Japan-South Korea dispute has been six months: South Korea is not easy to find alternative raw materials

In the six months since the dispute broke out between Japan and South Korea, three chemical raw materials vital to the global smartphone and semiconductor supply chains are becoming the main weapon in the diplomatic tussle between Japan and South Korea. South Korea is reducing its economic impact by developing alternative raw materials, negotiating with German suppliers and reducing overall reliance on trade.

In July, the Japanese government in Tokyo began requiring Japanese companies to apply for permits when exporting fluoromethamphetamine, photoresist and high-purity hydrogen fluoride to South Korean customers, a process that could take 90 days or more. The three chemicals are the basic chemical raw materials for the production of memory chips, televisions and other displays, which are the backbone of South Korea’s $1.6 trillion export-oriented economy. The three chemicals are found not only in Apple’s iPhones and Dell laptops, but also in a variety of Samsung electronicdevices.

In the weeks that followed, the Japanese government also removed South Korea from the so-called white list. Access to the whitelist would give Japan preferential treatment for the export of sensitive chemical materials, which are both for military and civilian use. “Once you’re on the road to using trade policy to increase its geopolitical influence, it sets a precedent,” said Shaun Roache, chief Asia-Pacific economist at Standard and Poor’s Global Ratings. This can cause considerable damage to trust across the supply chain. ”

The conflict between Japan and South Korea dates back to the 1965 Basic Treaty between Japan and South Korea. Under the terms of the treaty, unequal treaties concluded between Japan and South Korea, such as the 1910 Japan-South Korea Merger Treaty, were all invalidated, and South Korea effectively abandoned its claim for compensation from Japan. Over the past decade, South Korean courts have ruled in several cases that Japanese companies must compensate South Korean workers who were forced to work during that time. Six months after a South Korean court approved the seizure of a Japanese steelmaker’s assets in South Korea and threatened to set a precedent, Japan began a move to restrict the export of three chemical materials.

Japan-South Korea dispute has been six months: South Korea is not easy to find alternative raw materials

Photoresist for microchip and circuit board-like production

Fluorolyamine, photoresistand, and high-purity hydrogen fluoride represent only a small fraction of Japan’s $55 billion annual exports to South Korea, but they are an integral part of the consumer electronics industry. Fluoropolymidamine is a plastic film that can be used as the bottom screen for mobile phones and other devices. Japan provides 90 per cent of this material, according to Display Supply Chain Consultant, a market research firm. Samsung Display is the main buyer and a subsidiary of one of South Korea’s largest conglomerates.

Japanese producers and some German companies are leading the world’s production of high-purity hydrogen fluoride, according to estimates by Societe Generale. This is a pure gas used to etch circuits on silicon wafers, and Japan supplies about 44% of the demand for Korean manufacturers. Helix buys Japanese-made hydrogen fluoride for its plant in South Korea.

Japan also produces 90% of the world’s supply of photoresist. If Japan cuts off exports to South Korea altogether, Samsung Electronics will be in trouble.

South Korea’s export-focused development model has been a huge success since the 1960s, helping South Koreans move from poverty to prosperity. But the Japanese government is exploiting one of its weaknesses: South Korea’s annual exports are equivalent to 40 per cent of gross domestic product.

Japan has refused to characterize its actions as retaliation, and the two governments have recently tried to bridge their differences. Even so, South Korean companies are struggling to develop alternative raw materials imported from Japan. Samsung is testing materials from different local suppliers, said a person familiar with the matter, who asked not to be named.

“Things get easier when you don’t buy in large quantities. “South Korean start-up Main Info is developing a navigation system using holographic technology. Park Yi-hyun, the company’s chief executive, said it was in talks with a German supplier of photoresist because the purchase application in Japan had not been approved.

But another person familiar with the matter said it was difficult to find high-quality, competitively priced alternatives to Japanese materials for South Korea’s technology industry. South Korea’s trade deficit with Japan reached $22.4 billion last year in the production of materials, components and equipment needed to produce goods such as semiconductors and displays, the country’s finance ministry said in a statement. The statement called it “a structural vulnerability that threatens national security and manufacturing competitiveness.” ”

South Korean President Moon Jae-in has moved to address the issue by putting an unspecified amount of his own money into a multimillion-dollar government fund set up in August to invest in South Korean suppliers. The South Korean government plans to invest $1.8 billion by 2020 to deepen its domestic supply chain. At the same time, the Presidential Advisory Council is working on a broader plan that could include easing labor and environmental restrictions. Shares of several South Korean semiconductor suppliers rose sharply in the face of market expectations.

A bigger question is whether South Korea can reduce its overall dependence on trade. South Korea’s government has laid out a bold plan to boost domestic demand by raising the minimum wage. After an 16% increase in 2018, it grew by another 11% in 2019. Even so, growth in private consumption has not been enough to offset the drag of slowing investment and exports. Bloomberg Economics estimates that Gross domestic product will grow by 1.9 per cent in 2019, largely due to increased government spending and interest rate cuts. “The key structural challenge for South Korea is to rethink its economic structure, ” says Mr Roach of Standard and Poor’s. “

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