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There's a brewing trade war brewing between two major economies that could further slow global growth and could potentially even make the price of your smartphones go up.
But this is not the one you're thinking of.
This one is between Japan and Korea.
Japan and South Korea are Asia's biggest economies after China and India, and have gained worldwide acclaim for their global brands.
But the relationship between the two powerhouses has long been strained, and now we're seeing those tensions manifest themselves in a trade dispute.
It all kicked off in July 2019, when Tokyo added trade restrictions on Korean companies purchasing three chemicals made in Japan.
It cited Korea's “inadequate management” of the sensitive items, essentially hinting the chemicals were being sent on to unapproved countries like North Korea and Iran.
Japan produces up to 90% of the world's supply of these chemicals, which are often used in making semiconductors and display screens.
Semiconductors are critical for making major components of today's electronic products, like your smartphone.
That makes the chemicals vital to South Korea's economy, which is home to semiconductor giants Samsung Electronics and SK Hynix.
These two companies alone supplied 61% of the components used in memory chips globally.
In 2018, semiconductor sales made up 92% of Korean export growth.
Now, thanks to a perfect storm, its trade is expected to fall in 2019.
The real bone of contention, however, goes way back in time and beyond trade.
Korea's modern-day resentment of the Japanese can be traced back to over a century ago,
when the Korean peninsula was colonized by the Japanese in 1910.
During this time, many Koreans were made to work in Japanese factories and mines under poor conditions.
Tens of thousands of women, many of them Korean, also served as “comfort women," a Japanese euphemism used to describe those forced into sex work at military brothels.
Korean culture, language and history were at risk of being erased.
Japanese rule came to an end in 1945, following the Axis powers' defeat in World War II.
After years of negotiation, the two nations signed a treaty in 1965. It aimed to resolve all colonial-era claims “completely and finally” in exchange for $800 million worth of economic aid and loans from Japan.
This amounted to more than a quarter of Korea's GDP at the time.
But many in Asia rejected the treaty as insincere or insufficient, pointing out it did not cover sensitive issues like Korea's “comfort women.”
The nations attempted to settle this decades later in 2015.
Japanese Prime Minister Shinzo Abe offered his “most sincere apologies and remorse,” and his government agreed to send Seoul $10 million to establish a foundation to support surviving “comfort women.”
As a part of the agreement, the two head of states agreed not to criticize each other over the contentious issue on an international stage anymore.
The agreement was short-lived.
Many Korean civilians and interest groups were unhappy with the outcome, saying they weren't consulted during the negotiations. The resentment festered and eventually escalated into several mass demonstrations on the streets of Seoul.
Korean consumers began to boycott Japanese goods.
In 2017, Moon Jae-in became South Korea's president, and made it clear that South Koreans would not accept the 2015 deal brokered by his predecessor.
Resentment was growing in Japan as well, where many felt South Korea kept “moving the goal post” on the issue, making it impossible to settle colonial claims.
At the end of 2018, the Japanese government was infuriated by a South Korean Supreme Court decision. It held Japanese companies accountable for forcing Korean workers into factories during the Second World War.
Two companies — Nippon Steel & Sumitomo Metal and Mitsubishi Heavy Industries — were ordered to compensate several Koreans for forced labor during the war.
It wasn't long before these tensions spread to other parts of the countries relationship, including their trade ties – which brings us back to where we left off in 2019.
Only a month after tightening trade exports to South Korea, Tokyo took it a step further by announcing it would remove South Korea from its white list.
Soon after, Seoul did the same thing.
So what is the white list?
It is a list of 27 countries – now 26 without Korea - that Japan considers to be trustworthy trade partners.
This means they won't misuse the goods they buy for unauthorized military use or resell them to sanctioned countries. The move affects more than 1,000 goods from South Korea.
Moving forward, the companies will have to go through more rigorous vetting.
Approval will take longer, and goods imported from Korea to Japan will go under closer examination.
As trade ties break down, prices of chips will go up in the short-term.
Samsung phone prices could potentially go up too.
And companies like Samsung and SK Hynix may be forced to look for alternative supply sources for its technology parts and materials imported from Japan.
But there may be a silver lining in the long run.
Before trade ties between both countries took a nosedive, the prices of DRAM memory chips, a common type of random access memory, were at new lows.
This was due to an expected abundance in supply.
That slashed profits at Samsung Electronics in the company's worst drop in four years.
But when Japan tightened its export controls, supplies of DRAM chips suddenly dropped and prices went up in turn, leading to better than expected results for Samsung and other Korean manufacturers.
Experts say that Japan's trade curbs on South Korea could actually backfire and hurt the Japanese economy because many Korean companies have lost trust in Japan and may choose not to do business with Japanese firms in the future.
Bilateral ties took a further hit in August. The South Korean government announced its withdrawal from a highly sensitive intelligence sharing pact.
So what is the intelligence agreement and why does it matter for global security?
The General Security of Military Information Agreement, more commonly referred to as GSOMIA, allowed the two countries to directly share information on North Korea's nuclear and missile activities, ensuring that the two U.S. allies are aligned defensively.
It's the first intelligence-sharing agreement between the two nations since Korea's liberation from Imperial Japan in 1945. It was signed in 2016 after five years of negotiation.
The delay, according to an expert, likely came down to negative public sentiment in South Korea, and it's very likely that is what drove Seoul's withdrawal now.
Dropping out of the intelligence sharing deal means that South Korea's government will no longer be quickly notified about irregular activities in regional waters.
In 2019 alone, Seoul and Tokyo exchanged “classified military information" about North Korea 7 times.
Still, the two Asian countries can technically share intelligence through their ally, the United States.
But that makes it more complicated.
Some experts say this could create a serious lag and cause detrimental consequences for the effective monitoring of North Korea's nuclear threats.
Beyond military effects, a worsening Japan-Korea relationship may weaken geopolitical ties.
The deteriorating relationship between the two neighboring countries is impacting the world's largest economies. For one, China and the U.S. are fighting to be the mediator.
While the two largest economies are in the midst of a trade war of their own, they're doing their best to avoid a souring bond between Japan and Korea.
China has publicly supported a resolution to the trade tension, but at the same time, Chinese companies are positioning themselves as replacements for their Japanese counterparts.
While China could benefit from new export orders, Beijing ultimately hopes to keep the Japan-South Korea-China free trade agreement negotiations on track, but that will be unlikely as tension escalates.
Analysts say China can benefit economically if South Korea and Japan resolve their differences, but it could potentially benefit geopolitically if their relationship worsens, weakening U.S. influence in the region.
The U.S., which has a sizable military presence in both countries, has always served as a bridge between the two nations.
But the Trump administration has stayed relatively low key in the recent Japan-Korea dispute.
Some experts suggest this could even indirectly strengthen China's influence globally, a prospect that is raising eyebrows in Washington.
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Why are Japan and Korea in a trade war? | CNBC Explains

99 Folder Collection
ayami published on November 19, 2019
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