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Japan-South Korea rift

South Korea to retaliate over Japan's 'white list' removal

Tensions escalate as neighbors take away each other's preferential trade status

Japanese Prime Minister Shinzo Abe, right, and South Korean President Moon Jae-in. (Source photo by AP)

TOKYO/SEOUL -- Prime Minister Shinzo Abe's government on Friday formalized Japan's decision to remove South Korea from its "white list" of 27 countries with preferential trade status, a move that further fuels bilateral tensions. South Korea responded by saying it will take Japan off its white list as a countermeasure.

The removal, which will take effect on Aug. 28, means that South Korea will be stripped of the privileged status that has allowed it to access Japanese goods without going through cumbersome processes.

Following the decision, all items except for food and lumber could potentially come under the scope of a Japanese government review when they are exported.

The move follows a decision by Japan on July 4 to tighten controls on exports for three chemicals used in the production of semiconductor products. The move has sparked fears in South Korea that the country's semiconductor makers such as Samsung Electronics and SK Hynix would run out of chemical stockpiles and no longer able to make those products.

Hiroshige Seko, Japan's minister of economy, trade and industry, on Friday announced the government's decision. "It is not a so-called export ban," he said. Companies "can export if [they] manage and go through the procedures properly."

Seko also stressed that South Korea's removal from the white list will only put it on par with other Asian economies such as Taiwan, and should not cause any major problems for South Korean production.

In response, South Korea's government said it will remove Japan from its own list of preferential trade partners as a countermeasure. Japan and 28 other countries are on South Korea's A-list for strategic materials management.

"We will [begin the] process to remove Japan from the A-list soon," said Sung Yun-mo, minister of trade, industry and energy. Sung, who was speaking at a news conference, said the ministry will announce a detailed plan next week.

Japan's Minister of Economy, Trade and Industry Hiroshige Seko speaks to reporters at a press conference on Aug. 2 in Tokyo. (Photo by Taro Yokosawa)

South Korean President Moon Jae-in, in a televised speech on Friday, said, "We will respond firmly to Japan's unfair economic retaliation." Moon stressed that South Korea has "options to counteract" Japan if it "tries to damage our country."

"We will never lose to Japan again. We can beat Japan," he added. Moon spoke at the start of an emergency cabinet meeting to discuss the issue.

The foreign ministers of Japan and South Korea carried on the quarrel in Bangkok, where a regional forum on security is being held by the Association of Southeast Asian Nations.

"We are gravely concerned by [Japan's] decision," South Korean Foreign Minister Kang Kyung-wha said in an opening speech at the ASEAN Plus Three meeting. "Nonetheless, let us not be deterred in our collective efforts to expand free, fair and nondiscriminatory [trade] in the region."

Japanese Foreign Minister Taro Kono, who spoke after Kang, said he has not heard any complaints from ASEAN nations, which are not included on the white list, about Japan's export management measures. "I don't know what is the source of the complaint by Foreign Minister Kang," he said.

The two ministers met in a bilateral meeting on Thursday but failed to converge on conflicting issues.

The breakdown in relations was sparked by last year's decisions by the South Korean Supreme Court to award reparations to the country's wartime laborers at Japanese companies during Japanese occupation. The court decisions challenged the understanding that all such claims were already settled "completely and finally" under a 1965 treaty that established diplomatic relations between the two countries.

Tokyo is asking Seoul to abide by the 1965 agreement and has asked for third-party mediation, fearing that the court ruling would open the floodgates for other victims to seek compensation from these and other Japanese companies. Seoul has so far declined to submit to such mediation.

Japan's trade curbs have been met with an anti-Japan movement in South Korea, where shops and consumers have organized campaigns to boycott Japanese products and services, including trips to Japan.

Semiconductors produced in South Korea are used in Chinese- and Japanese-branded smartphones, while displays are used in Apple iPhones and TV sets of various brands. Samsung itself runs assembly operations in countries like Vietnam. New export controls are can be applied to items exported to factories run by South Korean companies in Southeast Asia, China and other parts of Asia.

Any disruption to the production of chips and displays could have far-reaching implications, analysts say.

"The decision ... could weigh on the market and lead to a quick escalation in bilateral tensions," economists at Goldman Sachs said in a report.

The report also noted that uncertainties over supplies from Japan "could weigh somewhat on private investment in Korea in coming years, given that it might not be feasible to develop local substitutes or diversify supply chains meaningfully in the short term."

Fitch Solutions analyst Andrew Kitson called the supply shock "a wake-up call" for South Korean manufacturers. He predicts that South Korea will try to diversify its supply base to reduce its dependence on Japan and vulnerability to potential supply disruptions.

But "it's going to be a costly process," he added. "It can take a long time to develop. ... For the next decade, they will be still dependent on the same traditional suppliers."

Japan's trade ministry on Friday also announced it will change the classification of countries in its export-management system. At present, countries and regions are classified as either white list countries or nonwhite list countries, with those on the white list receiving certain benefits. The new classification system will put white list counties in group A and the others in groups B, C or D.

The ministry says this is because countries not on the white list will be subject to different procedures, depending on their status.

Nikkei staff writer Cliff Venzon in Bangkok contributed to this article.

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