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South Korea-Japan Trade Agreement Nearer After Summit

Korea Japan trade conflict: The roots lie deep in the past.

Officials from South Korea, Japan, and China reached an agreement to progress a trilateral free-trade deal at December’s economic summit despite tensions in Asia and with the US.

The economic and trade minister’s meeting on December 22, held in Chengdu, China was significant for all three countries but especially so for South Korea and Japan which have not met for over a year. For China and Japan too, the meeting could be a sign of progress towards better relations.

South Korea’s President Moon Jae-in and Japanese Prime Minister Shinzo Abe held talks as part of the group summit with China’s Premier Li Keqiang. The meeting between the two, as per the BBC, continued for 45 minutes instead of the planned 30, a positive sign considering relations between the two countries have been affected recently by trade disagreements and tensions over World War Two compensation.

Recent disagreements stem from decades-old issues

As per reports, President Moon said he hoped that differences could be rectified through dialogue but Prime Minister Abe said it was Seoul’s responsibility to propose measures to resolve bilateral disputes.

In 2018 a court in South Korea ordered a Japanese company to compensate South Koreans who were used as forced labour during World War Two. Japan responded by saying post-war reparation issues had been settled by the 1965 treaty which established diplomatic ties between South Korea and Japan.

Then, in August 2019 Japan revealed it would remove South Korea’s trade partner status and added export controls to the neighbouring country’s electronics sector. Because of the move by Japan, South Korea ended an intelligence pact between the two but in November rescinded the action, appearing to signal more positive relations.

Economic impact, but restrictions are being lifted

A report by Japan Times on November 21, suggested the worst of South Korea’s boycotting of Japanese goods and companies may have passed. However, a number of industries suffered from the boycott that started in late 2018. Flights were cancelled to Japan, the tourist industry was impacted and clothing companies like Uniqlo and Descente saw profits fall.

Japan’s Finance Ministry said in October that beer exports to Japan had dropped 99.9% in September compared to a year earlier, though South Korea is only a small proportion of Japan’s breweries market.

The factory output of both South Korea and Japan also contracted in November. Scott Seaman, Asia director at policy consultancy firm Eurasia Group said, as per CNBC, shortly afterwards that, “the outlook for both economies is not particularly bright, and an even more intense and acrimonious trade fight would certainly not benefit either country.”

Japan’s economic output fall is not being pinned on South Korea’s impact but instead the typhoon disruption, a consumption tax hike, weakness in global demand and also the US-China trade war.

Analysts are divided but goodwill gestures are apparent

Jesper Koll, senior advisor at WisdomTree Investments told CNBC that, “Japan and Korea relations are very much on the mend, both sides are working hard to normalize relations. Despite different views on historical events persist, pragmatism on the economic policy and trade front are poised to prevail.” Other analysts aren’t ruling out a trade agreement but believe tensions could persist into 2020.

South Korean lawmakers submitted a proposal to the country’s parliament regarding the World War Two compensation that if passed could potentially break the stalemate on the issue. The suggested legislation would create a compensation fund for the World War Two workers using donations from both companies and individuals in South Korea and Japan. The proposal, submitted ahead of the December 22 meeting, was sponsored by National Assembly Speaker Moon Hee-sang and 13 others. Moon said he hoped it would be a “turning point for cooling South Korea-Japan relations to focus on the future.” Objections from other lawmakers mean that it is uncertain whether the resolution will be passed.

Also prior to the trade meeting with South Korea, Japan partially lifted restrictions on exports to South Korea of the material used to make microchips.

Can South Korea, Japan and China work together?

During the meeting between South Korea, Japan, and China on December 22, trade ministers agreed to move forward with discussions for a three way, or trilateral, trade deal as well as a Regional Comprehensive Economic Partnership (RCEP). The proposed RCEP also encompasses Australia, India and New Zealand. As per SCMP, Chinese Commerce Minister Zhong Shan said China was willing to work with South Korea and Japan to “oppose unilateralism and protectionism,” and to support a multilateral trade system. Shan said the three countries should “jointly maintain regional peace and stability and promote an open world economy.”

South Korea’s minister Sung Yun-mo and Japan’s trade minister Hiroshi Kajiyama declared at the start of the summit that all three countries should work together to progress the RCEP. However, there is diversion here too as China reportedly hopes for a more regional deal that would not include India which is loathe to lower its trade barriers. Japan would prefer to include India.