The Japan-South Korea Trade Dispute

Political differences between Japan and the Republic of Korea (ROK) led to a trade dispute starting in July 2019. Each side has imposed trade restrictions on the other, particularly with respect to strategic goods. Strategic goods are items whose trade is restricted on the basis of foreign policy, national security, and international nonproliferation commitments. They include conventional arms, military equipment, and dual-use items – civilian goods and technologies that can be applied to a military end-use, a weapon of mass destruction (WMD), or a WMD delivery system. While the sides have maintained a commitment to cooperation, the dispute could have lasting effects on their bilateral trade in strategic commodities.

Japan Trade Restrictions on South Korea

Japan initiated trade restrictions against South Korea in July 2019. On July 1, the Japanese Ministry of Economy, Trade and Industry (METI) issued the notification “Update of METI’s licensing policies and procedures on exports of controlled items to the Republic of Korea.” It stated that METI would apply “more stringent procedures” over exports of certain goods and technologies to South Korea because “the Japan-ROK relationship of trust… [had] been significantly undermined” and “…certain sensitive items [were] exported to the ROK with inadequate management by companies.”

Beginning on July 4, 2019, Japan exporters no longer would be able to apply for a bulk license (which authorizes multiple exports of less sensitive controlled items) to export the following goods or transfer their related technology to South Korea:

• Hydrogen fluoride (Export Trade Control Order, Attachment List No. 1(3)(1), and Ministerial Ordinance Specifying Goods and Technologies Pursuant to the Provisions of Attachment List No. 1 to the Export Trade Control Order and the Attachment List to the Foreign Exchange Order, Article 2, Paragraph 1, Item 1);

• Fluorinated polyimide (Export Trade Control Order, Attachment List No. 1(5)(17); Ministerial Ordinance, Article 4, Paragraph 14); and

• Photoresists (Export Trade Control Order, Attachment List No. 1(7)(19); Ministerial Ordinance, Article 6, Paragraph 19).

The items are used in the production of semiconductors and smartphone screens and are of great importance to the South Korean economy.

The July notification stated that exporters would be required to apply for an individual export license (a transaction-based license), the application would be subject to examination by METI, and exporters would be required to submit the application directly to the METI Security Export Licensing Division rather than to a METI regional bureau.

In addition, the notification opened a period of public comment concerning the possible removal of South Korea from the 27-country “white list” found in Appended Table No. 3 of Japan’s Export Trade Control Order. The white list identifies countries that are members of the multilateral export control regimes (MECRs) and considered by the Japanese government to implement effective export controls. The MECRs, which consist of many of the world’s major producers of strategic goods, formulate common control lists and guidelines for evaluating trade in military and dual-use commodities. Japan exporters can export less sensitive controlled items to the white-list countries under a general bulk license.

On August 2, 2019, the Cabinet of Japan issued a decree amending the Export Trade Control Order to remove the ROK from the white list. This would make South Korea ineligible to receive controlled goods or technologies from Japan under a general bulk license. Furthermore, exports and technology transfers from Japan to South Korea would be subject to Japan’s “catch-all” controls, meaning that persons may be required to obtain an export license for a non-listed item under conditions related to a WMD or military end-use.

At the same time, exports and technology transfers from Japan to the ROK (except for hydrogen fluoride, fluorinated polyimide, and photoresists) are eligible for a special bulk license, which enables exports of specific items repeatedly to a particular customer. An applicant must have a METI-validated internal compliance program and meet other requirements in order to obtain a special bulk license.

METI announced on August 2 that it would use a new categorization scheme to refer to countries based on their eligibility for general and special bulk licenses and to reflect South Korea’s new licensing status. The categories are:

• Group A: Countries and regions listed in Appended Table III of the Export Trade Control Order;

• Group B: Countries and regions participating in the MECRs and satisfying certain conditions, excluding those in Group A (now housing South Korea);

• Group C: Countries and regions not falling within Groups A, B, or D; and

• Group D: Countries and regions listed in the Appended Table III-2 or Appended Table IV of the Export Trade Control Order.

The removal of South Korea from the white list and Group B designation went into force on August 28, 2019.

ROK Trade Restrictions on Japan

In response to Japan’s export control changes, the ROK announced its intent in August 2019 to remove Japan from its 29-country white list in September. Countries on the Korean white list benefit from relaxed export controls, such as simplified reviews for exports of strategic items.

