<![CDATA[Explained: what's driving Japan's escalating feud with South Korea?]>

Relations between Japan and South Korea have hit rock bottom in recent weeks as an unresolved dispute over Korean forced labourers has spiralled into an escalating spat over trade.

The dispute, which comes amid the ongoing trade war between the United States and China, has economists sounding the alarm about disruption of technology supply chains and knock-on effects for the global economy.

How did the spat begin?

Tensions between both sides escalated dramatically when Japan announced that from July 4, it would restrict exports of three materials used in South Korean smartphone chips and displays.

South Korean President Moon Jae-in's administration accused Tokyo of retaliating against court orders telling Japanese companies to compensate forced labourers during Japan's 1910-1945 colonial rule of the Korean peninsula.

Japan insists that all claims arising from its colonial rule were settled by the signing of a 1965 normalisation treaty that provided Seoul with US$800 million in economic aid and loans.

Tokyo has since cited national security concerns arising from Seoul's "inadequate management" of exports of sensitive chemicals, including hydrogen fluoride, which can be used for the manufacture of chemical weapons by countries subject to international sanctions, such as North Korea.

The administration of Shinzo Abe is now mulling the removal of South Korea from a "white list" of countries with minimum trade controls.

What's the fallout?

South Korean tech giants such as Samsung and SK Hynix rely on Japanese suppliers to manufacture chips and displays, which are in turn bought by Apple and other tech firms for use in their smartphones.

The complicated web of supply chains involved in the production of popular tech products means that escalating trade tensions between the East Asian neighbours could lead to higher prices for customers globally, according to analysts.

"Japan's decision to place export restrictions on South Korea will ripple out to other countries," said Troy Stangarone at the Korea Economic Institute in Washington. "The downside to the type of weaponised interdependence that Japan is using to coerce South Korea is that ... there will be collateral damage as interdependent links are disrupted."

Bernstein, an investment management and research firm, reported on Monday that prices of dynamic random-access memory chips, of which South Korea is the world's largest producer, had risen 12 per cent in less than a week.

Samsung relies on Japanese suppliers to manufacture chips and displays. Photo: Bloomberg alt=Samsung relies on Japanese suppliers to manufacture chips and displays. Photo: Bloomberg

South Korea's chipmaking sector accounts for 25 per cent of exports, while Samsung alone represents 21 per cent of the country's stock market, according to the South Korean government, which has accused Japan of trying to damage its export-led economy.

But Lloyd Chan of Oxford Economics is more sanguine.

"We do not expect tensions to escalate to such an extent that they harm businesses significantly, particularly when the ongoing US-China trade conflict is already weighing on the trade outlook," he said.

"Korea and Japan should have enough economic incentives to minimise the potential fallout.

In the meantime, major firms such as Samsung and SK Hynix have began looking to mainland China, Taiwan and local producers to make up the shortfall in key materials.

Sundi Aiyer, managing director of supply chain and operations advisory Aiyer Group, said the spat would serve as a "wake-up call" to South Korean manufacturers who were dependent on Japanese suppliers.

"This might mean that Korean companies will seek more reliable supply sources from alternative markets such as China or Taiwan, which could, in turn, use the opportunity to build up their own capabilities," he said.

Why can't Japan and South Korea get along?

Despite sharing a mutual ally in the United States and a common security threat in North Korea, the two countries remain bitterly divided over a raft of outstanding historical and territorial issues.

These include the treatment of "comfort women," the euphemistic term used for Korean and other Asian women and girls forced to work in wartime brothels for imperial Japan. A 2015 agreement to settle the issue fell apart last year after Seoul dissolved a foundation set up to provide compensation, following complaints from surviving comfort women that they hadn't been properly consulted on the deal.

When history isn't causing friction between the countries, territory is getting in the way. Dokdo, a tiny islet claimed by both countries, is a semi-constant source of tension between the sides.

"For the Republic of Korea [South Korea], their modern identity is rooted in the Japanese colonial experience and subsequent division of the peninsula," said Stephen Nagy, a senior associate professor at International Christian University in Tokyo. "For Japan, their post-WWII identity is rooted in their experience of being the only nation to experience the atomic bomb, their pacifist constitution and their post-WWII behaviour in the region and on the international stage.

"Both identities are not recognised by each other and as such bilateral frustrations, nationalism and selective historical understandings continue to divide what should be natural allies in the region," he said.

Brad Glosserman, deputy director of the Centre for Rule Making Strategies at Tama University in Tokyo, said that historical and territorial disputes were often exploited for domestic political gain in both countries.

"This is seen as a domestic play on the part of the South Koreans to appeal to a domestic political base on the part of the progressives and President Moon himself," said Glosserman, adding "there is a similar tendency in Japan."

Will the US come to the rescue?

During previous spats between South Korea and Japan, the US, which hosts key military bases in both countries, has tried to get its mutual allies talking to iron out their differences. Abe and former South Korean president Park Geun-hye met for the first time in 2014, more than a year after the leaders had entered office, after then-US president Barack Obama brought them together on the sidelines of a nuclear security summit at The Hague.

The Trump administration, however, appears less inclined to get involved.

Although the US State Department last week said it would work to "strengthen our relationships between and among all three countries," David Stilwell, assistant secretary of state for East Asian and Pacific Affairs, on Friday said that Washington did not plan to intervene.

Analysts say President Trump's suspicion of traditional alliances and Pyongyang's improved relations with the US and South Korea mean that Washington is likely to take a hands-off approach to the growing rift between its allies.

So what will happen next?

For now, there looks to be no end in sight to the spat. Seoul has said that it will file a complaint against Japan with the World Trade Organisation and raise the matter at the WTO General Council next week in Geneva.

On Monday, Moon warned Japan that its trade restrictions had "shattered credibility" for cooperation in manufacturing and would hurt its economy more than South Korea's in the end.

Korean business owners have rallied to boycott Japanese products and in a poll released last week by Gallup Korea, 67 per cent of South Koreans said they supported a boycott of Japan.

Meanwhile, the sides face a number of deadlines and politically-charged milestones that could raise tensions further, including the July 18 deadline for South Korea to accept a third-party arbitrator in the forced-labour dispute; Japan's July 21 upper house election, that critics argue has given Abe a political incentive to keep the dispute alive; and the July 24 deadline for public feedback on Tokyo's plans to remove South Korea from its trade "white list" paving the way for customs restrictions on 40 new categories of South Korean products. On August 15, South Korea will celebrate National Liberation Day, which marks the end of Japanese rule over the peninsula.

Shin Kak-soo, former South Korean ambassador to Japan, believes the only way out is for the Korean government to "suggest a viable solution to resolve the forced labour issue".

If not, he said: "There is a likelihood of further measures by Japan that will rapidly lead to a downward spiral, being fanned by strong nationalism in both countries."

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This article originally appeared on the South China Morning Post (SCMP).

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