Japan, South Korea step up trade dispute

Japan and South Korea ratcheted up tension on Tuesday in a diplomatic dispute that threatens to disrupt global supply of smartphones and chips, with Seoul denouncing Japanese media reports that it transferred a key chemical to North Korea.

The friction, stemming from the issue of South Koreans forced to work for Japanese firms during World War Two, worsened last week when Tokyo said it would tighten curbs on exports of three materials crucial for advanced consumer electronics.

The move could hit tech giants, such as Samsung Electronics (005930.KS) and SK Hynix (000660.KS), which supply chips to the likes of Apple (AAPL.O) and Huawei [HWT.UL], and underscores Japan’s sway over a vital link of the global supply chain.

In some of the sharpest comments yet, South Korean Industry Minister Sung Yun-mo urged Japan to “stop making groundless claims immediately”, an apparent response to a Japanese media report last week.

South Korea rejects Japan media reports on transfer of material to North Korea

The report quoted an unidentified senior member of Prime Minister Shinzo Abe’s ruling Liberal Democratic Party (LDP) as saying some hydrogen fluoride exported from Japan to South Korea had ultimately been shipped to North Korea.

Hydrogen fluoride, a chemical covered by Tokyo’s recent export curbs, can be used in chemical weapons. Japan has said it has seen “inappropriate instances” of South Korea’s export controls, but has not elaborated.

Asked about countermeasures, Sung said Seoul was reviewing “every possible plan”, but gave no details. The neighbors plan to hold talks on Friday, he added.

Earlier, Japan had once again floated the possibility of further measures against South Korea.

“Whether Japan implements additional measures depends on South Korea’s response,” Industry Minister Hiroshige Seko told a news conference.

Tokyo was “not thinking at all” of withdrawing the curbs, which did not violate World Trade Organization rules, he added.

South Korea appears to be pressing both the WTO and Washington on the issue, however.

The export curb figured on the agenda of a Tuesday meeting of WTO member nations, where Seoul is set to explain its position, a South Korean foreign ministry spokesman said.

A South Korean foreign ministry official was also expected to discuss the curbs with his counterpart in Washington.

South Korean President Moon Jae-in on Monday called for the restrictions to be withdrawn, adding that Seoul could not rule out countermeasures for damage inflicted on its firms.

Tokyo also threatened last week to drop Seoul from a “white list” of countries with minimum trade restrictions, hitting supply of a wider range of items used in weapons production.

Japan’s halt of preferential treatment for the three materials key to consumer electronics would force exporters to seek permission for each individual shipment to South Korea, a procedure that takes about 90 days.

The dispute stems from Tokyo’s frustration at what it calls a lack of action by Seoul over a South Korean court ruling last October ordering Nippon Steel (5401.T) to compensate former forced laborers.

Japan says the issue of forced labor was fully settled in 1965 when the neighbors restored diplomatic ties.

The curbs came weeks ahead of a July 21 upper house election that Abe’s Liberal Democratic Party (LDP) and its junior partner are expected to win with a solid majority.

“Unfortunately, the election is coming,” said one person familiar with the government’s thinking. “The LDP will do anything to solidify their support base.” The neighbors share a bitter history dating to Japan’s colonization of the Korean peninsula from 1910 to 1945, which saw forced use of labor by Japanese companies and the use of comfort women, a euphemism for girls and women, many of them Korean, forced to work in its wartime brothels.