Despite recent news headline has been concentrated on RMB depreciation as US labels China as a currency manipulator, the heightening trade tensions between Japan and South Korea is another risk that investors should be closely monitored. Last Friday, Japan decided to remove its neighbouring country from its “white list” of trusted export destinations from Aug 28. Hours later, South Korea then reciprocated Tokyo’s move by removing Japan from its own white list too. The latest two-way trade restriction will leave each other out from the preferential treatment given to their trade partners.
Japan on July 1 had already imposed export curbs on three essential chemical materials, namely fluorinated polyimide, photoresists, and hydrogen fluoride etching gas, that are crucial to South Korea’s world-leading semiconductor industry. However, the latest control of dropping out Korea from the “white list” expands the restriction to nearly all export items except for food and lumber. Japanese exports of goods to Korea could potentially under the Japanese government review and may require individual export licenses, which will result in lengthier processes and more bureaucracy. Besides, new controls also applied to items exported to factories run by South Korean companies in Southeast Asia, China and other parts of Asia.
South Korea government although has pledged to increase support for local industries to develop new materials and components to replace the Japanese imports, the move won’t happen overnight but years, while shifting to alternative suppliers is also subject to availability and a significant amount of time may be required for quality inspection and approval. Among all the sectors, Korea’s tech sector is likely to face the biggest hit as the largest import items from Japan in 2018 are machines and apparatus (US$5,815m) that used for the manufacture of semiconductor boules, wafers, ICs and flat panel. Japan accounts for about 34% of total Korean imports in this area, and this item falls on Japan’s latest export-controlled list. Other sectors, such as airlines, tour companies, casinos, shipping as well as consumer sectors may also be negatively affected by the latest move.
On the other hand, given that Korea is also one of the major exporting countries of intermediate tech components and production materials in the world, other countries that involved in the high-tech supply chain such as United States, China, Vietnam, Malaysia and even Japan will be affected too as they are very interdependent nowadays. For example, US and China electronic firms are vulnerable to supply shortages of memory chip as Korea’s Samsung Electronics and SK Hynix are the two largest memory chip supplies globally.
In a nutshell, there are no winners in the trade war. Korea equity market has been the worst performer among regional peers since 1 July and it may continue to underperform the regional peers in the next few months. According to UBS forecast, the latest two-way trade restriction may hurt Korea’s GDP by 0.5ppt if exports of key materials from Japan fall considerably.