A political dispute between Japan and South Korea is spilling over into trade. Unless it is resolved, the consequences for smartphone makers could be serious.
It’s a difficult time for smartphone makers. Shipments of devices are likely to fall for a third consecutive year in 2019, so the introduction of new 5G phones is the industry’s great big hope for a return to growth in 2020. However, problems with supply chains caused by trade tensions are now a real threat to the sector. The escalating dispute between Japan and South Korea is another major trade headache – particularly for the world’s manufacturers of mobile phones. With feelings running very deep, this may prove as difficult to resolve as the issues between Washington and Beijing.
South Korea filed a complaint at the World Trade Organisation (WTO) last Wednesday over a Japanese decision to remove preferential trade status for materials critical in the manufacture of semiconductors, an essential component of mobile devices. Seoul claims that Japan had violated WTO rules by putting up trade barriers for political reasons alone.
The dispute is historic and relates to the Japanese colonial rule over the Korean peninsula during the early part of the 20th Century. A South Korean court ruling last year ordered Japanese companies to pay compensation to Koreans over forced wartime labour and the exploitation of “comfort women” for their occupying troops. However, the two countries normalised relations with a 1965 treaty that saw Japan give hundreds of millions of dollars in loans and aid to its former occupier. Japan considered this settled the matter. South Korea does not.
The three chemicals initially targeted by Japan are fluorinated polyimides, photoresists and hydrogen fluoride. Fluorinated polyimides are used in smartphone displays. Photoresists are thin layers of material used to transfer circuit patterns onto semiconductor wafers and hydrogen fluoride is used as an etching gas in the chip-making process. Japan produces about 90% of the world’s fluorinated polyimides, photoresists and about 70% of hydrogen fluoride. This means it is difficult for smartphone component makers in the country such as Samsung, SK Hynix and LG Display to find alternative supplies. Samsung is the largest global supplier to the semiconductor industry and is a major supplier to companies such as Apple.
Still time to come back from the brink
Japanese officials have not yet stopped shipments of the materials and companies have some stockpiles but there could be disruptions ahead. The dispute has already escalated, after Japan stripped “white list” status from South Korea under a trade control law, requiring Japanese exporters to seek a license for items that could be used in some weapons-related applications. As we have seen in the US-China trade war. Such tit-for-tat moves can escalate quickly.
South Korea’s decision to seek a ruling from the WTO on these three chemicals came after the organisation ruled in Japan’s favour this week on a case relating to valves. On Tuesday, the WTO ruled for a second time that South Korea’s anti-dumping duties on Japanese valves violated international trade rules, ordering Seoul to modify its duties on the pneumatic transmission valves.
Tensions were also increased this week after the South Korean government asked the International Olympic Committee to ban Japan’s “Rising Sun” flag from next year’s Tokyo Olympics, comparing it to a Nazi swastika and deeming it an offensive reminder of colonial atrocities. This demonstrates the depth of feeling in the country over the issue – and South Korean citizens have already launched an effective boycott of Japanese goods – from Hello Kitty merchandise to cat food. Japanese car sales slumped by 57% year-on-year in August, with Toyota’s South Korean sales slipping 59% and Honda’s down 81%. Also, South Korean imports of beer from Japan plunged 97% in August year-on-year. There are so few people now wanting to travel between the two countries that airfares are available for less than $10 for a one-way trip.
Difficult way forward
The two countries are key US allies in the region but, so far, the current US administration has done relatively little to help resolve the situation. The White House has said it will not mediate the situation, but China has stepped up to the plate. China’s Foreign Minister Wang Yi has held talks with his opposite numbers in Tokyo and Seoul. But Japan considers the matter settled and its companies are refusing to make any additional payments. Tokyo also wants the court decision from last year reversed. This appears unlikely right now.
The Washington-Beijing spat is already proving a headache for the supply chains of major technology companies. Google is said to be moving its Pixel production out of China to Vietnam and Apple is looking to move between 15% to 30% of its iPhone production to Vietnam and India. HP and Dell Technologies have similar moves planned for their notebooks. Microsoft, Nintendo, Sony and Amazon are also believed to be looking at moving some of their operations to avoid Washington’s tariffs. All of this is costly, takes up management time and provides logistical headaches.
The smartphone industry did not need this other trade war to add to its woes. The Japanese retaliatory action against South Korea, if it goes unchecked, could lead to the slower production of essential components for the technology sector. This could make their essential parts more expensive, crimping margins in a sector that is already facing a number of challenges. It’s possible this issue could remain long after any rapprochement between Washington and Beijing.
The above article was previously published by Charles Stanley on 16th September 2019