Kimberly Ann Elliott
Japan and South Korea are in the midst of a nasty diplomatic dispute, and Japan is using trade restrictions as a weapon to try and resolve it. Beyond the potential threats to American and regional geopolitical interests if the two countries remain at loggerheads, the nature of the spat is also disturbing. Japan’s use of trade restrictions to force South Korea to back down, while publicly justifying them as necessary for national security reasons, echoes U.S. President Donald Trump’s cavalier approach to trade rules and alliance relations. If the dispute is not resolved quickly, it could complicate efforts to deal with North Korea as well as other regional threats, while also dealing another blow to the World Trade Organization and the rules-based trading system.
Seoul and Tokyo are key U.S. allies in the Pacific region, but their relations have long been strained by the legacy of Japan’s colonial rule over the Korean Peninsula from 1910 until 1945. Japanese companies forced many Koreans to work for little or no pay and, during World War II, the Japanese military forced Korean women into sexual slavery. Japan insists that all war debts and reparation claims were settled under an agreement with South Korea, signed when the two countries normalized diplomatic relations in 1965. But the money provided by the Japanese government was part of a package of economic aid for the government in Seoul. The South Korean president at the time, Park Chung-hee, used most of the money for economic development and not to compensate individuals. Many South Koreans believe that Japan has never accepted full responsibility for its actions and that it should pay compensation directly to the victims of its human rights abuses or their descendants.
The current dispute erupted after South Korea’s Supreme Court upheld an appellate court ruling giving private citizens the right to sue Japanese companies for reparations over their forced labor claims. Japan protested, saying that all such claims were settled by the 1965 agreement. Tokyo tried to invoke an arbitration clause in the agreement, but South Korea refused. After the Japanese government told the affected companies not to make reparation payments, the plaintiffs’ lawyers launched an action to seize the companies’ South Korea-based assets.
On July 4, Japan announced that it was restricting exports to South Korea of key industrial materials—fluorinated polyimide, hydrogen fluoride and photoresists—that are essential for the production of semiconductors and display panels for smartphones and televisions. Japanese producers of those materials will now need a license to export them to South Korea, which could cause delays and disrupt operations even if the Japanese authorities eventually allow the exports to proceed.
South Korean imports of the three restricted products were worth only around $400 million last year. But they constitute more than 90 percent of the supply for some companies. Japan is also expected to remove South Korea from a “white list” of countries allowed to import dual-use goods—items with both commercial and military applications—with few restrictions. That move, which could come as early as next month, would spread the potential disruption to a much broader list of goodswith wider applications.
Japan’s willingness to use trade as a weapon is a warning for anyone who thinks that defeating Trump next year would return the global trade agenda to the status quo ante.Tokyo justified the restrictions on national security grounds, suggesting that some of the restricted items were leaking into North Korea in violation of United Nations sanctions. But the announcement of the action explained it as a response to lack of trust in the relationship. The government also blames South Korea for a broader deterioration in relations, saying that it had repeatedly refused to negotiate or accept arbitration of the reparations issue. The government in Seoul believes the move is retaliation for the court’s ruling, and South Koreans have responded with a boycott of Japanese goods.
There is no good time for a fight between two key U.S. allies, but this is a particularly bad time for one. North Korea is testing missiles again, and South Korean fighter jets intercepted a joint Russian-Chinese air patrol last week, firing flares and warning shots at a Russian jet that veered into South Korean airspace. The standoff with Tokyo is undermining the united front needed to maintain “maximum pressure” on North Korea as part of efforts to constrain that country’s nuclear program. By hurting major South Korean technology companies, Japan’s export restrictions could also work against the Trump administration’s efforts to weaken Huawei and find alternatives to that company’s 5G network technologies. Yet the Trump administration has thus far sent mixed signals about its willingness to mediate.
Beyond the national security consequences in the region, the dispute also threatens the international trading system. South Korea asked for the dispute to be put on the agenda of the World Trade Organization’s General Council meeting last week, complaining that the Japanese restrictions were discriminatory and unjustified under international trade rules. It is now considering filing a complaint. Japan reiterated that it had imposed the restrictions for national security reasons and therefore they should be exempted from discipline under Article XXI. That is the same rationale that the Trump administration has used for the tariffs it imposed on imports of steel and aluminum.
The Trump administration has argued that it is up to countries themselves to determine national security interests and that the WTO does not have the authority to review such decisions. That would blow a huge hole in the ability of the WTO to restrain protectionist actions. In a recent case involving Russia and Ukraine, however, a WTO dispute panel rejected that argument and put some constraints on member states’ national security claims, ruling that they must be able to demonstrate a clear link to a legitimate national security concern.
Even with the ruling in the Russia-Ukraine case, the proliferation of these national security cases is a serious threat to the trading system. It is particularly troubling in this case because Japan has long been one of the strongest defenders of the WTO and the rules-based trading system. Japan’s willingness to use trade as a weapon, and to justify it on national grounds, is a stark warning for anyone who thinks that defeating Trump next year would return the global trade agenda to the status quo ante.
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