Japan’s deteriorating ties with South Korea over disagreements on their wartime history were highlighted by Tokyo last week when the government ended preferential treatment for the exporting of key materials to its Asian neighbor that are vital in the manufacturing of semiconductors and digital displays.
The government may be trying to hamstring South Korea’s mainstay industries by playing the trade card to bring it to the negotiating table, but the tactic could backfire as many domestic companies do business with partners in the country.
A number of firms said they are anxiously watching developments, noting it remains unclear if the newly-introduced regulations will actually hinder trade between the two nations. Under the new regulations, at the longest, it could possibly take 90 days for Japanese exporters to get official approval on certain key items bound for South Korea.
Meanwhile, some experts have said that the impact will probably be limited as the move is not an outright ban or a restriction — at least in technical terms — that would significantly cripple the production capability of South Korean firms.
Some companies, though, said if the situation escalates somehow, it could cause adverse effects to the whole supply chain.
“Things are still unclear at this point, so we can’t really answer now,” said a spokesman at Tokyo Ohka Kogyo Co., a manufacturer of photoresists, adding the revised trade procedure might disrupt the company’s manufacturing and shipping plans to South Korean customers.
Stella Chemifa Corp., an Osaka-based chemical company that makes hydrogen fluoride, also said the possible effects are still unknown.
Last Thursday, the government started requiring Japanese manufacturers to submit applications each time they wanted to export fluorinated polyimide, hydrogen fluoride and resists to South Korea. Fluorinated polyimide is used to make smartphone displays, while in the manufacturing of semiconductors, hydrogen fluoride is used as an etching gas and resists are applied to print circuit patterns.
According to a report by J.P. Morgan, Japanese firms are among the leading manufacturers of the three materials and it would be hard to find alternative suppliers with the exception of a type of fluorinated polyimide.
South Korea is Japan’s third largest export destination following China and the United States. Semiconductor machinery was the top selling item in 2018 taking in ¥630 billion, according to data compiled by the Japan Foreign Trade Council.
Japan’s move to review the trade procedure shows Tokyo’s frustration with Seoul and its reluctance to resolve wartime forced labor issues after South Korean court rulings that ordered Japanese companies to pay compensation to former workers or their families.
Still, some industry observers maintain the trade spat will not likely hurt Japanese firms.
“It needs to be said clearly that Japan has not imposed a ban or restriction against South Korea,” Atsushi Osanai, a professor at Waseda Business School, wrote in an email to The Japan Times.
He said many media reports seem to overlook this point.
Requiring approval for individual shipments is normal procedure for exports being sent to many other countries including China.
Thus, “it’s not like the implementation (of the requirement) this time will suddenly stop or restrict exports,” said Osanai.
The Japanese government is also currently soliciting public comments over removing South Korea from its whitelist of countries that are given preferential treatment on trade items. Based on the assumption they will not use the materials to produce weapons of mass destruction, export procedures to countries that are on the list are simplified.
Osanai added that the list is based on trust, so the level of impact on trade may change depending on South Korea’s response.
Even if the situation is aggravated and Tokyo decides to actually set restrictions, the overall damage to the Japan’s domestic industries will be probably limited, he said.
South Korea’s gross domestic product growth is largely dependent on its big companies. So if the export of the three materials is actually regulated, it will be a big blow to companies such as Samsung, LG and SK Hynix, all “chaebols,” or large industrial conglomerates, that help sustain South Korea’s economy.
Meanwhile, Japanese chemical makers of fluoride polyimide and resists sell their products to other makers in other countries, so the damage would be contained, Osanai said. But Japanese hydrogen fluoride makers ship a good chunk of their exports to South Korea, so they may see some fallout, he added.
Tokyo Ohka Kogyo sells various types of photoresists to South Korean firms, which makes up a big part of its business, according to the company spokesman. But the change in the trade procedures only applies to some of its products, so the firm’s sales will not likely be affected much, he said.
The spokesman, though, did express concern over the knock-on effect further down the production chain.
“Semiconductors are manufactured through many processes. Missing even one process will make it impossible to produce quality products,” he said.
If that happens, “the whole supply chain could be paralyzed. In that sense, we will have to monitor the situation carefully.”
Under such circumstances, big companies could switch or increase their sales to other semiconductor makers. But for small and mid-size companies, things may be more unpredictable.
Many smaller Japanese companies do business with South Korean semiconductor-related companies, so there will be some impact whether it’s direct or indirect, said a chief executive at such a manufacturing firm in Tokyo, who wished to remain anonymous.
His firm has exported products used in semiconductor manufacturing to a South Korean firm, which at one time made up a major portion of its sales. There may not be a lot of small and mid-size firms that directly provide to South Korean makers, but if the production stopped in South Korea, those firms will have a hard time trying to switch suppliers, unlike big companies, he said.
*Original article online at https://www.japantimes.co.jp/news/2019/07/07/business/japanese-firms-cautious-fallout-deteriorating-ties-tokyo-seoul/#.XSM3TFB7lbU
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