Trade dispute likely to hit Korea harder than Japan, but no winners: S&P Global Ratings

Trade dispute is expected to hit Korea harder than Japan, but, however, there is unlikely to be any winners, according to a Credit FAQ published today by S&P Global Ratings.

The restriction of fine chemical goods exports and the exclusion of South Korea from Japan's "white list" of preferred trading partners have spurred a series of escalations and retaliations between the nations. This is taking place when economies across Asia Pacific are experiencing headwinds from the U.S.-China trade conflict.

"Both countries are surfacing longstanding grievances in the dispute. However it seems like Korea may be at a disadvantage, given its higher dependence on inputs imported from its neighbor," said S&P Global Ratings Asia-Pacific chief economist Shaun Roache in the report titled, "No Winners In Korea-Japan Trade Spat But Korea Has More To Lose".

Korea and Japan trade much more with China and the U.S. than they do with each other. However, these numbers do not tell the important part of the story.

Perhaps the most damaging but hard-to-measure impact could be on the mutual trust in an open, transparent, and market-driven trading relationship. Firms could respond by reducing their reliance on supplies or customers from each country beyond those products targeted by export controls.

Such trade diversion would likely mean higher costs, lower revenues, and a reduced return on capital for companies in both economies. Consumer sentiment may be affected by a souring relationship but, while consumer boycotts grab headlines, the macroeconomic impact may be limited.

Much of the trade between Japan and Korea is in capital goods or intermediate goods that feed into each economy's supply chains. For example, Japanese inputs--such as machinery, refined chemicals, parts, and components--account for between 2 percent and 4 percent of Korea's gross output in industries including electrical equipment and technology hardware.

Japan's share has been declining (while China's has been rising) and, while these numbers do not appear high, in a prolonged trade battle Korean importers may find it hard to switch suppliers.

For many goods that Korea imports from Japan, Japanese exports account for a large share of global trade. Japan also exhibits a strong competitive edge in many of its shipments to Korea, reflecting an advantage over global rivals due to intellectual property or advanced technology, the report added.

Together, these suggest that if Japan restricts its shipments of some capital and intermediate goods, Korean importers may have to pay much higher prices to alternative suppliers. In a worst-case scenario, Korean firms may have to curtail production if alternatives are not found quickly.

"Samsung and SK Hynix heavily rely on Japanese chemical imports to produce semiconductors," said S&P Global Ratings credit analyst JunHong Park. "Although details on dependency or potential production issue are unknown at this point, we believe a prolonged import disruption could hurt Korean memory chipmakers."