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Japan-South Korea rift

Moon struggles to draw Korean executives into trade spat with Japan

Business leaders say Seoul should consult with Tokyo over export curbs, not them

SEOUL -- South Korean President Moon Jae-in summoned business leaders Wednesday to discuss a response to new export curbs imposed on chipmaking materials by Japan, but received only a lukewarm response from those in attendance.

Moon accused Japan of playing politics with the export curbs, which Tokyo has hinted are a response to sensitive materials being smuggled from the South to North Korea.

"The Japanese government is taking steps to deal a blow to the Korean economy for political purposes," he told executives from 30 major corporations who attended the meeting.

He called the situation an "unprecedented emergency" and urged for the creation of a public-private response system.

"I'd like to listen attentively to what you business leaders have to say concerning how to respond to and overcome a situation like this," Moon said.

He said he envisions a dialogue between his top economic aides and business leaders to produce short- and long-term strategies to deal with Japan's export controls. He plans to provide government assistance to increase imports from other countries, including through simplifying administrative procedures, and to boost domestic production of parts, materials and equipment South Korea now buys from Japan.

But South Korean companies were skeptical of Moon's response. "The government should be talking to the Japanese government, not us," said an executive who attended the meeting.

Samsung Electronics Vice Chairman Lee Jae-yong and Lotte Group Chairman Shin Dong-bin both skipped the meeting for a trip to Japan.

Japan claims that South Korea is not strict enough with export controls, suggesting that chipmaking materials bound for the South could have been diverted to North Korea, where they could be used for nuclear and missile development.

There were 156 instances between 2015 and March of this year of sensitive materials illegally shipped from South Korea to Southeast Asia, China, the Middle East and elsewhere, the South Korean Trade Ministry said Wednesday. This included the export of a centrifuge that can be used to enrich uranium to Russia in May 2018.

Fourteen of these cases were discovered in 2015 and 22 cases in 2016, the ministry said. That number roughly doubled to 48 in 2017, the year Moon took office. Forty-one cases were caught last year, as were 31 in the first three months of this year alone.

The numbers show that South Korea is enforcing export rules effectively, the government said.

But if it is proven that these shipments eventually ended up in North Korea and other countries that are developing weapons of mass destruction, the U.S. and Europe could also curb exports to South Korea.

Japanese companies hold a 70% to 90% market share in the three chipmaking materials targeted by the new export curbs: etching gas, photoresist and fluorinated polyimides. They are virtually impossible to replace in the semiconductor supply chain.

Samsung, along with South Korea's SK Hynix, control 50% to 70% of the world's semiconductor market. Companies in both countries are now grappling with how the spat could wreak havoc on chip production in the long term.

If Japan takes South Korea off the so-called white list of countries that enjoy preferential trade treatment, the number of affected products could grow significantly. "It will take a very long time, not just a year or two," to replace them with South Korean-made parts and materials, said Ahn Ki-hyun, a director at the Korea Semiconductor Industry Association.

Seoul is on a campaign to win over the international community on the issue. South Korean envoy Paik Ji-ah said at the World Trade Organization on Tuesday that Japan's move "will disrupt the global value chain" and harm South Korean companies.

But technically speaking, Japan has only revoked preferential treatment for South Korea, subjecting its companies to the same controls that Chinese and Taiwanese rivals face. "It would be difficult to prove this is a violation of WTO rules at this time," said Inha University professor Cheong In-kyo.

The spat could drag on as the countries dig in their heels. South Korea has not responded to Japanese requests to set up a dispute settlement panel on the wartime labor issue, which many believe is the underlying reason behind Tokyo's recent moves. Japan is urging Seoul to intervene in recent Supreme Court rulings ordering Japanese companies to pay South Koreans forced to work for them during World War II.

The impact is already starting to spread beyond the semiconductor industry. Sales of Japanese beer have dropped 10% to 15% in South Korea in the week ended Monday, while vandalism involving throwing kimchi on luxury Japanese cars have become more common. It is unclear whether this could lead to a widespread boycott, but Japanese companies are growing concerned.

Still, not all expect a long-term fight. South Koreans boycotted Japanese products in 2013 amid tensions over a territorial row, but it did not last long. Conservative newspaper JoongAng Ilbo urged readers not to react emotionally to the situation.

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