A woman walks past an advertisement featuring Japanese and South Korean flags at a shop in Shin Okubo area in Tokyo Friday, Aug. 2, 2019. Japan has approved the removal of South Korea from a "whitelist" of countries with preferential trade status, escalating tensions between the neighbors. The decision will fuel antagonism between the two neighbors already at a boiling point over the export controls and the issue of compensation for wartime Korean laborers. (AP Photo/Eugene Hoshiko)

SKorea vows countermeasures as Japan downgrades trade status

August 02, 2019 - 3:42 am

TOKYO (AP) — Japan's Cabinet on Friday approved the removal of South Korea from a list of countries with preferential trade status, triggering anger and threat of retaliation from Seoul and fueling antagonism already at a boiling point over earlier export controls and the issue of compensation for wartime Korean laborers.

The decision expanding controls over exports of sensitive materials takes effect on Aug. 28. It follows an earlier requirement that Japanese exporters to South Korea be approved on a case-by-case basis for three materials used in semiconductors, smartphones and other high-tech devices — South Korea's key exports.

Trade Minister Hiroshige Seko said the decision was needed to "appropriately carry out export controls for national security purposes" and was based on South Korea's "insufficient" export controls.

In addition to escalating tensions between the Asian neighbors, the move will ripple across the high-tech sector, further affecting supply chains already rattled by U.S.-China trade tensions.

The loss of preferential trade status will apply to dozens more products on a list of items that potentially could be converted to weapons. That's in addition to more than 200 other items requiring individual inspection for exports to all countries. Ending South Korea's "white country" status would also mean Japan could limit exports of any product on national security grounds.

South Korea's President Moon Jae-in, before heading into an emergency Cabinet meeting to discuss the Japanese measures, vowed stern countermeasures against Japan's planned downgrading of his country's trade status, calling it an attempt to contain South Korea's economic growth and harm global supply chains. Moon accused Japan of retaliating against South Korean court rulings that ordered Japanese companies to compensate Korean plaintiffs for their wartime labor.

South Korea says the Japanese trade curbs could hurt its export-dependent economy and has accused Japan of weaponizing trade to retaliate over disputes stemming from wartime history. Tokyo's export measures since early July have already triggered angry protests and boycotts from South Korea.

Japan denies Seoul's allegation that the export controls were retaliation for South Korean court rulings allowing Japanese companies' assets to be seized as compensation for their wartime use of Korean laborers.

"We have no intention whatsoever to affect relations between Japan and South Korea, and it's not meant to be retaliation on something to begin with," Seko said. "I hope South Korea understands that this is not an export ban."

Japan, South Korea and the U.S. will hold three-way foreign ministers' talks later Friday on the sidelines of the Association of Southeast Asian Nations in Bangkok.

The tighter approval for the export of the three items — fluorinated polyimides, photo resists and hydrogen fluoride — has had a limited impact, analysts say, because South Korean companies have at least three-month stockpiles of the computer chips and displays that would be affected, amid slowing demand and worries over U.S.-China trade tensions.

Additional controls, however, add to uncertainty for Korean manufacturers including SK Hynix and Samsung Electronics that rely heavily on Japanese suppliers.

"Japan has responded to a resurfacing, deeply felt, historical grievance with the use of highly impactful and damaging trade restrictions, seeking to choke off the South Korean semiconductor industry," Fitch Solutions said in a recent report. "The ripple effects to the technology, consumer and tourism sectors, the Korean and Japanese economies, as well as the fragile political and security balance in the region, will be notable."

Japan and South Korea are both important hosts for U.S. military bases in East Asia. But they've been bickering for years over a territorial dispute and over South Korean demands for more contrition and compensation for the wartime labor and sexual abuse of Korean women in military brothels during the Japanese colonization of the Korean Peninsula in 1910-1945.

Until recently, the history disputes had not affected trade between the two export-dependent countries. Japan has run a perennial trade surplus with South Korea, at $20.3 billion in 2018, with parts, chemicals and other materials and equipment accounting for about $15 billion of its exports last year.

The trade spat came as relations between the two neighbors have soured over South Korea's demands for compensation for their harsh labor for Japanese companies before and during World War II, an issue Japan says was "completely and finally" settled under the 1965 treaty normalizing relations. The Foreign Ministry released Monday official documents from May 1961 that showed South Korea declined Japan's proposal for compensation to individual forced labor victims.

Japan's potential damage from the wartime labor issue could be massive and far-reaching.

Currently, under the South Korean Supreme Court decision, assets of three major Japanese companies held in that country are to be seized to get compensation for the plaintiffs, with more than a dozen other lawsuits pending.

The wartime labor issue involves an estimated 20,000 families and relatives of the victims, and if they all come out and demand compensation from 200 other yet-to-be-sued Japanese companies, the amount of damage could be trillions of yen (billions of dollars), a senior Foreign Ministry official said on condition of anonymity because of the sensitivity of the issue.

"The Korean labor issue is far more serious (than the export dispute) ... We must stop it at an early stage, or it will be a serious problem."

Japanese officials say the 1965 treaty states Japan's provision of $500 million grant and loans to South Korea settles all compensation issues, and Seoul's demands beyond the agreement violate international law.

Japan has created funds for former sex slaves twice, paying a total of 1.5 billion yen ($13.8 million), but both of them were scrapped by South Korea after domestic criticism.

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This story has been corrected to show the decision takes effect Aug. 28, not 23.

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Associated Press writer Kim Tong-hyung in Seoul, South Korea, contributed to this report.

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