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(EDITORIAL from Korea Times on Aug. 26)

Economy 07:00 August 26, 2019

Minimize economic fallout
Contingency plan needed to avoid any crisis

The escalating Seoul-Tokyo standoff over historical and trade issues is expected to cast a darker cloud over the Korean economy. Pessimism is growing as the conflict is spreading to security matters. On Thursday, the Moon Jae-in administration decided to terminate a military intelligence-sharing pact with Japan. This decision was part of Seoul's countermeasures against Tokyo's expanding export restrictions on industrial materials and parts crucial for South Korean companies.

On top of that, the Korean armed forces launched a two-day military exercise Sunday to defend the easternmost islets of Dokdo. This drill is likely to further aggravate bilateral ties which have already plunged to the worst level since the countries normalized diplomatic relations in 1965. Dokdo has long been a thorny issue between the Asian neighbors because Japan continues to make territorial claims over the volcanic islets.

The Moon government decided to scrap the General Security of Military Information Agreement with Japan because Tokyo has refused to accept Seoul's offer for dialogue to resolve the problem diplomatically. The move may risk undermining security cooperation with Japan in dealing with North Korean military threats. It could also weaken the alliance with the U.S. The Trump administration expressed strong concerns and disappointment because the agreement is part of its efforts to push for a trilateral security alliance with its Asian allies.

It is against this backdrop that Japan is highly likely to take additional retaliation against South Korea. Hiroshige Seko, Japanese trade minister, said his government would solemnly implement its decision to remove Korea from a list of favored trade partners Aug. 28 as scheduled. The removal follows Tokyo's July 4 measures to tighten control on the export of three high-tech materials needed for Korean firms to produce semiconductors and display panels.

Industrial watchers predict that the Shinzo Abe administration may increase the number of sensitive items subject to export curbs, or apply complex and cumbersome customs procedure for exports to Korea that can be diverted to military use. Other retaliatory measures may include higher tariffs on Korean goods, tighter rules on remittances and strengthened standards for visa issuance for Korean visitors.

There is no doubt that Seoul would take tit-for-tat measures if Tokyo retaliates further. No one can rule out the possibility of both sides heading for an all-out trade war. That is why the Moon government should pull out all the stops to minimize the fallout of the trade row on the economy. The Seoul financial markets have shown volatility since July when Japan began to take economic retaliation against the South Korean Supreme Court's rulings ordering Japanese firms to compensate Korean victims of forced labor during World War II.

The trade spat with Japan is increasing uncertainties over the Korean economy, which has already been hit by negative external factors such as the U.S-China trade war, Brexit and a global economic downturn. The country's exports have been on a downward march for eight months in a row since December. The export-driven economy continues to suffer from sluggish production and facility investment.

Under these dire circumstances, the Moon government should work out a contingency plan to cope with any unpredictable consequences. It must mobilize all possible means available to prevent any potential economic crisis down the road. It is also imperative to make every effort to find a diplomatic solution to the confrontation with Japan.

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