South Korean president Moon Jae-in hon Monday held out an olive branch, suggesting his country should attempt a  diplomatic solution in response to the Japanese government’s measure to tighten regulations on exports to South Korea of essential materials used in semiconductor and displays. He did not go into details.

It is the first time that the Korean government has mentioned a diplomatic effort to tackle a Japanese retaliatory trade measure taken in response to a court ruling requiring compensation for Korean victims of forced labor.

“We are in a situation where our corporate production is feared to be disrupted by Japan’s recent trade restrictions, and the supply chain around the world is threatened,” President Moon said in a meeting with his senior secretaries. “Not only South Korea but the whole world is concerned about the move, for political purposes, to restrict trade between mutually beneficial private companies.”

“The most important thing is that the government and the business community closely communicate and cooperate in this unprecedented, extraordinary situation,” he said. “Following the development of the situation, we should consider establishing a contingency plan in which both the public and private sectors participate.”

He added, “The presidential office and related ministries should come forward to listen to the firms suffering from the difficulties and discuss solutions. The government also needs to spare the necessary support.”

It was then that he mentioned diplomatic efforts. “The government will make diplomatic efforts to resolve the issue in a calm manner,” he said, adding, “The vicious cycle of action and counteraction is never desirable from the standpoint of both countries.”

Despite the reference to diplomacy, the president said, “If the Japanese retaliatory measure damages Korean companies, our government will have no choice but to take the necessary steps, which I do not want to do.”

He called for Japan to withdraw the trade restrictions and engage in sincere dialogue with Korea.

Moon also expressed his commitment to foster the affected Korean industries. He said, “The government will make fostering parts, materials and equipment industries one of the top priorities of the nation’s economic policy, and support these industries by mobilizing all available resources such as budget and taxes.”

Room for compromise

Experts say there is room for compromise between the two as Japan’s move is still in the threat stage – hasn’t been carried out. There is speculation that the government could seek a diplomatic solution after the Japanese election on 21st of this month.

In a survey conducted by the Korea Broadcasting System on Sunday, 38% of the respondents said the government should seek international legal measures, including a World Trade Organization complaint. Another 30% favored diplomatic efforts, while 29% supported the idea of economic retaliation against Japan.

The Japanese government tightened export regulations, which – if the decision is not reversed – will require Japanese chip and display material manufacturers to obtain approval from the Japanese government when they export to Korea fluoride polyamide, which is used in smartphone displays; etching gas, for semiconductor cleaning; and resist, used to make semiconductor substrates.

Under the Japanese government ruling, would-be exporters of the three materials to Korea will have to wait up to  90 days for approval.

According to industry officials, the three materials that Japan has restricted are essential for the production of organic light-emitting diode (OLED) displays and semiconductors, with Japanese companies having a 70-90 percent global market share.

South Korean companies such as Samsung Electronics, SK Hynix and LG Display are highly dependent on Japanese products.

“Japan’s move is, in fact, a warning message, said Kim Yang-paeng, a researcher at the state-run Korea Institute for Industrial Economics and Trade (KIET).

“Japan was already making and managing a regulatory list of strategic materials, and it takes up to 90 days to approve exports,” Kim said. “Only when approval is delayed for an extended period or rejected, Korean semiconductor and display companies will suffer from production disruptions. ”

The Korean government is preparing countermeasures. Minister of Trade, Industry, and Energy Sung Yun-mo said last week that the government would take necessary steps in accordance with international and domestic laws. The Blue House also said it would take necessary steps, including a WTO complaint, and would explain to the world that Japan is in violation of free trade policy as well.

The Korean government is committed to supporting the localization of semiconductor parts and materials, including three items designated as export-regulated items by Japan. It plans to earmark the necessary budget in the extra budget worth 6.7 trillion won which has yet to pass the National Assembly’s approval.

In addition to the WTO sanctions, retaliatory measures such as a ban on semiconductor exports to Japan and imposition of tariffs on imports from Japan are also being mentioned, but such steps are unlikely to materialize as they could escalate into an all-out trade war.

“At this point, we can’t talk about specific countermeasures,” a senior government official told the Asia Times. “Everything ranging from retaliatory measures to a diplomatic solution can be considered. ”

If the government starts diplomatic efforts, they are expected to begin after  Japan’s upper house elections are held. Diplomatic efforts at the parliamentary level are also likely to be launched after election day.

“For now, it is difficult to have a parliamentary level dialogue with Japanese counterparts because of the upper house elections,” a ruling party lawmaker said. “There is a possibility that parliamentary efforts could be made after the upper house elections.”