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Japan-South Korean Tensions Exacerbates Global Trade Conflicts

15 July 2019PoliticsEconomicsEmerging Markets

Japan imposed restrictions on exports of three raw materials crucial to South Korea’s semiconductor and display producers. For the first five months of 2019, South Korea sourced 92% of photoresists, 94% of fluorinated polyimide and 46% of hydrogen fluoride from Japan. This makes it difficult to find alternatives, at least in the near term.

The restrictions, which took effect on July 4, require licensing, rather than an outright ban, and could meaningfully impact the tech supply chain in Asia. Direct victims are Korean makers of handsets, semiconductors, computers and electronics, comprising about 20% of Korea’s total exports. Korea also supplies the wider Asian region with chips.

Near-term, investors should remain cautious on Korean tech names as they have yet to fully price in potential escalation. Alternative suppliers of the restricted materials could benefit, for example, Taiwanese chip makers, especially in memory chips.

Japan-South Korean Tensions Exacerbates Global Trade Conflicts

Past performance is no guarantee of future results, real results may vary.

Sustained restrictions on South Korea could exacerbate supply chain risk for China tech firms: China/HK depend on Korea for 21% of semiconductor imports and 48% of memory chips. Given US-China trade tensions, China is already under pressure for US supply of key tech components. Spillover demand from China may benefit Taiwanese suppliers.

Larger potential economic impact on Korea: While the directly affected products account for a very small part of the Japanese and Korean economies, potential for escalation could affect larger supply chain, other products and tourism. Japan has a consistent trade surplus with Korea ($20bn in 2018). Relative to Japan, the disrupted industries account for a much more significant part of the Korean economy.

Timing for bilateral negotiations has yet to be fixed: but Citi analysts feel a resolution before end-2019 may be possible given the potential negative impact across both countries. Negotiations are more likely to come only after the Japanese upper house elections on July 21, coinciding with US-Japan and US-China negotiations.

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