Antagonisms between South Korea and Japan are already at the boiling point. They're bound to deepen with Tokyo's plan to expand controls over exports of sensitive materials by dropping its neighbour from a list of 27 countries granted preferential trade status.
The decision, expected soon, will ripple across the high-tech sector, further shaking up supply chains already rattled by trade tensions between the US and China.
As of July 4, Japanese companies need case-by-case approvals to export to South Korea three materials used to make semiconductors and displays used in smartphones and other high-tech devices.
With the loss of South Korea's so-called "white country" status, that requirement will apply to dozens more products on a list of items that potentially could be converted to weapons, according to a Japanese trade ministry document.
That's in addition to more than 200 other items requiring individual inspection for exports to all countries.
Japan's trade ministry says Seoul has undermined a "relationship of trust," including export controls, with lax controls on re-exports to other countries. South Korea denies that, as meanwhile tensions have risen with some South Koreans calling for boycotts of Japanese products.
More From This Section
As a "public comment" period ended Wednesday, Japan's trade minister Hiroshige Seko said Japan plans to go ahead and strip South Korea of its preferred status for export licensing. He said Seoul had failed to provide a convincing explanation to address Japan's doubts that South Korean export controls are strict enough to prevent sensitive materials from potentially being misused.
Officials are studying opinions submitted to the government, but that's largely a formality.
Chief Cabinet Secretary Yoshihide Suga has not confirmed reports the Cabinet will approve the plan as early as August 2. If it does, the new rules would take effect on August 23, forcing exporters to get licenses to sell a huge array of products ranging from alloys of aluminum to freeze dryers and vacuum pumps.
Approvals of such exports could take up to 90 days, slowing but not halting shipments. But ending South Korea's "white country" status would also mean Japan could limit exports of any product on national security grounds.
Officials say Japan found some sensitive items were shipped to South Korea "with inadequate management by companies" without giving specific examples or saying which Japan-based companies were at fault.
In at least five cases that were exposed and penalized, Japanese exports to South Korea have ended up illegally in North Korea since South Korea was added to the white list in 2004, government documents show.
Adding another layer of ambiguity to the diplomatic dispute, Tokyo also has expressed dissatisfaction over demands for compensation for people forced to work for Japanese companies before and during World War II, an issue Japan says it settled under the 1965 treaty normalizing relations.
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 from Japan for its use of forced labor and sexual abuse of Korean women in military brothels during the Japanese occupation of the Korean peninsula in the early 20th century.
Until recently, such issues had not affected trade between the two countries, both of which depend heavily on exports. Japan has run a perennial trade surplus with South Korea, at USD 20.3 billion in 2018, with parts, chemicals and other materials and equipment accounting for about USD 15 billion of its exports last year.
The tighter approvals on the three items newly subject to licensing controls fluorinated polyimides, photo resists and hydrogen fluoride have had a limited impact, analysts say, because South Korean companies had at least 3-month stockpiles of the computer chips and displays that would be affected, thanks to slowing demand and worries over trade tensions between the US and China.
But the tightening controls are adding to uncertainty for technology manufacturers: According to IHS Markit, in 2018 Korean firms SK Hynix and Samsung Electronics supplied 61 per cent of memory components used in various electronics, relying heavily on Japanese suppliers.
"If restrictions remain, Korean chipmakers' production lines and therefore global semiconductor supply chains are likely to be disrupted. Korean chipmakers are major actors in global semiconductor supply chains," Fitch Ratings said in a recent report.
"The restrictions threaten not only Korean companies but also companies from many other markets that take part in the global technology ecosystem," it said.
Japanese companies are also already suffering from weaker demand. Looking at the three sensitive materials already targeted, Japan supplies about 90 per cent of the fluorinated polyimides, 90 per cent of photoresists and 40% of hydrogen fluoride used by South Korean companies, Fitch said, citing the Korean International Trade Association.
For Tokyo Ohka Kogyo Co, a major Japanese semiconductor parts maker, the July 4 export measures have only affected a special type of EUV, or extreme ultraviolet wavelength, photoresists, so the impact has been limited, says company spokesman Takashi Ono.