Japan-Korea Trade Tensions Improving; Little Hope for Removal of Section 232 Tariffs: Panelists

A Japanese and a Korean economist said that trade tensions between their two countries are no longer really disrupting Korea's semiconductor industry, though they are still increasing costs for some of the Japanese exporters.

Korea Development Institute and Johns Hopkins University Professor Wonhyuk Lim said that "Japan weaponized export restrictions on semiconductor materials" because the government was angry that the South Korean Supreme Court ruled that Japanese corporations needed to pay people who had been forced laborers during World War II. "Korea tried to seek other partners like Dupont," Lim said during a webinar on U.S.-Japan-Korean economic relations June 3. Asia Society Policy Institute Vice President Wendy Cutler was also a panelist in the discussion.

Shujiro Urata, an Association of Southeast Asian Nations senior research adviser, agreed with Lim's assessment, but said Japanese exporters have adjusted. "Daikin increased their production in Korea," he said. "And also some Japanese companies are importing materials from their plants in Europe." But Urata said that means extra costs to sell to Korea. "This disrupted supply chains for a month or two, but now it’s coming back," he said.

Urata noted that Japan and Korea are asking for a World Trade Organization panel to decide who was wrong in the dispute. Cutler added, "This dispute settlement case in the WTO, this could be settled in a very short time between the two parties if the political will was there."

Moderator Tom Byrne, Korea Society president, asked Cutler why the Section 301 tariffs on China are still in place when President Joe Biden has reversed so many other Trump policies since taking office.

"I think it’s obvious," she said. "I think there is an overwhelming public sentiment in the United States that China is an unfair trading partner," and so, even if the tariffs hurt U.S. interests, the politics support them because of anger toward China.

Cutler said she would love to see the tariffs lifted, and thinks it's possible the two countries could agree to a reciprocal partial rollback, either by reducing tariff rates on some goods or by removing some tariff lines from the trade war.

"I think they’ll be under a lot of congressional scrutiny to show what they’ve gotten in return for lifting any tariffs," Cutler said, referring to the Biden administration. "It is so much easier to impose tariffs than to lift them. There’s a lesson to be learned here. It’s not just the China tariffs. Look at the steel and aluminum tariffs as well." She said those tariffs hurt many American businesses, including the auto industry.

"Once you put the tariffs on and you build up a constituency that’s benefiting from them … it becomes very difficult to lift tariffs," she said.

The moderator asked all the panelists what their respective countries' trade priorities are. Cutler said the new administration's goals aren't entirely clear, but her take is: "Our trade policy is no longer really centered around opening other markets." Still, she said, there is some trade policy the Biden administration could pursue, either in increasing resiliency of supply chains or supporting climate policy.

Lim said Korea is not inclined to negotiate new agreements, and he recommends that it also focus on supply chain security. Urata said that partly because of the COVID-19 pandemic, Japanese leaders "realized it’s very important for Japan to reduce its trade dependence on China." He said that there are some incentives for Japanese companies to diversify their production outside of China, either by bringing it back to Japan or by opening factories in other countries, such as Vietnam. Japan and Vietnam are both members of the Trans-Pacific Partnership free trade agreement.

Urata said Japan would like Korea to join the TPP. It is not interested in opening talks to expand the mini-deal with the U.S. into a broader bilateral trade deal, he said.

Cutler said she questions the utility of a bilateral deal, since there aren't a lot of irritants between the U.S. and Japan, and she thinks cooperating in the World Trade Organization or on other multilateral initiatives would be a better use of the trade ministry and the Office of the U.S. Trade Representative's time. Cutler was a professional for decades at USTR.

Urata said that Japan most wants lower tariffs in the auto and light truck sectors in the U.S., and that does not seem to be on the table in a bilateral deal. Also, Japan does not want to open up its services sector to the degree that the U.S. would ask for. So, he said, Japan is more interested in the U.S. rejoining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership than a full bilateral deal.

Lim said Korea is intrigued by China's interest in joining the CPTPP. "Is China joining the CPTPP sort of a third rail [for the U.S.]? Or is it a positive development if China is willing to accept and abide by the stringent rules?" he asked.

Cutler responded, "Look, with respect to China and the CPTPP, we all need to be honest. China is moving more and more toward more state involvement" in the economy, both with private companies and state-owned enterprises. At the WTO, she said, China has not been open to strengthening rules on subsidies or transparency, which are both core planks of the TPP. And, she said, China has been hitting Australian imports into China despite those two countries' free trade agreement (see 2103260029).

To the extent that China is serious about joining the CPTPP, she said, "It’s not because China wants to reform." She added, "I would hope that other CPTPP countries keep their eyes open here."

In response to a question from International Trade Today about whether Korea and Japan see the urgency of confronting Chinese overcapacity in order to get Section 232 tariffs lifted, both Lim and Urata questioned whether the steel industry in the U.S. really believes in competition at all, rather than its stated view that it welcomes competition on a level playing field.

"Korean steel producers are not happy about [Section 232 tariffs], but at the same time, they understand the lobbying power of the steel industry in the United States, and also the upcoming midterm elections in the United States. It would be good if these tariffs could be phased out, but realistically, Korean companies don’t see them being lifted this year," Lim said.

Urata said that steel workers need to shift to more productive activities. "Easy for me to say," he acknowledged, but it's difficult to achieve.

Cutler said that in order to lift the tariffs, the administration will have to show how other countries are coordinating efforts to address the problem of Chinese overcapacity, and she said she would hope that Japan, Korea, Europe and others would unite to pressure China to stop un-economic production of steel or other products.

Lim said that previous U.S. administrations put tariffs on Chinese steel exports, and as a result imports from other countries increased. (This is exactly the steel industry's argument for why global tariffs are needed; they argue that firms in other countries accept cheap raw steel from China and process it and export it to the U.S., essentially profiting from the dumped product.)

Lim said overcapacity from China "could be real," but added, "the problem may have more to do with the competitive position of the U.S. steel industry."