This is the second of a two-part series looking at the economic and commercial implications of the long-running dispute between South Korea and Japan.
For part one, please read: Decades of distrust: South Koreans angry at Japan’s export curbs.
As a former teacher from Japan who spent four years teaching Japanese in South Korea, Yoko Tanaka believes she has a fairly good perspective on what the people of the two neighbouring East Asian countries feel about one another.
Many Koreans have never forgiven Japan for the atrocities it committed during its occupation of the Korean peninsula from 1910 to 1945, despite periods of calm. Over the last month, those feelings have once again soured, threatening a highly lucrative but complex trading relationship between the tech industry titans.
Japan’s move on July 4 to restrict the sale to South Korea of three key chemicals used in Seoul’s economically critical chip-making industry has provoked thousands of Koreans to take to the streets in protest. It even led to the death of a man who set himself on fire outside the Japanese embassy in Seoul to make a point. Another South Korean man also set himself on fire on Thursday. And small businesses have boycotted selling Japanese goods.
On Friday, Japan further raised the temperature in the dispute. Tokyo said it would remove South Korea’s fast-track export status, making it the first country to be excluded from Japan’s “white list” of destinations approved for the sale of sensitive materials.
Tanaka says the lack of trust cuts both ways.
“Many Japanese seem to think Korea is not a trustworthy partner any more in terms of diplomatic relations,” Tanaka, 33, who lives in Saitama Prefecture just outside Tokyo, told Al Jazeera. “I think few Japanese people disagree with the government’s action, even if certain exporters will be going through a hard time.”
Tanaka’s thoughts on the issue are borne out by the results of a poll conducted by the Asahi Shimbun newspaper and published on July 15. It showed that 56 percent of respondents supported the government’s move, while 21 percent were against it.
And analysts agree that some industry-leading Japanese firms might indeed suffer because of their government’s restrictions.
Among the world’s top makers of chemicals used in the chip industry, Japanese firms feature prominently.
For instance, Japanese companies such as JSR Corporation, Tokyo Ohka Kogyo and Shin-Etsu Chemical are some of the world’s biggest producers of photoresists, which are used to transfer circuit patterns onto semiconductor wafers, and which are one of the chemicals under Tokyo’s restrictions.
The other chemicals affected by the new rules include fluorinated polyimides, used in smartphone displays, and hydrogen fluoride, an etching gas for making chips.
The chemicals industry accounted for 8.3 percent, or $57.3bn worth, of Japan’s exports in 2017, according to the Massachusetts Institute of Technology’s Observatory of Economic Complexity.
Nearly six percent of those chemicals were for the electronics industry, the third-biggest product segment after industrial fatty acids and packaged medications. South Korea bought 17 percent of Japan’s exports of chemicals for electronics, second only to the US percentage of purchases.
And Japan’s chemicals industry employed around 890,000 people as of 2016, the Japan Chemical Industry Association says.
“There are several large companies in Japan that could see revenue declines if the Japan and Korea trade dispute is not resolved,” Len Jelinek, senior director of semiconductor manufacturing research at IHS Markit, told Al Jazeera. “Due to the size of the major Korean manufacturers, there are not a lot of options available for the Japanese companies.”
Tokyo says its decision to restrict the chemicals’ sales was based on South Korea’s “inadequate management” of the sensitive items Japan was selling Korean tech companies such as Samsung Electronics and SK Hynix, the world’s two biggest chipmakers.
Some of the substances can also be used to make chemical weapons. Japanese broadcaster NHK said hydrogen fluoride was being shipped on to other countries including North Korea.
Tokyo has not directly accused Seoul of breaching sanctions against North Korea, and South Korea has denied making any such violations of its trade agreement with Japan.
But many people in South Korea see Japan’s export restrictions as retaliation for a ruling by South Korea’s highest court last year that ordered Japanese conglomerate Mitsubishi Heavy Industries to compensate 10 people who were victims of forced labour during the Japanese occupation.
Japan believes the matter had been settled under a 1965 treaty and it denied that the restrictions were a response to the South Korean court order.
Japan’s restrictions mean that exporters now need to seek permission each time they want to ship these chemicals to South Korea, a process that can take up to 90 days.
The new rules make it harder for South Korean chipmakers to source these crucial substances, in turn threatening the global supply of chips for electronics manufacturers such as Apple and Chinese telecommunications giant Huawei.
And the latest moves by Japan are hurting South Korean chipmakers while they are already down.
Samsung Electronics, South Korea’s biggest company, reported a 56 percent drop in operating income for the three months through the end of June, before the restrictions came into force. The country’s other big chipmaker, SK Hynix, turned in an even worse performance, with an 89 percent plunge.
Prices of memory chips have fallen sharply over the past year as output grew faster than consumer demand and the US-China trade war disrupted global markets for electronics like smartphones.
“The Japanese government’s decision will lead to mutually assured destruction as South Korea is an important export market for Japan,” Waqas Adenwala, an analyst at The Economist Intelligence Unit (EIU) told Al Jazeera.
“The producers of materials used in manufacturing of semiconductor devices will struggle to find new buyers. Meanwhile, Japanese companies producing electronic devices buy semiconductor components from South Korea and they will face delays in their production too.”
Analysts say that if the dispute drags on, Korean companies may start sourcing the chemicals from elsewhere, permanently denting this important niche in Japanese industry.
“If the new rules take effect for a long time, Korea will diversify sources of its providers including domestic suppliers. The best resolution would be lifting the sanction as soon as possible. Otherwise, both countries will take a huge loss,” Mun Byung-ki, senior researcher at the Institute for International Trade at the Korea International Trade Association, told Al Jazeera.
Producers of the chemicals in mainland China, Taiwan and even South Korea itself could start ramping up production to take advantage of the drop in supplies from Japan, analysts say.
And China could end up becoming a winner in the chip production business too.
“The disruptions will benefit producers of semiconductors in China. The rivalry between Japan and Korea also is a diplomatic gain for China in the long run,” the EIU’s Adenwala said.
Meanwhile, the dispute could get worse before it improves.
Japanese media have reported that Tokyo is considering removing South Korea from its list of countries that enjoy preferential treatment in trade. Japan’s so-called “white list” consists of 27 countries, including the US, the United Kingdom, Germany, Australia, New Zealand and Argentina.
South Korea’s attempt last week to bring the dispute to the World Trade Organization (WTO) left the two sides as far apart as ever.
Japanese ambassador Junichi Ihara told the WTO meeting in Geneva that the change in trade procedures was Japan’s prerogative and was nothing unusual.
South Korea’s deputy trade minister Kim Seung-ho replied: “It’s not at all a trade measure, it’s not at all a security measure, it’s purely strategically planned to gain the upper hand in the diplomatic rows, I mean the forced labour issues.”
Tanaka, the former Japanese teacher, says she does not believe South Korean President Moon Jae-in cares about relations with Japan.
“Japanese people think Korea hasn’t deeply considered the stance of Japan while Japan has tried to talk to Korea to resolve the conflicts,” she says.