Japan’s removal of South Korea from a “white list” of preferential export destinations took effect today, as multiple indicators – from trade data to Seoul’s countermeasures to US comments – make clear the steep economic and diplomatic odds South Korea now faces.

Seoul lost no time in responding to today’s action by Tokyo, which had been previously announced on August 2.

“The government strongly regrets the latest action taken by Japan,” Deputy National Security Adviser Kim Hyun-chong said, alleging that Japan was treating Korea as a “hostile nation”.

“Japan’s measure is not as part of a review of its export management and operation, but a clearly retaliatory trade measure for the rulings over forced labor and a significant challenge that shakes the foundation of long-standing friendly and cooperative ties between South Korea and Japan,” a foreign ministry spokesman said, according to Yonhap news agency.

Separately, on the same day, Seoul revealed plans to provide some US$4.1 billion between 2020-2022 to the domestic parts and material industries to support localization, in a countermeasure against the Japanese action.

But prior experience suggests that Seoul may be unable to wean itself from the Japanese component teat, while both historical and recent macroeconomic data indicates that Japan holds the whip hand in the intensifying dispute.

Real reason for trade tussle?

It is widely believed in Seoul and elsewhere that Tokyo’s export restrictions are unrelated to actual monitoring of dual-use exports that could be used for weapons, and are, in fact, a reprisal for the decision made by Korea’s Supreme Court.

Last year, the court found in favor of local plaintiffs who were mobilized as forced labor for Japanese companies during the Pacific War. This year, the court ordered the seizure of Japanese firms’ assets in Korea.

Tokyo’s position is that the forced labor issue was dealt with by a 1965 state-to-state treaty, which came packaged with hundreds of millions of dollars in compensation and loans. Since the court decision, Japanese Prime Minister Shinzo Abe – widely despised in Korea for his revisionist historical views – has said that he considers Korea “untrustworthy.”

However, despite Korean criticism regarding the lack of a basis for Japan’s actions, Asia Times has learned that there may, in fact, be grounds for Japan’s complaints about South Korean export-management procedures.

A person familiar with the Japanese position said that for three years, Tokyo’s trade ministry had requested meetings with its Korean counterpart regarding export controls and monitoring, but had been ignored.

A South Korean government official confirmed to Asia Times that related discussions had, indeed, not taken place for three years, though he did not clarify the reasons why.  A meeting took place last December, the official said, during which it was agreed that a discussion on the issue would take place sometime after March.

That latter meeting, apparently, had not transpired before Tokyo took its first economic action against South Korea on July 4, restricting the export of key chemicals to Korean display and semiconductor manufacturers. Tokyo followed up by announcing it would strike Korea off its list of 27 preferential trade partners, which was implemented today.

The list covers some 1,100 items. Korean companies seeking to acquire listed items will henceforth have to go through more onerous procedures to obtain them than had previously been the case.

War of numbers

Despite Korea’s ever-feisty attitude toward Japan, and a common belief that Japanese firms will lose out when Korean firms diversify away from them as suppliers, virtually all data shows that Japan holds the upper hand.

Japan’s economy, the global number 3 with a nominal GDP of $5.2 trillion is over three times the size of South Korea’s, which is ranked 11th and worth $1.6 trillion, according to IMF data from 2019. Since 1965, the year the two countries entered bilateral relations, South Korea has run consistent annual trade deficits with Japan; last year it was $24.08 billion – bigger than with any other economic partner, the Hankyoreh, a Seoul daily, reported.

Financial news provider Bloomberg provided a range of data today highlighting Japan’s muscle in the dispute.

Last year, Japan’s trade surplus with Korea, according to Japanese figures, was $52.8 billion worth of exports against imports valued at $32.4 billion. Moreover, Japan’s aggregate investments in Korea total $4.87 billion, as opposed to $1.97 billion of Korean investments in Japan. Asia Times has learned that some 80,000 Koreans are employed by Japanese firms in Korea.

