South Korea downgraded trade relations with Japan on Wednesday and dropped it from the list of preferred partners that receive fast-track approvals in retaliation against Tokyo’s decision last month to remove Seoul from its own preferential list of trusted trade partners.
If continued for a long time, the conflict could have a big impact “because it might disrupt (the) global value chain — especially in high technology sector,” Heenam Choi, chairman and CEO at the Korea Investment Corporation, told CNBC’s Amanda Drury at the Singapore Summit.
The high tech products that both countries buy from each other include electronic equipment, parts like integrated circuits and various materials used to produce computers, smartphones and cars and represent a significant part of the global high-value product chain.
Tensions between the longtime rivals intensified in July when Japan announced stricter restrictions on exports of three crucial high-tech materials used by South Korean tech companies, leading Seoul to launch a complaint with the World Trade Organization. There is no official reasoning behind Japan’s actions against South Korea, however, media reports have suggested Tokyo’s decisions could be in retaliation against their ongoing dispute over forced labour during World War II. Amid calls to boycott Japan, sales of Japanese products in South Korea — from cars to clothes to beer — have plummeted. South Korean local media also reported that lawmakers have proposed a bill to revise the Korea Investment Corporation Act to stop the sovereign wealth fund from investing in Japanese companies involved in wartime slave labour.
Choi, however, stressed that a bigger note of concern for the sovereign wealth fund is the trade war between the United States and China. Choi told CNBC that while it may not be easy for both the US and China to reach an immediate consensus in the trade war, there is a “strong incentive” for them to reach some sort of agreement, or the war is very likely to end in a “lose-lose” situation.
“They are going to make (a) compromise in some areas. On trade tension, even though it looks ugly, but I’m already a bit optimistic about that.”
In contrast, Choi said the outlook for some kind of resolution between Japan and South Korea appeared less certain as the dispute has only just begun. Both countries play a “very important role in (the) global supply chain,” and neither of them wants to disrupt that, Choi explained.
