The Japan-South Korea trade dispute has taken a turn for the worse, with economic consequences that are starting to bite.
Japan's export restrictions on South Korea have led to a significant decline in South Korean chip exports.
South Korea's chip exports to Japan have fallen by over 40% in the past year.
This has resulted in major losses for South Korean companies like Samsung and SK Hynix.
The dispute is also affecting the global tech industry, with many companies relying on South Korean chips for their products.
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Japan's Actions
Japan announced on July 1 it would restrict exports of three chemicals to South Korea, citing "inadequate management" of the chemicals, which could be diverted for military use.
These high-tech materials are used in the production of semiconductors and display screens, and Japanese exporters must now seek permission each time they want to ship them to South Korea, a process that takes about 90 days.
The restrictions came into effect on July 4, and Tokyo plans to strip South Korea off some preferential treatment in its trade ties with Japan, which could involve removing South Korea from a "white list" of countries deemed trustworthy by Japan.
This would require Japanese exporters to obtain licenses to ship to South Korea some 850 items that could be used in weapons-related applications.
Japan dropped South Korea from its white list citing national security concerns over a lack of export control measures that could cause sensitive substances and technology to end up in rogue nations such as North Korea.
South Korea has denied the accusation that it has inadequate export control measures, and the Japanese Ministry of Economy, Trade and Industry (METI) said it found some items had been exported to South Korea without adequate controls.
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Impact on South Korea
South Korea's tech manufacturers, including Samsung and SK Hynix, are among the biggest producers of semiconductors in the world.
Their production may be affected by delays in procuring crucial supplies from Japan, which could force them to cut production and impact the development of cutting-edge products.
More than 90 percent of fluorinated polyimide that South Korea imports comes from Japan.
This could be a blessing in disguise for South Korea, as its government believes it could benefit from the dispute by forcing it to diversify its supplies or boost its capacity to produce its own materials.
However, Japanese firms that have exported hi-tech products to South Korea over the years will try to diversify their export destinations.
South Korean firms may still be able to get their supplies through a third country, such as China, Taiwan, the US, or the Netherlands.
Impact on Japan
Japan's trade status has been restored by South Korea, but how will this impact Japanese firms? Japanese companies buy semiconductors, machines, and equipment from South Korea and could be affected by negative shocks to global supply chains.
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Japanese firms like Sony import finished semiconductor products from South Korea, which means they could be impacted by the changes in trade status. The changes are unlikely to cause permanent damage, analysts say.
South Korean firms are the biggest clients for Japanese firms producing chemicals used in semiconductor manufacturing. This could lead to negative impacts on Japanese firms.
Even without preferential treatment, Japanese firms can still get permission to export critical products to South Korea, but it would take more time and steps.
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Consequences
Japan's dominance of fluorinated polyimide and resists, and hydrogen fluoride, will make it difficult for South Korean companies to find alternatives if their supplies are disrupted.
South Korea is home to semiconductor giants Samsung Electronics and SK Hynix, which supplied 61% of components used in memory chips globally in 2018.
Any production disruption would be bad news for tech companies like Apple and Huawei that rely on these components.
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The two South Korean suppliers have "high" levels of semiconductor inventories that they can rely on for now, but when that's drawn down, they could have trouble meeting production deadlines.
Citi's analysts estimated that at Samsung Electronics, inventories of the chemicals restricted by Japan could last the company 20-30 days.
A prolonged disruption of Japanese exports could cause a global shortfall in memory chips supply and push up prices.
The U.S. and China might also feel the pain given that both countries rely on supplies from South Korea.
American electronics firms with production sites in both countries are especially vulnerable.
If supply constraints arise in South Korean memory chip production, the price of memory components could significantly increase due to the inability of other suppliers to meet global demand.
End products like servers, mobile handsets, PCs, and consumer electronics would be impacted.
Consumers from all over the world may have to pay a higher price for those products.
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Frequently Asked Questions
Why is there conflict between Japan and Korea?
There is ongoing conflict between Japan and Korea due to historical disputes over territorial claims, including the name of the body of water between them and sovereignty over a group of rocky islets. These long-standing issues have led to tensions and disagreements between the two nations.
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