Tension between Japan and South Korea is rising, and it looks set to drag down trade

Tensions between Tokyo and Seoul intensified on Friday when Japan’s prime minister imposed new restrictions on exports that could hit South Korea’s tech industry. In response, some Koreans called for a boycott on Japanese goods.

As the United States and China, the world’s two largest economies, continue hashing out their wide-ranging tariff battle. Two of Asia’s major economic players appear to be nearing their own trade war over political disputes.

“The two governments will engage in a tit-for-tat exchange of retaliatory measures for at least the several months that further sours bilateral relations,” Scott Seaman, director for Asia at political consultancy Eurasia Group, said in a Sunday note.

The latest escalation seems in part to have been caused by Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in failing to make progress on outstanding disagreements at last month’s G-20 summit.

According to Seaman, Abe  “appears to have been particularly irked” by the failure to resolve “differences over the handling of recent South Korean court rulings awarding damages to Koreans claiming to have been forced to work for Japanese firms during World War II.”

Last Monday, Japan’s Ministry of Economy, Trade, and Industry issued a statement that Tokyo “will apply updated licensing policies and procedures on the export and transfer of controlled items and their relevant technologies to (South Korea).”

“Through careful consideration among the relevant ministries in Japan, the Government of Japan cannot help but state that the Japan-(South Korea) relationship of trust including in the field of export control and regulation has been significantly undermined,” the statement said.

Additionally, Tokyo removed South Korea from the list of “white countries” — countries that Japan deems to have trustworthy export control systems.

The recent tensions between the two countries stem from more than six decades of resentment from South Korea toward Japan. During the Japanese occupation of the Korean Peninsula from 1910 to 1945, many Korean women were forced into sex work in military brothels. The term “comfort women” has often been used by Japan as a euphemism for all the women forced into sex work in the region during WWII.

Japan apologized to the women as part of a 2015 deal and provided a 1 billion yen, approximately $9.4 million, fund to help them.

But advocacy groups for “comfort women” in Korea have criticized the fund, and the South Korean government on Friday dissolved the fund despite Japan’s warnings that such action could damage bilateral ties.

Tokyo’s changes to its approach to South Korean trade went into effect on Thursday, and Japanese exporters are now required to apply for licenses for some individual shipments to South Korea. That will include exports of chemicals mostly used for making refrigerants, pharmaceutical intermediates, metals manufacturing, and sometimes semi-conductor preparations.

Seaman wrote that the “change is expected (and arguably intended) to complicate and slow the process of exporting these goods from Japan to South Korea.”

“Bulk licenses can, in principle, cover three years of shipments,” he added. “In contrast, applying for an export license for individual shipments can take 90 days or so to complete, with no guarantee of success, thus creating more uncertainty and potential costs.”