standing by: Seoul is likely to put the issue on the agenda for WTO dispute resolution this week, adding to ongoing cases over alleged Japanese dumping of stainless steel and Korean subsidies for the shipbuilding industry. Both countries have been beefing up their teams for WTO dispute resolution. Going to the WTO will take at least a year, however, and its appeals system has shut down for lack of judges.
That suggests the latest bout of trade wrangling between Tokyo and Seoul is unlikely to turn into trade hostility just yet. With the world economy in trouble, and both countries heavily reliant on a free and open international trading system, they have far more incentive to make the dialogue on export controls work than to provoke another crisis.
Charted waters
At the heart of China’s drive to become technologically self-sufficient is a company that few have heard of. But Semiconductor Manufacturing International Corporation, which is preparing for an offering on Shanghai’s new Star market, is China’s best bet at reducing its dependence on foreign-made chips, write Yuan Yang and Nian Liu. However, SMIC still has neither the equipment nor skills to compete with leading players such as Taiwan’s TSMC.
Policy watch
Charles Michel, European Council president, insists the EU will never abandon its demand that UK companies compete with European rivals on a level playing field © Francisco Seco/Pool/EPA-EFE/Shutterstock
UK prime minister Boris Johnson on Monday set an end-of-July deadline for sealing a UK-EU trade deal, amid growing optimism in London and Brussels that a post-Brexit agreement might be possible, write George Parker and Jim Brunsden.
Johnson and EU institutional leaders agreed to inject “new momentum” into the negotiations and, in spite of tough talk from both sides, privately officials said the mood was improving.
“I don’t think we’re actually that far apart,” Johnson said, adding that he had urged the EU to “put a tiger in the tank” of the talks. “What we need now is to see a bit of oomph in the negotiations,” he added.
Charles Michel, European Council president, agreed on the importance of injecting energy into the talks, while warning that the EU would never abandon its demand that British companies compete with European rivals on a level playing field. He tweeted that the EU would not “buy a pig in a poke”.
But in Brussels there was a sense of relief that Johnson was committed to intensified negotiations in July and had not walked out of the talks, which have been deadlocked for weeks.
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