To make this change, the ROK amended its Public Notice on Trade of Strategic Items. In this public notice, the Ministry of Trade, Industry and Energy (MOTIE) divides final destination countries for strategic exports into regions A and B. The countries in each region are subject to different types of export controls. Countries in region A are members of the principal MECRs – the Nuclear Suppliers Group (NSG), Australia Group (AG), Wassenaar Arrangement (WA), and Missile Technology Control Regime (MTCR). Region B consists of all countries not in region A.

Region A serves as the ROK’s white list. Exports of strategic items from South Korea to region A countries are eligible for government-issued comprehensive (bulk) licenses, as opposed to individual export licenses. Comprehensive licenses allow multiple exports of specified items to a specified end-user in a destination country. The license holder must have a validated internal compliance program. Comprehensive licenses are valid for two to three years. Exporters of strategic items to region A countries are exempted from submitting certain documentation, such as an end-user statement and an exporter’s pledge (oath).

By contrast, exporters of strategic items to region B countries must obtain individual export licenses with shorter validity periods, provide the ROK licensing agency with more documentation, and undergo longer application review periods by the licensing agency. Exports to region B countries also are subject to more stringent catch-all controls.

On September 18, 2019, the ROK amended the Public Notice on Trade of Strategic Items to create a new category exclusively for Japan. It is referred to as region A-2. This category is designated for countries that abide by the MECRs but whose national export control systems the Korean government believes to be in violation of international export control principles. In general, the ROK will apply the same types of export controls to region A-2 countries as it currently applies to region B countries. However, the ROK will grant fast-track approval processes (5 as opposed to 15 days) to South Korean companies that export to Japan under long-term agreements. Over 1,700 strategic items exported to Japan will be impacted by this amendment.

Other Developments and Prospects for Resolution

In addition to removing Japan from its white list on September 18, the ROK and its citizens are taking other retaliatory action.

• Effective August 8, 2019, South Korea’s Ministry of Environment (ME) implemented enhanced inspections on imports of Japanese coal ash.

• The Korean government will begin conducting heightened environmental, health, and safety inspections of waste imports from Japan. ME will strengthen and increase the number of radioactive and heavy metals tests to ensure imports of Japanese batteries, tires, and plastic waste are free from contamination.

• On August 22, 2019, the ROK announced its decision not to renew the General Security of Military Information Agreement (GSOMIA), which will expire on November 24, 2019. The GSOMIA is a bilateral security agreement under which Japan and the ROK exchange information on North Korea’s missile and nuclear activities.

• Beginning August 23, 2019, the Ministry of Food and Drug Safety (MFDS) implemented enhanced inspections on imports of 17 food items from Japan known to have traces of radiation as a result of the 2011 Fukushima nuclear accident. MFDS is doubling the number of inspections and inspecting the items more thoroughly.

• The ROK is expected to strengthen control over seafood imports from Fukushima and the surrounding region by reducing the country’s current import quota of seafood and agricultural and fishery products.

• Many South Korean citizens have engaged in a boycott of Japanese goods and services.

The ROK also is mulling the application of export controls to DRAM (dynamic random-access memory) chips going to Japan. South Korea has approximately 73 percent of the DRAM market share, and many Japanese companies import DRAM chips from South Korea to use in smartphones, personal computers, and servers.

Although no decisive action has been taken to resolve Japan and South Korea’s ongoing dispute, both governments have acknowledged the importance of maintaining a dialogue. At the August 2019 trilateral summit in Beijing among Chinese, Japanese, and South Korean leaders, Japan and the ROK restored diplomatic dialogue and pledged to cooperate on supporting free trade.

Despite this development, the ROK is investing in and cooperating with domestic industry to reduce South Korea’s reliance on Japan. The ROK is working to diversify its import sources of key components, equipment, and materials, expand local manufacturing facilities to strengthen international competitiveness, relax certain domestic regulations that impact industry, and develop alternative technology.

SECURUS monitors legal and regulatory developments in order to keep clients informed of how changes in countries’ trade controls can affect them.

Authors: Amy Elise Brister, Amy.Brister@SECURUSTrade.com, Emily Holub, Emily.Holub@SECURUSTrade.com, and Richard Glen Young, Richard.Young@SECURUSTrade.com, September 23, 2019