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Japanese Prime Minister Shinzo Abe during a campaign rally in Fukushima on July 4.
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Protectionist economic measures from Abe and Trump threaten global economic health
July 6 marks exactly one year since the US and China announced their trade war, with each dropping a “bomb” of high tariffs on imports arriving from the other in their respective markets. As of midnight on July 4, the Japanese government under Prime Minister Shinzo Abe introduced South Korean export control measures on three strategic goods, including semiconductor materials. As the US-China trade war triggered by US President Donald Trump’s “America first” policies has dragged out, Abe too has joined in the fray, mimicking Trump’s model of trade-based retaliation. The major trade powers have been plunging the global free trade order into chaos, and with acts of trade retaliation escalating – based on monopolistic export status rather than any rational arguments – South Korea’s export-based economy is now facing a serious test. With the latest controls on South Korean exports of strategic goods, Japanese businesses exporting items from three categories must apply for permission for each export contract, effective immediately. In the past, they were able to receive overseas transport permits all at once for volumes spanning up to three years. In a report the same day, the Nikkei newspaper said that SK Hynix had “requested that a Japanese company providing it with parts and materials send as much stock as possible by July 4.” While it is outwardly attempting to skirt charges of violating the WTO agreement’s spirit of free trade reciprocity by not adopting a full-scale embargo, Japan’s aim is for all intents and purposes to shut off exports of strategic goods to South Korea. With export approval and disapproval reviews typically taking around three months, the first case of export sanctions being invoked according to these measures is not likely to happen right away. But observers are predicting the Abe administration could launch a second round of retaliatory measures on South Korean exports of high-tech materials by moving next month to remove South Korea from a “white list” of 27 “trustworthy” countries granted exemptions and preferential treatment for permit applications. In a July 2 article on the Abe administration’s export regulations, the Wall Street Journal criticized the Japanese government for “taking a page from Trump’s playbook” with trade-based retaliation tactics, despite outwardly professing itself to be a free trade believer. During a meeting on countermeasures against the Japanese export controls by relevant government agencies held on July 4 at the Korea Trade Insurance Corporation in Seoul, Minister for Trade Yoo Myung-hee said the Japanese measures “violate international norms and pose a major threat to the global economy by undermining the global supply system that has been established over the years.” Her claim was that the Abe administration was directly flouting the global free trade order and norms that established themselves as the global standard over the postwar decades. While the measures were ostensibly precipitated by a South Korean Supreme Court ruling ordering compensation for forced labor mobilization, some analysts have concluded that Japan’s underlying motive is to reorganize the international division of labor for IT products – including South Korea’s semiconductor industry – with a new production and supply value chain centering on Japan itself. For days, the Japanese press has been sounding a unanimously critical note on the Abe administration’s trade-based retaliation measures. In a July 4 editorial, the Mainichi Shimbun observed, “The biggest issue is that this violates the very same principle of ‘promoting principled free trade’ that Japan itself has proclaimed.” “Lacking in resources, Japan has developed through active trade. Free trade based on principles is a lifeline for trade-dependent countries,” the newspaper said. In the Tokyo Shimbun newspaper the same day, Atsushi Osanai, a professor at the Waseda University Business School, predicted, “If Japanese and South Korean companies both collapse and their global competitiveness dwindles, China will grow in the area of manufacturing.” “This is not a time for Japan and South Korea to be battling and tearing at each other,” he stressed. S. Korea suffers most from US-China trade conflict The trade war that has unfolded over the last year as the world’s top two trade powers – the US and China – have met retaliation with retaliation continues to escalate with no signs of escape. The global economy has begun showing signs of a slowdown as the ongoing US-China trade conflict has become entrenched into a new vicious cycle, and the negative effects on South Korea have started to become visible. In an analysis of figures from the Bureau for Economic Policy Analysis (CPB), a Dutch agency collecting statistics on global trade trends, the Hankyoreh found that South Korea was suffering the “biggest and broadest” damages from the two superpowers’ trade war even among emerging economies. Over the three months between February and April, exports fell by 0.5% globally (from the same period in 2018) and 1.0% for emerging markets, while rising 1.2% for advanced economies. During the same period, South Korea’s exports averaged a decline of 7.2%. Exports have also been declining for seven straight months since December 2018, when the ripples of the US-China trade war first truly began affecting export goods. The biggest factors identified in the change have been a sharp decline in exports to China, which South Korea chiefly sells intermediate goods to, and imports by the US, one of South Korea’s main export markets. Amid the effects of the trade war, the rate of increase in China’s global exports has dropped off substantially, falling from 14.3% (compared to the same period in 2017) at their annual global trade volume high in October 2018 to 1.1% as of May. The rate of increase in US’ imports from around the world also fell sharply from 9.0% to –0.02% over the same period. Between January and June 2019, China accounted for 24.3% of total South Korean exports, compared to 13.6% for the US and 5.3% for Japan. Japanese products represented 9.7% of all South Korean imports. The onslaught of destructive acts against the free trade order by major trade powers has led to deepening pessimism in predictions of the rate of expansion in global trade (including both exports and imports). The OECD and World Bank recently revised their 2019 global trade expansion projections drastically downward – from predictions of 3.6–3.7% as recently as late last year to the range of 2.1% (OECD, May) to 2.6% (World Bank, June). The structure is one where the South Korean economy stands to suffer a direct blow from a decline in global trade. “The South Korean economy lives on exports. The international community referred to South Korea as a ‘country that has benefited for decades from free trade in its economic development process,’” said a senior trade official. “We aren’t in a position to invoke import regulations as our own retaliation, and we could face even harsher retribution if we rush to respond,” the official said, suggesting Seoul has few effective avenues for a response. By Cho Kye-wan, staff reporter, and Cho Ki-weon, Tokyo correspondent Please direct comments or questions to [english@hani.co.kr]
