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Economist warns on larger ripple effect of Japan-South Korea trade war
FILE PHOTO: A police officer stands guard near Japan and South Korea national flags at hotel, where South Korean embassy in Japan is holding the reception to mark the 50th anniversary of normalisation of ties between Seoul and Tokyo, in Tokyo June 22, 2015. REUTERS/Toru Hanai/File Photo

Economist warns on larger ripple effect of Japan-South Korea trade war

An escalation of the trade war between Japan and South Korea will have a greater ripple effect than is priced in the markets, as it could disrupt the technology supply chain starting with China, S&P Global Ratings has warned.

While there may be isolated winners in the stock market, an ongoing dispute will have global implications, boosting production costs for technology components or cutting output, said Shaun Roache, the chief Asia-Pacific economist at S&P Global Ratings.

If Japan stops granting export licenses, South Korea would have to either curtail production or pay a “much higher price” to secure crucial materials, a move that will impact China, he said.

“If anything interferes with this bilateral trade between Japan and Korea, China’s technology supply chain is going to be disrupted,” Roache said in an interview in Tokyo. “Even small disruptions further upstream could have very, very large impacts downstream.”

The best-case scenario is for the dispute to go away completely, but even if it is resolved, Roache sees the potential for long-term trust issues.

“It’s going to be persistent damage to trust between the two countries and trust in the global trading system, which is already what we’re starting to see,” he said. “Trust goes down. And it has a permanent effect on the way firms think about their risks and strategies.”

South Korea may fare worse than Japan.

According to S&P, a continuation of the current “stalemate,” with minimal direct disruptions, would create a moderate downside risk for S&P’s economic growth forecasts of 2 percent and 2.6 percent in 2019 and 2020 for South Korea.

The impact on Japan may be “milder,” although it may exacerbate an expected slowdown in the wake of its consumption tax hike. S&P forecasts growth in Japan of 0.8 percent and 0.1 percent for 2019 and 2020.

South Korea announced its 2020 budget in August, saying that it will spend 2.1 trillion won (¥188.44 billion) to achieve self-reliance in materials and parts. Self-reliance is “inefficient, it’s costly. It’s going to undermine the fundamentals of the firms in those sectors,” Roache said.

South Korea’s exports are poised for a 10th monthly slide as trade disputes and a tech sector downturn weigh on demand.