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An Old Feud Between American Allies Rattles Tech Giants’ Supply Chains

Source: The Wall Street Journal | July 25th, 2019 | By Timothy W. Martin
Location: South Korea
Industry type: Electronics Industry

Spat could threaten availability of Apple’s iPhones, Amazon’s cloud-computing data servers and the inventory of many internet-connected gadgets

Protestors hold up placards reading ‘No Abe!’ during a rally denouncing Japan for its recent trade restrictions against South Korea, near the Japanese embassy in Seoul, July 20. Photo: jung yeon-je/Agence France-Presse/Getty Images


SEOUL—A trade feud between Japan and South Korea, two of the world’s leading tech producers, has prompted groups representing Silicon Valley giants to warn an escalation could wreak long-term damage across an already-buckling global supply chain.

Having been hit by disrupted U.S.-China relations, American trade groups—whose members are technology companies, semiconductor makers and manufacturers—have written to Japan and South Korea, emphasizing that the global supply chain relies on efficient delivery of components, chemicals and materials. The two nations produce semiconductors and displays that are indispensable for services and gadgets made by the likes of Apple Inc., Amazon.com Inc., and Microsoft Corp.

The latest supply-chain rupture centers on a festering spat between Tokyo and Seoul that is driven more by politics than profit. The trade rift opened early this month with Japan tightening export controls on three chemicals essential for memory chips and phone displays, fields where South Korea produces most of the world’s supply.

Chips DownSouth [ SEE BOX WITH MORE INFORMATION IN THE ORIGINAL ARTICLE] Korea faces new trade curbs for Japan-made materials used in semiconductors, displays. Japan’s top five trade partners by exports,first half 2019Source: Japan’s Ministry of FinanceNote: U.S., China, South Korea, Taiwan, Hong Kong

Tokyo is considering broadening the trade curbs as early as next week for roughly 1,000 more Japan-made products that flow into South Korea. That would cover virtually every product Japan ships to the country. Few anticipate a quick resolution, despite the two nations arguing their side this week in Washington and at the World Trade Organization.

“Non-transparent and unilateral changes in export control policies can cause supply chain disruptions, delays in shipments, and ultimately long-term harm to the companies that operate within and beyond your borders and the workers they employ,” the letter from the U.S. trade groups said.

On Thursday, the American Chamber of Commerce in Korea issued a statement urging Japan and South Korea broker a fair settlement to “minimize the damage to the economy” and added a protracted dispute “will have negative implications globally.”

Global supply chains are increasingly coming up against nationalism, revealing how tech’s manufacturing interdependence has created vulnerabilities in the delivery of smartphones, computers and other electronics. Globalization consolidated industries and created niche roles for some countries that threaten to unravel.

The latest spat has set off alarms across the tech world. South Korean production delays, even for several weeks, may threaten the availability of Apple’s iPhones, Amazon’s cloud-computing data servers and the inventory of many internet-connected gadgets, according to economists and industry analysts. Apple and Amazon didn’t respond to requests for comment.

Tokyo is considering broadening the trade curbs for roughly 1,000 more Japan-made products that flow into South Korea. Pictured, containers at a port in Osaka, western Japan. Photo: Eugene Hoshiko/Associated Press


The dispute between two of Washington’s closest, and most prosperous, Asian allies comes as its trade fight with Beijing drags on. The heads of more than half a dozen U.S. technology companies met President Trump on Monday to discuss easing restrictions on sales to China’s Huawei Technologies Co.

“The politicization of tech supply chains is a massive threat,” said Shaun Roache, the Asia-Pacific chief economist for S&P Global Ratings. “This is something firms didn’t have to deal with five years ago. They were looking at the economics of the decision and now they have to factor in the politics, too.”

