Japan Likely to Expand Export Restrictions against South Korea

Posted on 02 August 2019

Source: Business Korea

Concerns are growing that Japan's economic retaliation against Korea, which started in the semiconductor and display sectors, may expand and hit the Korean industry as a whole.

As Japan is expected to remove South Korea from a "whitelist" of trusted importers, Korean companies that import the 1,120 strategic items from Japan are highly likely to suffer a big blow starting from later next month.

An official from the Ministry of Trade, Industry and Energy (MOTIE) said, “Even when South Korea is on the whitelist, it needs to receive a separate permit to import each of the 263 highly sensitive items. If Korea is excluded from the list, it will be required to receive a separate permit for each of the remaining 857 items.” Moreover, some non-strategic materials which can be used for military purposes will be subject to a “catch-all” system.

When South Korea is included in the whitelist, South Korean companies can import materials without preliminary examinations and get a permit once every three years. However, they will need to obtain a separate permit for each of the goods they import and notify Japan’s Ministry of Economy, Trade and Industry, of the quantity, purpose, use and final destination of materials. Trade experts say that the license screening period will take at least 90 days, but they express concerns that the Japanese government could disapprove imports and delay the screening process.

Japanese media outlets reported on July 27 that the Japanese government is planning to approve the rule at a cabinet meeting on Aug. 2 at the earliest. The new regulations will come into effect 21 days after the promulgation.

Market experts predict that the high-tech materials and electronics sectors will be the main target since they can strike the hardest blow to the South Korean economy due to Korea’s heavy reliance on Japan and the difficulty to find substitutes. Cases in point are precision machine tools, fine chemical products, such as functional films and adhesives, and carbon fiber which is used to produce aircraft and automobiles. As a result, the South Korean industry will be hit hard in various areas, ranging from semiconductors to displays, future cars, batteries and smartphones.

The Korean government is currently working on countermeasures with regard to 100 items most likely to be targeted by the Japanese government while monitoring situations in the industries including automobile and precision chemical.

South Korea imported 4,227 items from Japan in 2018. Among them, Korea relied on Japanese imports more than 90 percent for 48 items, according to a report on released by Hyundai Research Institute on July 28. The value of these high-dependence imports was US$2.78 billion (3.29 trillion won), 5.1 percent of Korea’s US$54.60 billion (64.67 trillion won) worth of imports from Japan and 0.5 percent of the nation’s total imports of US$535.20 billion (633.94 trillion won) last year.

The problem is that the South Korean industry is heavily dependent on Japanese industrial goods, such as intermediary and capital goods. Japan accounts for 14.6 percent of South Korea’s total industrial material imports. Although the percentage of overall Japanese imports to Korea has continued to fall, that of products that require high technology is still high.

“South Korean industries’ average degree of dependence on Japanese materials and components is more than 33 percent and this is a very high level,” said an industry expert, adding, “Japan’s economic retaliation will have a significant impact on the industries with time.”

Specifically, the South Korean chemical industry’s degree of dependence on Japanese materials and components is as high as 55.6 percent, followed by automotive (36.9 percent), steel (34.6 percent) and semiconductor and display (29.2 percent). Notably, the South Korean semiconductor industry, which has been targeted by Japan, is at an absolute disadvantage as a whole despite an absolute advantage in memory chips.

In the meantime, Yoo Seung-min, head of the investment strategy team of Samsung Securities, said, “The current disputes between South Korea and Japan are unlikely to get worse to the point of devastating both countries’ economies and industries,” adding, “An extreme confrontation will have a negative impact on the global economy and Asia’ regional security.” 

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