(ATTN: RECASTS lead; ADDS more details in paras 3, 6-7)
By Kim Seung-yeon
TOKYO/SEOUL, Aug. 2 (Yonhap) -- Japan approved a proposal to remove South Korea from a list of trusted trading partners Friday in additional economic retaliation over a row surrounding wartime forced labor, dealing yet another heavy blow to their badly frayed relations.
The Cabinet decision, which was widely expected, follows Tokyo's first restriction, imposed on July 4, that applies a tougher approval process for exports to South Korea of three key chemicals used for semiconductor and display production.
Japanese Trade Minister Hiroshige Seko announced at a press briefing that the new measure will take effect Aug. 28 after due procedures, Kyodo News reported.
The row began after South Korea's Supreme Court rulings last year that Japanese firms should compensate forced labor victims. Japan has vehemently protested the decisions, arguing all reparation issues stemming from its 1910-45 colonial rule of Korea were settled under a 1965 accord that normalized bilateral ties.
Japan claims the export curbs are unrelated to the forced labor issue but few believe the claim.
Friday's decision, if put into effect around the end of this month, will strike South Korea off the whitelist of 27 countries, including Argentina, Britain, New Zealand and Australia, granted simplified procedures for purchasing sensitive goods that can be diverted for military use.
South Korea was added to the list in 2004 and is the first country whose preferential status has been revoked.
Under the measure, Japanese exporters will need individual authorization, rather than fast-track approval, for exports of around 1,120 dual-use items to South Korea. It is feared it would cause significant delays and disruptions to imports from Japan.
Although it is not yet clear which items will be most affected by Seoul's removal from the list, analysts speculate that sectors with strong growth potential, including lithium-ion batteries, carbon fiber and engineering equipment, could be the targets of Japan's stringent export controls.
But it could hit Japanese companies too, as they may lose revenue from Korean buyers.
In a last-minute effort to defuse the row, South Korean Foreign Minister Kang Kyung-wha held talks with her Japanese counterpart, Taro Kono, in Bangkok on Thursday on the sidelines of a regional security forum, but the two sides failed to narrow their differences.
After the talks, Kang warned that Seoul could reconsider its participation in a bilateral military intelligence-sharing accord with Japan if Tokyo presses ahead with removing South Korea from the list.
Officials in Seoul have hinted that the country could consider terminating the 2016 General Security of Military Information Agreement aimed at sharing intelligence to better cope with threats from North Korea. The pact is supposed to be renewed automatically every year, but can be terminated if either side informs the other of its intention to end it.
This year's notification deadline is Aug. 24.
South Korea has urged Japan to withdraw its economic retaliatory measures, saying they are unfair and run counter to principles of international trade. Seoul has called for a resolution of the matter through diplomacy rather than a dispute settlement process.
As a solution to the forced labor issue, South Korea proposed in June that companies of the two countries create a joint fund to compensate victims, but Tokyo immediately rejected the offer.
Seoul has sought Washington's help in resolving the row.
The U.S. has reportedly called for its two Asian allies to consider signing a "standstill" agreement to buy time to negotiate a solution. Japan has denied it received such a request from Washington.
On Thursday, a senior U.S. official was quoted by Reuters as saying that the U.S. is concerned about Japan's removal of South Korea from the whitelist, warning that it may bring negative repercussions if it leads to a "downward spiral."
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