Season 3 - Rethinking Asia: Asia’s Latest Trade War: Japan vs. South Korea

Pacific Exchanges

In this episode of our series Rethinking Asia, we spoke with Chad Bown, Reginald Jones Senior Fellow at the Peterson Institute for International Economics. Chad is an expert on trade, having worked on the issue at the World Bank, the White House Council of Economic Advisors, and the World Trade Organization.

We sat down to discuss the recent trade disagreement between South Korea and Japan. While, rooted in the countries’ deep historical, political, and social tensions dating back to the early 20th century, the attitudes and tactics adopted in the dispute reflect broader global sentiments surrounding trade. Key takeaways from the discussion include:

• A new front in global trade wars has opened, with South Korea squaring off against Japan. Specifically, the Japanese government put export restrictions on various exports to South Korea and, most recently in early August, removed South Korea from its so called ‘white list’ of countries that enjoy special trade terms with Japan. The move requires Japanese companies to follow a bureaucratic process when exporting to Korea, disrupting supply chains for Korean microchip and display manufacturers that rely heavily on Japanese inputs.
• Today’s tensions date to the Second World War, when Korea was a Japanese colony and Japanese companies used forced Korean labor. In 1965, the two countries signed a treaty to normalize the relationship under which Japan paid restitution to South Korea. Recently, however the South Korean Supreme Court ruled that the treaty only applied at a country level and that individuals could bring cases against Japanese companies. Japanese export restrictions are seen as retaliation for the decision.
• The deterioration of the trade relationship between Japan and South Korea reflects current attitudes and trends in trade by which countries are increasingly using trade as a lever to resolve political and social disputes once mediated through diplomatic channels.
• This dispute reveals that a focus on bilateral disputes may make it harder for countries to form regional or global trade agreements. Prior to the dispute, according to Bown, South Korea was interested in acceding to the Japan-led CP-TPP (Comprehensive and Progressive Agreement on Trans-Pacific Partnership) trade agreement among 11 countries. It is unlikely to follow through in light of current tensions.
• It is hard to say whether the current attitudes toward trade will upend the trend toward globalization established in the aftermath of the World War II. Recent results are a mixed bag: while high profile cases of anti-trade rhetoric and behavior have garnered the most attention, other countries continue to sign free trade agreements.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.