Trade War Between Japan And South Korea – Are The WTO Laws Shielding Political Vendetta?

On 1st July, 2019 government of Japan brought in new regulations (effective from 4th July) which tightened the exports of several chemicals (fluorinated polyimides, hydrogen fluoride and photoresists) used in the production of smartphones, chips and semiconductors in South Korea. This regulation mandate exporters to apply for permission every time they want to export these goods to Korea. Subsequently, Japan also removed South Korea from “white list” countries, an index of trusted trading partners. This list facilitates the flow of technology transfer which has national security implications and can be used for military purposes. The removal of South Korea from “white list” countries comes as a second blow to its trade.

According to the Ministry of Economy, Trade and Industry of Japan, Trust which is indispensable for building an export control system, is no longer intact between Japan and South Korea. They also state the reason that there is absence of talks between the authorities and risk to “national security” is hovering around the relationship between Japan and South Korea.

Japan justified its move by stating that it is not an export ban and clarified that they are just making the export process as complicated as it was before 2003.  They said that the decision is just the consequence of review of trade policy and it has nothing to do with the growing diplomatic spat between Japan and South Korea.  

This article has been divided into two parts. First part envisages to analyse the validity of Japan’s argument that the move has been made because there is a risk to ‘national security’ and therefore, it is covered under the ‘security exception’ of Article XXI, GATT. Second part analyses the consequence of Japan’s actions on the economies of South Korea and Japan and it also evaluates the effect on global supply chain of semiconductors.

Does The Move Fall Under Security Exceptions Of Article Xxi, Gatt?

The flare between Seoul and Tokyo has a long historical disagreement and has been further stirred by a judgment passed last year by South Korea’ court. It adjudicated in favor of people left out in 1965 peace treaty between the two countries and ordered to compensate workers of forced labor. Japan has often shown displeasure during periods of growing tension through economic means. For instance, in 2015, Japan terminated the currency swap agreement with South Korea at the period of raised diplomatic tensions. This time they created a trade embargo on South Korea’s high technology goods under the garb of “national security”. Japan claimed that the move of putting embargo on export is covered under security exceptions as they suspect some cases of inappropriate export to North Korea. It is also Japan’s contention that South Korea is leaking confidential and sensitive information to North Korea, which they are using to make weapons. However, they do not back their case with any evidence.

The matter has been taken to WTO by South Korea stating that such curb to trade will act as a barrier which will disrupt the global supply of semiconductors. However, Japan claims that the measures, among other factors, falls under the national security exception. This claim made by Japan prevents the applicability of WTO rules and hence, adjudicatory body cannot review. However, the present move by Japan seems to be a strategically planned retaliation to worsen relations between the two countries under the garb of security measure. Now, the moot question that comes up is whether Article XXI, GATT is non-reviewable and countries like Japan, whose actions de facto seem to be motivated by political vendetta can cite the security exception to justify its move. The author strongly disagrees. Indeed, the wording of Article XXI is vague and adjudicatory bodies of WTO have not dwelled upon the same and have not interpreted the wordings of Article XXI properly.  However, the aim of WTO is to establish a stable and predictable dispute settlement mechanism as given under Article 3.2 of Dispute Settlement Understanding (DSU). Article 6 of DSU also affirms the above by stating that every member of WTO has the right to establish a panel unless denied by negative consensus. Therefore, if any member is aggrieved by any action of other member state, it can request to establish a panel.

Recently, the panel in Russia- Traffic in Transit  passed a ruling pertaining Article XXI, GATT. This judgment is historic in two sense- (I) by taking the matter for adjudication, panel refuted the argument that WTO rules is exempted while invoking article XXI and (II) it elucidated the meaning of security exception and laid down that political and economic differences are not covered under security exception.

The present dispute before WTO is at a very nascent stage and it might be possible that South Korea withdraws the dispute if an amicable settlement is reached between these two allies of the USA.  However, if the dispute subsists, it will be interesting to see how South Korea will prove its stance and how the adjudicating body will adjudicate when nothing much has been decided over the national security exception.

Damage To The Economy Of Japan And Korea And Impact On Global Supply Chain Of Semiconductors

The barrier has potential to disrupt global supply chains of semiconductors, computer chips, displays, as South Korea is the world’s biggest supplier of these products and because of this there can be a  can have a short term chilling effect to the trade of both South Korea and Japan. Semiconductors are Korea’s top export item and a key material which is installed in almost all the electronic gadgets and contribute a huge amount to the economy of the country. Any delay in its production can pose a threat of scarcity in the world market and can also be a threat to the economy of South Korea.

Japan produces almost all of world’s supply of fluorinated polyimides, hydrogen fluoride, photoresists which are used by South Korean tech giants like Samsung, Hynix, LG etc. If the dispute continues, these companies will suffer the hardest.

South Korea is also displaying its anger by boycotting the Japanese products and travel to Japan.  Additionally, the government of South Korea is planning to remove Japan from the ‘white list’, an index of its trusted partners. It is also planning to put Japan in the list of new low-tier category countries so that it gets isolated from all future benefits from South Korea’s end. This step has the potential to further downturn the relationship between the two countries.

Conclusion

The infuriated trade dispute is showing high chances of decoupling Asia’s 2nd and 4th largest economies i.e. Japan and South Korea. Additionally, it has potential to slow down global trade, which is already affected by a trade war between USA and China. This dispute will be interesting to witness as both the countries are allies of USA. During previous diplomatic spats, USA played a critical role in facilitating to normalize the relations between the two countries. However, no such move has taken place this time. If Japan and South Korea want to thrive economically, this trade war should end and both the countries must act pragmatically and come to an amicable settlement.

 

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