An escalating “trade war” between Japan and South Korea could be good news for China, both economically and diplomatically, observers say.

With Tokyo’s export restrictions on South Korean firms likely to prove mutually destructive, Chinese manufacturers could gain a competitive edge, according to analysts, while the souring of relations between two key US allies is likely to leave Beijing’s diplomats rubbing their hands.

On Tuesday Tokyo vowed to stand behind its decision to restrict exports vital to its neighbour’s tech industry, despite a claim by Trade Minister Hiroshige Seko that it was “open to talks”. This suggested it had been unmoved by South Korean President Moon Jae-in’s threat that Seoul was prepared to take “necessary countermeasures”.

The deepening row promises a headache not only for South Korean tech behemoths like Samsung and LG Display – both of which are heavily reliant on Japanese suppliers – but also for Japanese firms, which will need to find new customers and could see their own supply chains disrupted if relations continue to sour.

Analysts believe among Seoul’s likely countermeasures would be a block on OLED screen exports to Japan, which would hit Japanese firms’ ability to produce high-end TV sets.

With the tit-for-tat measures compromising the tech industries of both countries, experts say Chinese manufacturers – and particularly the country’s nascent semiconductor industry – would be among the best placed to fill the void.

The seeds of the trade row lie in a dispute between Seoul and Tokyo over the legacy of Japan’s colonial rule over the Korean peninsula prior to the end of World War II. Tokyo, which believes it settled all necessary compensation under a treaty signed in 1965, has been angered by a South Korean court’s recent order that Japanese firms must compensate wartime victims of forced labour.

In response, Tokyo has said it will impose export restrictions on three materials: fluorinated polyamides, used in smartphones; photoresists, used in semiconductors; and hydrogen fluoride, used in semiconductors. South Korean firms are heavily reliant on Japan for all three – in May, the country sourced 94 per cent of fluorinated polyamides and 92 per cent of photoresists from Japan, according to the Korea International Trade Association.

MUTUAL DESTRUCTION

However, the reliance isn’t just one way. Ryo Hinata-Yamaguchi, a visiting professor of the College of Economics and International Trade at Pusan National University in South Korea, said the row between Tokyo and Seoul would be mutually destructive.

“Japan has been a source of chemicals and manufacturing technologies that are vital to South Korean industries, while for Japan, South Korea is a vital market for exports,” Hinata-Yamaguchi said.

That point was backed up by June Park, a lecturer specialising in international political economy at George Mason University Korea, who said the two countries’ tech industries were “very much connected and complementary”. For instance South Korean firms buy materials from Japan to produce semiconductors that are often sold back to Japanese companies.

“But decoupling is not an unlikely scenario considering the level of tensions,” said Park. “These tensions, if they persist, could create a spillover effect that would impact the global chip supply in electronics, impacting global smartphone players like Apple and Huawei.”

WHY CHINA BENEFITS

Analysts say this intense trade battle will ultimately benefit Chinese manufacturers.
As a result of its trade war with the US, China has been pushing ahead with the development of its own microchip industry, reducing its industrial reliance on foreign countries.

At the core of that plan is its semiconductor industry. Under the Made in China 2025 plan, Beijing aims to produce 40 per cent of the semiconductors it uses by 2020 and 70 per cent by 2025 – up from less than 10 per cent at present.

Analysts say this aim will be boosted if tensions between Tokyo and Seoul disrupt global supply chains, as Chinese firms will step in to the vacuum.

“If we limit the ongoing trade conflict to a short-term squeeze on the South Korean semiconductor industry, we can anticipate that if South Korea’s performance on the global market is restricted, China may seize the opportunity to climb to the top,” Park said. “China certainly has motivations to up its game in the semiconductor industry … time will tell whether China becomes the sole beneficiary in this process,” Park said.

If China can take advantage of the present tensions, it would merely be continuing a decades-long jostling of power between the three countries in the semiconductor industry. In the 1990s and 2000s, Japan was dominant; from the 2010s South Korea has been in the ascendancy.

“The semiconductor industry is very complex and industry leadership has been shifting time and again during the past four decades,” Park said.

And, with both Tokyo and Seoul threatening further retaliation, some analysts wonder whether now is China’s time to lead.

“We may be able to consider a situation where Huawei tries to secure its semiconductors from elsewhere and catapults itself to becoming an indigenous developer in the process,” said Park.

DIPLOMATIC GAINS

Industry aside, there are also the geopolitical gains for China to consider.

“Geopolitically, negative relations between Japan and South Korea would benefit China as [Beijing] has always been sensitive to close relations between Seoul and Tokyo that could evolve into a quasi-alliance,” said Hinata-Yamaguchi.

China has long been wary that three-way ties between the US, Japan and South Korea could develop into a global alliance aimed at keeping in check China’s military expansion in the Pacific – much as Nato has worked to check Russia’s influence in Europe.

“Japan and South Korea have been in a state of diplomatic paralysis for a long time. However, the deterioration of economic relations between the two would not only cause economic problems on both sides – it would [plunge] bilateral ties to a whole new [low],” Hinata-Yamaguchi said.

“Given the collateral economic damage and risk of the situation worsening, it is vital for the two governments to restore relations. Yet given the myriad, politicised problems that have plagued the relations, both governments will need to take bold measures to salvage the strategically important bilateral ties.

“At the end of the day, how much China benefits from the conflict between Japan and South Korea depends on how much worse relations get,” Hinata-Yamaguchi said.

Source:www.scmp.com/week-asia/geopolitics/article/3017918/how-china-can-win-trade-war-between-japan-and-south-korea