24 July 2019
The other trade war
In South Korea recently, shoppers have been avoiding Uniqlo, convenience stores have been removing Asahi beer from their fridges, and holiday-makers have been cancelling trips to Tokyo. This unofficial boycott of Japan is part of a new trade war that began on 4 July, when the Japanese government began curbing exports of material crucial to South Korea’s smartphone industry. The feud, underpinned by deep historical rivalries, is a reminder that dangerous faultlines in Asia extend well beyond those caused by China’s rise.
For Australia, the dispute threatens the economies of two of its largest and most important trading partners. And, more worryingly, it suggests that Donald Trump’s weaponisation of trade is spreading, creating new retrograde global norms.
Japan’s trade restrictions apply to three chemicals South Korea uses to make smartphones and semiconductors. The country claimed it was motivated by national security concerns, implying that South Korea may be allowing North Korea to access these chemicals, but has not provided any evidence of this. The controls are apparently in retaliation for recent South Korean court rulings that order firms such as Mitsubishi to compensate Koreans subjected to forced labour during the Japanese colonial occupation from 1910 to 1945.
A prolonged trade war between the two neighbours will hurt both economies and could affect their dealings with Australia. In 2017–18, Australia’s second-largest trading partner was Japan and its fourth-largest was South Korea. The two countries accounted for 16 per cent of Australian trade and almost a fifth of its exports. In 2017, Australia received $344 billion in dealings with Japan, but this flow could stall if Japan’s economy is damaged. For instance, Asahi could lose more than S$35 billion from reduced sales. Last week, the firm bought Carlton & United Breweries from its European owner and flagged long-term plans to revive the local beer industry.
The US has close ties with Japan and South Korea, including large military presences in both, but under Trump its capacity or willingness to resolve trade disputes is limited. Trump has warned he’ll impose tariffs – his preferred foreign policy tool – on everything from Canadian steel to Spanish olives. Japan was copying Trump’s playbook when it cited national security as the reason for its recent trade restrictions, even though there was no discernible risk.
On Monday, the World Trade Organization agreed to consider South Korea’s complaint about the dispute. But tensions have been worsening. In South Korea, President Moon Jae-in said the conflict was undermining the 1965 treaty to re-establish relations following the Japanese occupation. In Japan, the government summoned the South Korean ambassador, and threatened further retaliation if its companies suffered. This could seriously damage South Korea’s technology sector and affect global supplies of consumer goods.
This trade war has been overshadowed by the one between Washington and Beijing, but it could severely disrupt global trade. It also suggests trade punishments are now seen as a natural and acceptable recourse for responding to tensions and resentments. Since Trump’s election, Japan and South Korea have partnered with Australia to defend the flow of global trade from rising protectionism. Their continued commitment is crucial. It is not a battle that Australia can fight alone.