| bibo:abstract |
IP2020-02E
Characteristics and Implications of Korea's 'Decoupling' In Response to Japan's Export Restrictions ―‘Decoupling from Japan' vs. 'Decoupling from Japanese Firms'
November 3, 2020
Yang-Hee Kim
Director-General, Dept. of Economy, Trade and Development Studies
Ⅰ. Introduction
More than a year has passed since July, 2019 when Japan imposed tighter export
restrictions against Korea. Despite the Japanese government’s denial, it is an open secret
that the action was Japan's economic retaliatory measure in the context of bilateral
historical disputes.1) Farrell and Newman2) uses the concept of ‘weaponized
interdependence’ to explain how, in today's global networked economy of increased
interdependence, a state which is a central node is able to use economic coercion when
there is power asymmetry between states. In an article published in Washington Post on
August 1, 2019, the authors cited Japan’s export control as an example of 'weaponized
interdependence.'3) On the other hand, Korea's response is regarded as 'decoupling' from
Japan. Thus, the ongoing bilateral trade dispute over the past year can be seen as a
dynamic interaction between Japan's 'weaponized interdependence' and Korea's
'decoupling.'
Immediately following Japan’s export control action, Korea actively proceeded with 'decoupling,' and
reaped unexpected results in a short period of time. But until now, most of the discussion on
this subject has focused on the current state and effectiveness of the decoupling and
did not pay much attention to the background that enabled such short-term results, the
future outlook, or the political and economic implications.
In this context, this paper will first identify the reason Japan chose semiconductor-
related export restrictions among the several candidates for retaliatory
measures, i.e. financial sanctions or suspension of visa issuance for Koreans, which
are measures Japan had mentioned even before the restrictions. Secondly, we will
examine the key characteristics of the background that enabled Korea's decoupling in a
relatively short time in the past year. Thirdly, we will look at the extent of damage
Japan's export restrictions have inflicted on Korea. And finally, we will identify the
political and economic implications of the bilateral trade dispute, and project the future.
Ⅱ. Japan's Export Restrictions - Weaponized Interdependence
Ⅲ. Current State and Characteristics of Korea’s ‘Decoupling’
Ⅳ. Tit-for-Tat, but All in Moderation
Ⅴ. Conclusion
In sum, the above analysis leads to the following conclusions. First, the reason for
Japan's ‘export restrictions on the 3 semiconductor items’ as a retaliatory measure is
found in the characteristics of the semiconductor GSC and the symbolic importance of
semiconductors in the Korean economy. So, did Japan use it as a weapon? At the least,
it was intended as a weapon to block Korea from enforcing the court decision on forced
labor. In this respect, the fact that Korea has not yet executed the court decision seems
to indicate that the weapon was effective to a certain degree. However, it can be said
that the weapon was not wielded in full force. This is because in the semiconductor SC,
the relationship between the two countries is one of interdependence rather than
dependence. Furthermore, weaponizing interdependence is a double-edged sword that
can disrupt the GSC as well as firms on both sides. It is because of this
interdependence that the two countries consistently appeared to be confrontational, but
in reality, conciliations and concessions were made so as to not cross the line.
Second, decoupling has so far demonstrated an intriguing aspect. It is taking place in
two different forms: ‘decoupling from Japan’ and ‘decoupling from Japanese firms.’ In
other words, ‘DfJ ≠ DfJF’ attributed to the fact that both countries are accustomed to
the long-term business relationships in an efficient division of labor where Japan
specializes in its own areas of strength. However, in third countries or in areas where
Korean companies could advance to be on par with Japan, ‘DfJ = DfJF’ occurs. In this
case, decoupling from Japan is occurring in parallel with decoupling from Japanese
firms. In any case, the Japanese government unwillingly turned complementary
relationships between Japanese firms and other countries’ firms into competitive
relationships, or created new competitors in the market. For the Japanese government,
decoupling from Japanese firms was probably more painful than decoupling from Japan.
Third, the common notion that Korea did not suffer much damage despite Japan’s
export restrictions is both correct and incorrect. This is because even within Korea
everyone is differently positioned and has different interests with regard to decoupling.
For the users of Japanese exports, the weaponization of interdependence means
increased uncertainty and the resulting opportunity cost is not small. A temporary rise
in unit prices of imports means that imports are at least possible. There may be cases
when importation itself becomes impossible. For these users, decoupling leads to an
unwelcome situation where they have to replace the optimal supplier with another for
non-economic reasons. On the other hand, it is an opportunity for those competing with
Japan. Therefore, Korea's decoupling from Japan needs to be carefully balanced and
harmonized, because the potential implications and economic rationale will be different
resting on one’s position.
Will the interdependence between Korea and Japan continue on into the future? In
other words, how far can Korea's decoupling go? It will not be easy for Korea to
reduce its dependence on Japan in the field of basic science and capital goods that
require enormous investments. Even if there are short-term monetary gains, unless
Japan is in an overwhelmingly powerful position, the two countries will do their best by
avoiding a chicken game that will be catastrophic for all. That said, once decoupling
occurs, corresponding adjustments will be made in chip design, material, and
equipment. Therefore, even if export restrictions are later lifted, it will be difficult to
revert back to the pre-restriction state due to significant switching costs.
Both Korea's exports and imports with Japan have been on an absolute decline since
their peak in 2011. Afterwards, exports and exports started to increase again after
bottoming out in 2015 and 2016 respectively, but decreased again in 2019. If the tension
between Korea and Japan continues for a long time, interdependence will gradually
diminish as well. Many political scholars, including Farrell and Newman, maintain the view
that interdependence provides the cause for exercising state power in asymmetric
relations. That is not to say that interdependence always provides the condition for states
to abuse power. Coercion is likely to happen when states feel that their asymmetrical
predominance as a hub is threatened. On the other hand, as Van Jackson, a former U.S.
Department of Defense official said that decoupling creates space for conflict, decoupling
might remove the safety pin that kept states away from ultimate confrontation.
In the era of economy-security linkage, Japan reminds us of the harsh reality of an
international order where interdependence can be weaponized against countries
sharing the same values of democracy and market economy. Therefore, governments
and firms in all countries need to be prepared for a new era. In addition, the WTO
complaint Korea filed against Japan revealed the implicit tension between export control
rules and WTO rules. Unless the Korea and Japan find a way to minimize the possibility
of abusing export control programs, uncertainty in trade policies will continue to
increase. One of the market's responses in times of such uncertainty is separating
politics and economics through the strategy of circumventive decoupling, as seen
during the disputes between Korea and Japan. It will be interesting to observe whether
this will happen in the case of U.S.-China disputes as well.
The COVID-19 pandemic is changing the economic order. Instead of the traditional
single-minded focus on efficiency, more emphasis is being placed on robustness and
resilience. Moreover, the intensifying strategic competition between the U.S. and China
has established an ‘economic iron curtain’ in the world economy, to borrow the words of
the former US Treasury Secretary Henry Paulson. There is a risk of global technological
standards and rules splitting into two, and countries being forced to choose one over
the other. At the same time, the key areas of the global production network are more
and more intensifying to North America, Europe and Asia, making regional cooperation
increasingly important. Against the above backdrop, if tensions persists between Korea
and Japan - two neighboring countries that share the values of democracy and market
economy – forward-looking cooperation and solidarity, which both countries desperately
need, will not take place and both countries will have limited strategic options. Conflict
over the past should not hinder future-oriented cooperation. What are needed at this
moment are not confrontation and conflict, but cooperation and dialogue.
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