Japan-South Korea dispute at risk of worsening this year

Akemashite omedetou gozaimasu or happy new year from Tokyo. The city is under a fresh state of emergency to control Covid-19 but the rules are mild; schools are still open and the main change is restaurants having to close at 8pm. The big question is whether it will be enough to stop the virus. Evidence from other countries might suggest not, but the Japanese public are good at following rules, and compliance with practices such as mask-wearing is exceptionally high.

With the Regional Comprehensive Economic Partnership and Japan-UK deals both agreed, the immediate trade agenda in Tokyo is light: there are long-running talks with Turkey, Colombia and over a possible Japan-China-South Korea trilateral agreement. The latter is by far the most significant, but today’s note discusses one of the main obstacles — the likelihood of a fresh crisis between Tokyo and Seoul over wartime history — and how Japan may choose to handle it.

Policy watch covers how Brexit is affecting the food industry, while our chart of the day examines the impact on foreign investment of Turkish president Recep Tayyip Erdogan’s tighter grip on power.

Relations sour between Japan and South Korea

By the summer of 2019, the global technology industry was getting used to tension between China and the US on trade, but it was taken aback when a dispute erupted between two of the most important and stable nations in semiconductor supply chains: Japan and South Korea. Citing a loss of trust between the two countries, Tokyo suddenly imposed export controls on fluorinated polyimide, photoresists and hydrogen fluoride etching gas — three crucial chemicals for which its companies have a dominant market share.

Underlying the stand-off was a dispute over forced labour during the second world war. South Korean courts have awarded damages against Japanese companies such as Mitsubishi Heavy Industries. Japan says all claims were settled when it paid compensation in a 1965 treaty. South Korea threatened to pull out of an intelligence sharing agreement, but the US persuaded both sides to stand down and the issue went quiet for a while.

It has not gone away, however. The rulings on forced labour have been working their way through the South Korean courts, and at some point soon they may order sales of local assets belonging to Japanese companies. Until now, there have been court rulings but no actual losses suffered; the forced liquidation of Japanese assets would mark a new and more serious stage in the crisis.

Protesters in Seoul demonstrate against Japan’s removal of South Korea from a list of trusted trading partners in 2019 © Jean Chung/Bloomberg

Tokyo would feel obliged to respond. The question is how. The 1965 treaty calls for arbitration, with each side appointing an arbitrator, and a third arbitrator selected either by the first two or by a neutral power. However, South Korea has declined to appoint arbitrators so this route is out, and while Japan might try for the legal high ground by bringing a case to the International Court of Justice, the Korean side is unlikely to agree to ICJ jurisdiction.

Japanese public opinion is also likely to demand stronger action. Direct, tit-for-tat retaliation targeting the assets of South Korean companies would run foul of Japan’s domestic law and constitution, which states that the “right to own or to hold property is inviolable”. Even an act of the Diet, Japan’s parliament, would probably not allow the arbitrary taking of assets from local subsidiaries of foreign companies.

Instead, Japanese government lawyers will be scouring the precedent books for some kind of state-level retaliation — be it sanctions, tariffs, export controls, regulation, visas or some other area of international co-operation — that causes more pain in Seoul than Tokyo, passes legal muster and does not lead to instant defeat in the court of international opinion. The 2019 export controls did considerable harm to Japan’s image as a reliable supplier. Nevertheless, that is unlikely to stop Tokyo from taking action to defend what it regards as a vital interest.

Ultimately, the only way out of the dispute is negotiation, but there is a gulf between South Korea — where the public increasingly regards the 1965 treaty as illegitimate — and Japan, where the public does not believe South Korea will respect any agreement to settle its wartime history. Joe Biden, the incoming US president, will try to keep the peace but look out for a new trade crisis in east Asia during 2021.

Charted waters

Turkey’s geopolitical ambitions under President Recep Tayyip Erdogan have long been a source of concern for other world leaders, including many of those in Europe.

As our Istanbul correspondent Laura Pitel writes in the first of a series of articles on Turkish foreign policy, Erdogan’s actions, both within and beyond the country’s borders, have had a dramatic impact on the economy. The turbulence has weighed on foreign investment. FDI has been substantially less than the OECD average since a failed coup attempt in 2016 led Erdogan to tighten his grip on power.

Policy watch

A container ship at Belfast port. Supermarkets in Northern Ireland are running short of fresh produce due the vast volume of new paperwork now required to process shipments from Great Britain © REUTERS

We’re almost a fortnight into Brexit and one of the areas of disruption that’s garnering a lot of attention is food.

The Guardian has a somewhat comical story on how Dutch TV has shown border officials seizing ham and cheese sandwiches from those making the trip from the UK to the Netherlands. That’s down to a ban on meat and dairy products meant for personal consumption entering the EU.

Businesses are also experiencing issues, including, as the Financial Times reports, supermarkets such as Marks and Spencer, Sainsbury’s and Tesco in Northern Ireland. The problems stem from the Northern Ireland protocol, the mechanism agreed by the UK and EU in 2019 to avoid a hard border between Ireland’s north and south.

Under the protocol, as the reporters write, Northern Ireland continues to apply EU internal market and customs rules to maintain frictionless trade over the land border with the republic. This means vast volumes of new paperwork are required to process Irish Sea checks on shipments from Great Britain to the region. The outcome being that supermarkets are running short of items such as fresh fruit and vegetables and chilled meat, all of which are time sensitive.

We’d anticipate that they will be far less significant a few months from now, once supermarkets have become more adept at filling in the paperwork. For now, though, it’ll be a source of disgruntlement for many shoppers in a region that voted to remain.

Don’t miss

Chancellor Rishi Sunak thinks Brexit will help “reinforce the UK’s position as a globally pre-eminent financial centre”, in spite of a looming regulatory stand-off with Brussels. The City of London has lost a significant chunk of business in euro-based shares and sovereign debt since Britain quit the EU. But Sunak believes Brexit could trigger a 1980s-style leap forward for what remains Europe’s biggest financial hub.
Read more

Ford plans to stop manufacturing vehicles in Brazil this year, ending more than a century of production in South America’s largest economy. Its operations there have been a cash drain since the country’s economic downturn in 2013.
Read more

Robert Armstrong asks why banks struggle to go global. 
Read more

Tokyo talk

The best trade stories from Nikkei Asia

Freight costs in Asia continue to soar as shipping volumes of furniture, toys and appliances surge, sending the rate for a 40ft container from Shanghai to the US up 150 per cent.
Read more 

Yangtze Memory Technologies plans to double its monthly chip output to 100,000 wafers, or 7 per cent of global output, in 2021, a key step for China’s ambitions to create a fully domestic semiconductor supply chain. 
Read more

Source: Economy - ft.com