It's not been a good week for trade here in Asia. President Donald Trump has stuck a 10% tariff on US$300 billion in Chinese goods, basically all the remaining items that weren't already under a higher import tax. And now South Korea and Japan have intensified their own trade war across the Sea of Japan.
Japan's cabinet voted on Friday to remove Korea from its "white list" of favored trading nations. That move, threatened earlier by Prime Minister Shinzo Abe, will go into effect on Aug. 28.
South Korea has taken it as personally as a nation can take things personally. "We won't be defeated by Japan again," Korean President Moon Jae-in said defiantly in a cabinet meeting, which unusually was broadcast live on TV. It will take the necessary "countermeasures" at the end of the month if Japan goes ahead with the move.
Korea's response pointedly dredges up the dreadful history between the two nations. Japan invaded Korea in 1910 and ruled it harshly until liberation in 1945 at the end of World War II. And this trade fight has its roots in that history, as I explained two weeks ago.
South Koreans aren't beyond cutting off their fingers to point out this painful legacy. Twenty young Korean protestors chopped off the tips of their little fingers in Seoul in 2001, one of my first memories after I moved to Asia, in a ceremony held in front of a former Japanese prison. They were aggrieved that the Japanese prime minister was about to visit the Yasukuni Shrine in Japan, which honors Japan's war dead, some of whom were convicted as war criminals.
"What the hell is going on?" is what I thought back then when folks were slicing off their pinkies. I think I have a bit of a better handle on it now.
In this current fight, Korea wants Japan to pay for the forced labor that many Korean men were ordered to do during that occupation. The South Korean Supreme Court handed down a verdict late last year ordering the Japanese company Nippon Steel (NPSCY) to pay 400 million won (US$340,000) spilt between one surviving laborer and the families of three others. A lower court then seized some of Nippon Steel's holdings in Korea.
There are many other such cases working their way through the South Korean courts. So Japan and Japanese businesses see an endless stream of reparations coming their way if they comply. Japan also says the whole issue was settled when it normalized relations with South Korea in 1965, at which point it supplied US$500 million in aid to its neighbor.
A month ago, Japan started restricting the shipment to Korea of key chemicals used to make smartphone and TV screens as well as semiconductor chips. It says those curbs to products that are at the heart of South Korea's high-tech industry are necessary because Korean companies aren't being careful with how they're storing the chemicals, which could be used for military purposes as well.
Korea isn't buying that. Moon says Japan is a "selfish nuisance" for disrupting global supply chains, which will "inflict tremendous damage." Korea's likely response would be to remove Japan from its own "white list" of favored trade nations, and to file a complaint with the World Trade Organization.
The ruling Democratic Party in Korea has described Tokyo's decision as an "all-out declaration of economic war."
Japan also appears to be taking personal offense. Sounding rather like someone heading for marriage counseling rather than a WTO tribunal, Japanese Industry Minister Hiroshige Seko said that "we want South Korea to first create an environment in which we can have dialogue with trust." He added that "it's South Korea's responsibility to do that."
Honestly, the United States is probably better off not getting involved in this marital spat. But it's under pressure to do so, not least because both nations are key U.S. allies in Asia. That's particularly true when it comes to North Korea, which has resumed blasting off missiles into the "East Sea."
Secretary of State Mike Pompeo has sensibly said that he hopes the two nations will come to some kind of agreement on their own. But he also said that cooperation among all three countries on North Korea is "incredibly important." Pompeo and his counterparts from South Korea and Japan are all currently in Bangkok for a meeting of the ASEAN group of Southeast Asian nations. Pompeo has advised his fellow foreign ministers to reach a "standstill agreement" that would pause the tit-for-tat so they can negotiate.
This fight has festered since that Supreme Court decision last October. South Korea would be the first country ever to be kicked off Japan's "white list" of 27 nations, which includes the United States, the United Kingdom and Germany. It would indeed be a nuisance factor, requiring Japanese companies to get approvals of, permits for and inspections over shipments to Korea. More paperwork, more work for the lawyers.
It is not a good time for the fight to happen. Korean stocks have been the weakest in Asia in 2019. The benchmark Kospi index is down 2.1% in 2019, and 6.2% so far this quarter.
The chip industry is suffering from a glut of supply. But tech earnings and shares had actually been recovering. It's clear that the "war" with Japan has knocked them again. Stocks in Taiwan, which has an equally tech- and especially chip-heavy industry makeup, are up 8.5% in 2019, and have shown sharp divergence with the market in Seoul.
Japan's Topix index of all major stocks is still up 2.6% for 2019, but heading the wrong way - it has surrendered 5.4% since the spring.
Economic growth in Japan has likely slowed to 0.4%, year on year for the second quarter, according to a Reuters poll of 17 economists released Friday. That's down from growth of 2.2% in the first quarter.
Weak overseas sales are the main decelerator. Exports out of Japan have now fallen for seven months in a row, through June, thanks to weak global demand for key products such as high-tech electronics. The official Q2 GDP will be out in a week.
The trade picture is only likely to get worse, and scores of South Koreans have started boycotting Japanese goods of all sorts. Expect tech products globally to start seeing their prices rise if this continues - things getting worse before they get better is the likeliest outcome right now.