Tokyo’s tightening of export controls, which took effect July 4, is the latest maneuver in a feud that traces back to Japan’s decadeslong occupation of South Korea, which finished when World War II ended. Japan has restricted exports of fluorinated polyimide, used in flexible smartphone displays, and photoresist as well as high-purity hydrogen fluoride, which are used to etch circuits onto slivers of silicon wafers to form semiconductors.

Japan’s move affects its domestic companies, subjecting their South Korean shipments to an approval process that could take up to 90 days—which Tokyo can elongate by requiring extra documentation.

Tokyo Ties – Tech components are the biggest imports to South Korea from Japan. [ SEE BOX IN THE ORIGINAL ARTICLE]

Analysts say it can’t yet be determined if the supply chain has been disrupted. But South Korean companies, which front-loaded some purchases, are burning through their stockpiles, estimated to be between one and three months, analysts say.

Staving off production delays will depend on whether South Korean companies such as Samsung Electronics Co. and LG Display Co. can line up alternative suppliers. Samsung declined to comment, while LG Display didn’t respond.

Last week, officials from several U.S. tech companies traveled to South Korea for a meeting with Samsung, asking about the market conditions due to Japan’s trade maneuvering.

But both governments are unlikely to be swayed by outside business pressures, said Scott Seaman, director for Asia at Eurasia Group in Washington.

“They likely want to be careful not to give anyone any reason to accuse them of considering the interests of foreign companies over the interests of their own countries’ firms,” Mr. Seaman said.

The Korea International Trade Association and four other economic groups sent a letter to Tokyo with a plea to roll back restrictions, saying “Japan’s actions endanger the principle of free trade.” Seoul hasn’t signaled it would take retaliatory trade moves, though it has discussed boosting homegrown alternatives. And locals are boycotting Japan-made products.

“The politicization of tech supply chains is a massive threat.”
—Shaun Roache, S&P Global Ratings

Washington hasn’t taken an active role in easing tensions between two U.S. allies. President Trump last week signaled he could potentially get involved, though only if “both want me to.”

An expansion in trade restrictions as being considered by Japan could trigger temporary disruptions for nearly all of the roughly $52 billion in goods that South Korea imports from Japan, according to Goldman Sachs in a Monday report. Japan-made products represented about 11% of South Korea’s total imports last year, Goldman said.

South Korea is Japan’s third-largest export market. The two countries have yet to hold formal talks. Seoul sees the matter as flouting global trade rules, while Tokyo says the moves are justified for national-security reasons.

Currently, South Korea is one of 27 countries—and the only one from Asia—given preferential treatment by Tokyo when buying Japanese goods. Taiwan ranks No. 1 in Japanese exports of chip-making tools despite not being on the so-called “white list,” a sign deliveries can be prompt, the Semiconductor Equipment Association of Japan said Wednesday.

Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in, pictured here at the G-20 summit in Osaka, in June. Photo: Kim Kyung-Hoon/Associated Press


Investors have taken a bullish view on the Japan-South Korea dispute, believing shared economic interests will see the sides eventually sort things out. Even with deeper trade curbs against South Korea, the broader economic effects would be short term before trade sharply normalizes by November, Goldman Sachs said.

Spot prices of a major type of memory chip called DRAM, which gives devices multitasking speed, have risen roughly 20% since early July, according to DRAMeXchange, which tracks semiconductor sales.

Any further supply-chain constraints could cause prices of memory chips to significantly increase more, while some U.S. electronics companies—particularly those with operations in China—could face shortages, said Rajiv Biswas, chief economist in Asia-Pacific for market researcher IHS Markit.

“China and the U.S. could be affected,” Mr. Biswas said.

The U.S. trade groups’ letter was addressed to the trade ministers of Japan and South Korea. Those who signed included the National Association of Manufacturers, the Semiconductor Industry Association and the Consumer Technology Association, whose membership includes Apple and Amazon. It also included SEMI, a global supply-chain trade group, which has a large European constituency.

*Original article online at https://www.wsj.com/articles/an-old-feud-between-american-allies-rattles-tech-giants-supply-chains-11564047082