The Koreas

Japan’s Economic Restrictions on South Korea Are Overkill

If the forced labor rulings are the hidden motivation, Tokyo’s actions are wildly disproportionate.

Troy Stangarone
Japan’s Economic Restrictions on South Korea Are Overkill

A woman walks past an advertisement featuring Japanese and South Korean flags at a shop in Shin Okubo area in Tokyo, Aug. 2, 2019.

Credit: AP Photo/Eugene Hoshiko

With Japan’s decision to remove South Korea from its “white list” of trusted export destinations, the two countries increasingly appear to be headed for a long-term standoff. Without judging which party is right or wrong in the underlying dispute, Japan’s disproportionate response, applying pressure through its economic relationship with South Korea, has raised the risk of a protracted standoff.

Nominally, the dispute between Japan and South Korea is about Seoul’s export control regime to prevent Japanese goods with potential military applications from being re-exported to countries such as North Korea. Japan says that it has lost trust in South Korea and has accused it of not preventing the export of sensitive materials to North Korea on five separate occasions since 2004.

If true, this would be a technical issue, and something that seemingly could be fixed through consultation between the two countries.

However, under the surface is the lingering dispute over Japan’s culpability for its colonization of South Korea and the use of forced labor during World War II. Last year, the South Korea Supreme Court ruled that Japanese companies that used South Korean forced labor were liable for compensation to the victims.

Japan has vehemently opposed this ruling. Foreign Minister Taro Kono called a November 2018 court ruling “extremely regrettable and totally unacceptable,” while suggesting that it overturned the legal foundation of the Japan-South Korea relationship. Japan more broadly has argued that the 1965 treaty that normalized relations provided compensation for the use of forced labor and this resolved the issue.

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While the export controls and forced labor rulings are seemingly separate issues, the Nikkei Asian Review has reported that the Prime Minister’s office asked multiple government agencies to come up with ways to apply pressure on South Korea earlier this year. Additionally, Japan’s initial press release announcing its decision to place restrictions on three chemicals critical for the production of semiconductors and displays included a fact sheet on the issue of forced labor, linking the two issues. Tokyo has also previously suggested it might use economic sanctions against South Korean companies in the dispute.

Whether reparations for forced labor are the dominant issue or only part of the motivation driving Japan, it raises the question of whether its effort to use economic pressure on South Korea is proportional.

While the South Korean Supreme Court’s decision in favor of victims of forced labor is not a traditional trade barrier that would be adjudicated at the WTO, the organization’s approach to conflict resolution does provide a framework for examining the proportionality of Japan’s initial decision to restrict exports of three critical components in the production of semiconductors and displays.

Under the WTO, the right of a country to respond to a violation of trade rules by one of its trading partners has traditionally been limited to no more than the value of the exporting country’s lost trade. For example, South Korea recently had a partial victory at the WTO in a case dating back to the Obama administration where the United States placed tariffs on imports of South Korean steel pipes. With the United States failing to comply with the ruling, Seoul is seeking authority to place tariffs on $350 million of U.S. exports per year to recoup losses estimated to be over $800 million.

Similarly, if this had been a WTO dispute that ruled in Japan’s favor, its ability to retaliate against South Korea would in essence be capped at the total amount of compensation Japanese companies had been forced to pay to South Koreans used as forced labor.

While the exact number of potential cases is unclear, using the number of reported cases and the South Korean Supreme Court’s ruling on the amount of compensation of cases to date, an estimate of potential current liability can be made. There are currently more than 1,300 plaintiffs in cases against Japanese companies and the awards to victims have ranged from as little as $10,000 to as much as $133,000.  If all the existing cases were settled at the high end of awards to date, Japanese companies would be liable for approximately $175 million in compensation.

While future cases could raise that number, and some have suggested that damages could rise to over $20 billion, Japan would only currently have the ability to address actual damages, not potential future damages. Of the current cases that have been adjudicated — such as one involving Nippon Steel, which had assets totaling approximately $354,000 seized but not yet sold to compensate victims — the amount is far less.

In contrast, Samsung alone could see billions in losses. In 2018, it had 72.38 trillion won (about $61 billion at current exchange rates) in memory sales. If production of semiconductors were to decline by 5 percent as a result of Japan’s restrictions, Samsung would see losses in revenue of over $3 billion beyond the cyclical losses it faces from the current downturn in memory chip demand.

This of course does not account for potential losses at SK Hynix, which also produces semiconductors, or further losses that could potentially develop from Japan’s decision to remove South Korea from the “white list.” Considering only the initial three chemicals that Japan placed export restrictions on, the Korea Economic Research Institute has estimated that a 30 percent reduction in supply could cost the South Korean economy $35 billion.

If Japan’s concerns have nothing to do with the Supreme Court issue, the current standoff should have been relatively simple to solve. Japan would provide a clear indication of where it believes South Korean export controls do not meet international standards and what remedial actions South Korea could take to quickly be restored to the “white list.” In this case, temporary actions by Japan would be understandable, if disruptive, while reforms are taking place. But that hasn’t happened. However, if the dispute is rooted even in part in Japan’s own frustration with the South Korean Supreme Court’s decision on forced labor, Tokyo’s action is economically disproportionate to its complaint over Seoul’s action.