Japan buys primarily raw materials from South Korea and is less reliant upon it for key components than vice versa, Bloomberg found. Notably, Japan buys less than 9% of its national supply of Korea’s top export, semiconductors, from South Korea.

The Hankyoreh, referring to Seoul’s mooted countermeasures reported above, noted that while previous administrations have attempted to improve the domestic components industry, “South Korea has been unable to catch up with Japan’s technological expertise in the areas of parts and materials for semiconductors and other products, an expertise that has been refined over the decades.”

One area where Seoul may have leverage is tourism. Some 7 million Koreans traveled to Japan last year, making them the second largest group of incoming visitors. Moreover, many visited second-tier destinations, such as remote towns that generally see few tourists. Now, a tourism boycott has resulted in carriers downsizing the number of flights between the countries.

Bloomberg noted, however, that Koreans spend only a third of what Chinese tourists do. Moreover, Japan is cushioned against a downturn in Korean visitors by tourism boosts expected from the Rugby World Cup, which kicks off next month and next summer’s Tokyo Olympics.

Battle of the boycotts

While the trade ruckus continues to make front-page news in Korea, there is far less interest in Japan. This suggests a Korean advantage: Boycotts of Japanese goods have been highly publicized, notably with damage being reportedly suffered by fashion retailer Uniqlo, which has closed one store in Seoul, and exporters of Japanese lagers – previously Korean’s favored foreign beers. Yet there is no opposing public boycott movement in Japan.

Trade data for July from Tokyo indicates that despite much ballyhoo about Korean boycotts, Seoul is losing this battle of numbers too. It found that while Japan’s exports to South Korea slipped 6.9%, Korea’s exports to Korea fell at an even faster rate: 8.6%.

In the absence of explanatory information, a businessman in Seoul suggested to Asia Times that this may be due to Japanese producers, fearing an escalation in the bilateral trade war and possibly considering Korean partners to be untrustworthy in the current climate, are diversifying away from Korean suppliers faster than Korean producers are diversifying away from Japanese suppliers.

No allies in sight

Given the centrality of South Korea manufacturers to the world’s semiconductor and display sectors, the dispute has the potential to hammer global electronics supply chains, although the impact is unlikely to be sensed until September or later, given that Japan applied its first export controls in July, and related approval processes extend to 90 days. Even so, South Korea has thus far found no support at the World Trade Organization for this case.

Moreover, with the bad blood between Seoul and Tokyo hobbling US-led security efforts in Northeast Asia, Seoul may be losing its only real ally.

In previous disputes with Japan, South Korea could rely on mediation from the United States. But the Donald Trump administration in Washington has so far given no signal that it will get actively involved, with officials stating only that they “encourage” the two parties to resolve their differences.

Last week, in an escalation of the ongoing conflict, Seoul announced that it was killing a military intelligence-sharing pact with Tokyo that had been signed, with US backing, in 2016. The US State and Defense departments responded to that move by criticizing Seoul, while American pundits – mostly former officials in diplomacy and intelligence – employed unusually candid language.

Criticism has since continued from both parties in the US Congress.

Representative Eliot Engel, the Democratic chairman of the US House Foreign Affairs Committee, said in a statement: “I am deeply concerned by President Moon Jae-in’s decision to terminate [the agreement].” And Representative Michael McCaul, a Republican, tweeted on the House Foreign Affairs Committee Twitter account that he was “disappointed,” adding, “democracies must work together and help protect one another.”

On Tuesday, the State Department renewed its criticism, this time aiming at South Korean military drills held on Sunday and Monday on and around a pair of islets in the Sea of Japan, whose ownership is disputed, even though South Korea administers and occupies them.

“Given the recent disagreements between [South Korea] and Japan, the timing, messaging, and increased scale of military drills… are not productive toward resolving ongoing issues,” a State Department spokesperson said, adding, “We encourage [South Korea] and Japan to have committed, sincere discussions on resolving these disputes.”