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Tackling Japan’s retaliation

July 05,2019
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Yi Jung-jae
The author is a columnist of JoongAng Ilbo.

You can pick your friends, but you can’t pick your neighbors. Korea faced economic retaliation from China a few years ago, and now it’s Japan. We cannot blame our ancestors for establishing the nation in such an unfriendly neighborhood. We are stuck with them, whether we like it or not. We can call them mean or unfair or whatever. But nothing changes the reality. Japan chose to aim directly at Korea’s strongest economic force — our chipmakers — in opening a trade war. We are left with only a few strategic options.

If Seoul wants to engage in this battle, it must first study the player. Japan is meticulous. After thoroughly studying Korea for eight months, it has found effective ways to maximize the damage to Korea while minimizing any pain on its own part. Japan targeted three core materials — fluorinated polyimide, photoresists and hydrogen fluoride (etching gas) — which are used in the production of TV and smartphone displays and chip manufacturing. Exempting Korea from a list of preferential treatment for IT materials is more or less an export embargo. Although Korean companies do not publicly complain so as not to further embarrass the government, the damage to Korean industry could be more than 30 times greater than to Japanese industry. Japan is said to have prepared over 100 attack moves.

To Japan, it may have been easier to pick a fight with Korea, given its track record of humbling Korea from the invasion of Korea to the Asian economic crisis in 1997. Japan fanned the surge in the U.S. dollar to the point of triggering a liquidity and default crisis for Korea. It was first to take money out of Korea and refused to roll over loans. It is an expert on attacking — and defeating — Korea. Japan has an internationally tradable reserve currency and competitive chemical and materials technologies. Its technologies are heavily protected by multiple patents. Its government and private sector move in synch. They are also adept at influencing international opinion.

Meanwhile, Korea can only complain to the World Trade Organization (WTO) or try to find alternative suppliers. But finding replacements could take two to three years. In the meantime, Korea’s production lines for its mainstay exports could be stalled and Korean brands could be shunned in the international market. Therefore, the government should avoid a full confrontation with Japan.

The best option is to look for a diplomatic solution. President Moon Jae-in seems willing to go very far indeed for our national interests. He had to eat dinner by himself during a state visit to China and got only a few minutes with U.S. President Donald Trump after flying many hours to Washington. He was even ridiculed by North Korea time after time despite all he has done to advocate for Pyongyang.

However, Moon has been consistently hard on Japan. He criticized Japanese political leaders for “politicizing” the forced labor issue and pointed out that historical issues always stood between the two countries, not merely this time around. Last month, he invited a government team to congratulate it for winning a World Trade Organization (WTO) suit against Japan and its import ban on fish from the waters near the Fukushima nuclear complex. Tokyo’s pride could have been hurt by the way Moon acted towards Japan. It could be brought around if Moon offers a hand first.

Or Korea can capture Japan’s attention by making it an offer it would like. A free trade agreement (FTA) is a good idea. That idea was first floated by President Kim Dae-jung during a visit to Japan in 1998. The late Kang Bong-khyun, Kim’s senior secretary for economic affairs, said that the president had thought of a free trade pact as the core of a new partnership with Japan. His liberal successor Roh Moo-hyun also pursued it. Kang, who also served as finance minister, said solution can be found in the economic realm when relations with Japan worsened, because economic affairs could be less affected by anti-Japan sentiment. Other issues will matter less when the two economies are more closely interlinked.

Korea could propose a trilateral FTA by inviting China to join in. If signing a bilateral deal with Japan is too complicated, Korea could join the Comprehensive and Progressive for Trans-Pacific Partnership (CPTPP) framework led by Tokyo. Under the multilateral deal that took effect last year, Korea can enjoy tariff and other trade benefits with Japan. The two neighbors cannot remain enemies. They must team up to face China. Seoul must get along with neighbors China and Japan to make opportunities out of crisis.

JoongAng Ilbo, July 4, Page 30