Japan’s trade and diplomatic dispute with South Korea has escalated sharply. Seoul terminated its intelligence-sharing pact with Tokyo last week and on Sunday went ahead with its postponed two-day military drills around the Dokdo islands, known in Japan as Takeshima, that are controlled by Seoul but claimed by Japan. 

Analysts remain sceptical that the stand-off can be resolved quickly and a further escalation could disrupt global supply chains as the world wrestles with the intensifying US-China trade war.

What led to the collapse in relations?

The spat traces its roots to a dispute over compensation for forced labour during the second world war. Tokyo says all claims were “settled completely and finally” by a 1965 treaty under which it paid compensation to the South Korean government. Seoul, however, maintains the deal does not preclude individual victims from suing for damages.

The row flared up in July after Japan imposed controls on three chemicals crucial to South Korea’s semiconductor industry. Tokyo further angered its neighbour after it removed Seoul from its so-called “white list” of trusted trade partners with preferential trade status.

Its decision to remove South Korea from the list is widely seen as retaliation, even though Tokyo’s insists that it was merely a procedural decision related to arms control.

Which side is likely to be most damaged?

The export-driven South Korean economy, led by big technology groups such as Samsung, SK Hynix and LG Electronics, relies heavily on materials from Japan. Seoul has announced plans to invest $6.5bn to shore up its tech industry while companies are urgently testing potential substitutes for the Japanese products, including from China. But analysts caution that this process will take time.

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They add that South Korea needs the co-operation of its allies to resolve the nuclear issue in North Korea.

“South Korea has the most to lose. Its security is strongly tied to co-operation with the US and Japan,” said Leif-Eric Easley, a professor of international studies at Ewha Womans University in Seoul. “Its economy is highly vulnerable to these trade disputes. And its ability to effectively engage Pyongyang and Beijing is based not only on its own capabilities, but also on its network power with Washington, Tokyo and a rules-based international order.” 

Japanese officials play down the impact that tensions with South Korea will have on its own economy, but critics say Tokyo has underestimated the long-term consequences of its actions. 

The row has already led to boycotts of Japanese products in South Korea, while the number of South Korean tourists travelling to Japan fell 7.6 per cent in July from a year earlier. “The uncertainty is a risk for Japanese companies, which are already wrestling with the US-China trade dispute and the upcoming increase in the domestic sales tax,” said Hidehiko Mukoyama, senior economist at Japan Research Institute. 

How can the dispute be resolved?

Analysts say concessions are likely to come when the two sides, and particularly South Korea, start to feel actual economic pain. Optimists in Japan, such as Hajime Izumi, professor of international relations at Tokyo International University, say this could mean the dispute is resolved before the end of the year. 

Another possibility is a more active intervention by the US in the face of military provocations by North Korea and its escalating trade dispute with China. A spokesperson for the US state department warned on Twitter that the withdrawal from the intelligence-sharing pact made it harder to solve the Korean crisis and would “increase risk to U.S. forces”.

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What are the security implications?

Officials in Tokyo and Seoul have played down the practical importance of the pact, with South Korean defence minister Jeong Kyeong-doo telling parliament that the accord was more about relationships than utility. There have been 26 instances of intelligence-sharing with Japan since the agreement was signed in November 2016, Mr Jeong said.

Withdrawing from the agreement does not mean that intelligence will not move between the two countries. Kim Hyun-chong, Mr Moon’s security adviser, said South Korea will share information through a three-way channel involving the US, and will try to bolster its own defence capability by introducing more military satellites and other reconnaissance assets. 

Japan has traditionally placed more importance on intelligence gathered from the US, although experts say it will probably become more difficult for Tokyo to attain information from South Korea regarding North Korean defectors. 

Still, analysts say the decision to scrap the accord will damage Seoul’s international reputation. “Regardless of its utility, it hurts South Korea’s credibility as a trusted security partner. Seoul’s unilateral decision despite the US opposition would raise doubt in the US over Seoul’s credibility,” said Bong Young-shik, an expert on international relations at Yonsei University in Seoul. 

Additional reporting by Leo Lewis in Tokyo

Via Financial Times