ESR | November 11, 2019

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When the Tiger and Sun fight

By Christina Render
web posted November 11, 2019

It is no secret that South Korea and Japan get along as well as cats and dogs do around each other. That is to say, they can have rocky interactions in their relations, to say the least. A rough patch in South Korea-Japan economic relations manifested itself on August 28th, 2019 when Japan removed South Korea from its list of preferred economic partners. In doing this, Japan put additional procedures for Japanese companies to go through on more than 800 “strategic materials” to the Republic of Korea including etching gas, computers, telecom equipment, and integrated circuits. Such products are all important to South Korea’s high-tech economy and smartphone industry which house companies like Samsung. In this essay, we’ll be exploring the context of the heated trade feud between South Korea and Japan, the economic impacts of the situation, relevant economic concepts applicable to the current trade feud, and lastly my personal opinion in regards to the situation. 

The seemingly spontaneous trade feud between the Republic of Korea and Japan may seem confusing to bystanders. However, there is a reason for the ‘sudden’ animosity between the two nations regarding trade. To start, South Korea and its people still remember the brutal Japanese occupation of Korea that ended a little more than seventy years ago. During that time, Japan forced thousands of Koreans to be used as labor for the nation of Japan and its colonies. Last year, the South Korean Supreme Court ruled that two Japanese companies needed to provide compensation to their forced wartime laborers. Japan’s government took offense to this as they claimed that the matter of compensation was already settled in a past treaty. Flash forward a year and tensions between the two nations have escalated to the point of Japan using trade as a weapon in the midst of escalating relations. 

Now that we have addressed the underlying cause of the trade feud, we should look into its economic impacts. First, South Korea’s high-tech industries such as the smartphone industry are likely to be facing troubles soon once their stockpiles of etching gas and other important materials imported from Japan run out. Samsung, the world’s largest smartphone maker, is in danger of facing increasing costs of production due to supply limitations. Once its stockpiles that are predicted to last several months run out, Samsung will likely have to raise its price somewhat on its products if it fails to find an appropriate alternative for needed etching gas and other necessary goods for production. The cost of switching from Japanese companies to alternative supply chains is expensive for Samsung and would have to be done slowly to mitigate the cost and damage to its profits. 

Another impact of the trade feud between South Korea and Japan is the worldwide effect it would have on the smartphone industry. In 2018, Samsung and SK Hynix supplied over 60% of memory chips globally and South Korean firms supplied over 90% of smartphone screens. The squabble between South Korea and Japan has worldwide implications due to how companies like Apple and Huawei rely on South Korean firms for memory chips and more. Prices on not just Samsung products but also Apple and Huawei products could increase as well, due to how supply becomes limited and price raising to cover the increasing production costs caused by Japanese regulations. 

Several key economic concepts apply to the trade feud between the Republic of Korea and Japan. For example, in regard to the concept of comparative advantage, South Korea is more efficient at producing smartphones and Japan is better at making the materials needed to produce said smartphones. Say, South Korea can make 3 thousand smartphones for every 1 thousand etching gas canisters while Japan can produce 4 thousand etching gas canisters for every 1 thousand smartphones it produces. It becomes clear that South Korea focusing on producing smartphones and Japan on making etching gas canisters benefit the nations the most. In doing this, they benefit each other when trading with one another as they are maximing their economies on the production-possibilities frontier. In addition, we can see the law of demand, another core economic concept, apply when considering the economic impact the trade feud has on high-tech companies like Samsung. The law of demand states that as the price of good increases, the demand for it will lessen and when the price of good decreases, the demand for it will increase. Since Samsung and companies like Apple will likely raise the prices of their products due to an increase in production costs, the quantity demand for their products will lessen in accordance to the law of demand. 

While this is primarily an economics essay, I do feel like I should address the underlying cause of the trade feud with my own personal opinion. Throughout my life, I remember reading the terrible and horrifying accounts of the atrocities that happened during the Japanese Occupation of Korea as well as hearing it from my family. The history that occurred during that time deserves to be remembered and never forgotten. However, the past can never be reversed as only the present and future can truly be changed. Digging up buried hatchets is counter-productive if such an action harms the people living in the present. The economy in South Korea has been slowing down over the past several years and this trade dispute endangers one of South Korea’s largest industries, the smartphone industry. With both nations choosing to continue escalating the situation, the trade feud is not doing any favors for the economic prosperity and health of the Republic of Korea nor the Korean people. 

In regards to Japan, a similar yet different argument can be made. Economically speaking, Japan doesn’t have much to gain from punishing South Korea by removing them from its list of trusted economic partners. After all, Japan actually has a trade surplus with South Korea. The trade feud with South Korea does harm Japanese companies to an extent. Since Japan has recently been suspected of going into a recession soon, Japan is doing no favors with itself by limiting trade with South Korea, one of its largest trading partners. 

In conclusion, we’ve seen the underlying cause of the trade feud between South Korea and Japan, its economic impacts, the relevant economic concepts the situation brings to mind, and my own personal opinion in regards to the situation surrounding the two countries.  ESR

This is Christina Render’s second contribution to Enter Stage Right © 2019 Christina Render

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