South Korea Taps US Trade Deal to Prevent Chip Spats with Japan

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(Bloomberg) — South Korea is seeking to play a bigger role in a U.S.-led trade pact in Asia, aiming to stem the risk of a dispute with Japan that has rattled global semiconductor supply chains.

In 2019, South Korea’s semiconductor production came under pressure when it became the target of Japanese export controls on chip-making materials such as photoresists. While the dispute has been resolved since last year’s summit between the two countries, the threat of fresh unrest remains in a region fraught with political and historical tensions.

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Now, with South Korea taking the lead on the so-called Indo-Pacific Economic Framework’s supply chain crisis response network, and Japan elected as co-chair this month, Seoul says any critical supply chain adjustments will be made through peer reviews by all 14 Indo-Pacific Economic Framework member states and not unilaterally.

“This will reduce the chances of trade frictions between South Korea and Japan as we have seen in the past. It will also enhance the stability of relations between the two countries,” Sim Jin-soo, director general of the new trade strategy and policy, said in an interview last week.

The agreement requires each member to reduce unnecessary restrictions that create barriers to supply chains. If Japan were to impose export controls unilaterally, it would violate the agreement, Sim said.

Although the agreement does not fully guarantee a future free of trade disputes, it is supposed to make it more difficult for the two countries to impose trade restrictions on each other.

For the United States, leadership roles by South Korea and Japan could help advance its agenda of fostering cooperative relations between its two biggest Asian allies, whose relations have sometimes been strained by disputes over Japan’s 1910-45 colonial rule of the Korean Peninsula.

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The crisis response network supports the supply chain agreement reached last year at the Forum for International Economic Cooperation. As chair, South Korea will have the right to call a meeting of member states within about two weeks of any supply chain emergency to coordinate a joint response.

In September, South Korea plans to hold mock drills involving member states with a focus on urea, a key input for diesel trucks that the country struggled to secure from China in 2021, Sim said. Semiconductors and battery-related materials are other potential items for joint simulations as the CRN takes shape, he added.

The simulations will allow South Korea to formulate contingency plans that will enable members to issue early warnings to each other, speed up customs clearance and provide alternative transportation routes, among other things, he added.

The international investment forum was part of efforts led by US President Joe Biden to counter China’s economic influence in Asia. Participating countries include India, Vietnam, Indonesia, Malaysia, the Philippines, Singapore, Thailand and New Zealand, which together account for about 40% of global economic output.

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South Korea relies heavily on trade for its economic growth, and finds itself sandwiched between the world’s two largest economies as Washington and Beijing compete for global influence. Seoul’s rise to the IPEF’s leadership of supply chains provides it with an opportunity to amplify its voice in an increasingly divided world of trade.

The supply chain component of the IPEF aims to avoid the kind of bottlenecks that occurred during the COVID-19 pandemic while two other pillars focus on the transition to renewable energy and a fair economy in relation to tax and corruption issues.

Meanwhile, members have yet to reach agreement on the final trade pillar on more complex issues such as digital trade rules and labor, and uncertainty about further progress remains after Republican presidential candidate Donald Trump vowed to end the IPEF if he returns to the White House.

Sim said South Korea will continue to support efforts to strengthen and stabilize supply chains regardless of the outcome of the U.S. election as the first chair of the Central Contact Group.

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