Japan on Tuesday turned up its nose at South Korea’s proposal to talk things out to prevent a diplomatic row over past issues spilling over to the economic front and hurting bilateral trade as well as free trade order.

Hiroshige Seko, Japan’s minister of economy, trade and industry, told reporters after a Cabinet meeting on Tuesday that Japan’s export curbs against Korea “are not an issue for negotiation” in formal response to President Moon Jae-in’s call for “sincere” bilateral talks while urging the Japanese government to retract its moves that can hurt not just manufacturers of the two nations but also the global supply chain.

Seko reiterated that the action is to “reassess domestic affairs to adequately enforce export control”, denying retaliatory design.

The minister, however, said the government will sit down for working-level discussions to explain the procedural changes to Seoul counterpart.

Last week, Japan announced its decision to tighten export rules on three materials essential for the production of chips and displays bound for Korea. The enhanced rule – which went into effect as of Thursday – is seen as an economic retaliation against Korea for Supreme Court rulings ordering Japanese companies compensate Korean victims for wartime forced labor.

The Japanese government and companies strongly resist, claiming the 1965 basic treaty has “completely” settled wartime and colonial period damages.

Japan’s export curbs can disrupt the production of chipmakers Samsung Electronics Co. and SK Hynix Inc. who represented a quarter of Korea’s exports last year.

Tokyo’ now requires Japanese companies to seek approval from the government for every shipment to Korea. No supplies were approved since the new rule went into effect last week.

Seko shrugged off the argument from Seoul that the act is in violation with the World Trade Organization (WTO) as Tokyo was simply stop giving Korea a preferential treatment.

On Wednesday, President Moon called for a diplomatic solution so that the embargo does not end up hurting bilateral relationship and production in the two nations to the extent of upsetting global supply chain.

Should Tokyo insist on its ways and cause “real” damages to Korean companies, the Korean government must take up ‘necessary” actions,” he warned without elaborating. He also called for the need for accelerated actions to “correct” chronic trade deficit with Japan in the longer run.

Korea has been in the red in trading with Japan since two normalized ties in 1965 as it heavily relies on technology transfer and parts from Japan because Korea from war ruins modeled industrialization after Japan.

In a separate briefing, Yoshihide Suga, Japan’s chief cabinet secretary, also reiterated that Japan’s latest move is a necessary measure to adequately enforce export management. He also noted the move is not subject to “talks” or “withdrawal.”

Suga also added that Korea’s export control authority has asked Japan for an explanation and that it will respond to it on a working level.

Despite strong rhetoric, the government is short in options and has turned to the private sector to devise immediate to long-term strategy.

Moon said the government will set up a public-private consultative body to formulate actions. He said that what is most important in an unprecedented state of emergency like this is for the government and the business circle to closely communicate and work together. He has rounded up heads of top 30 business groups on Wednesday.

Morgan Stanley, meanwhile, on Tuesday cut outlook for the Korean economic growth to 1.8 percent for this year from its earlier estimate of 2.2 percent, citing additional headwinds on the external front due to trade tensions with Japan. It estimated the economy will further deteriorate to a growth of 1.7 percent next year.

Shawn Kim, the company’s Asian tech analyst, noted that “Korean companies are holding less than three months of inventory for these input materials” and that “if the approval process is going to take three months or even longer, this could pose supply-side constraints or higher input costs for Korean producers and they source from alternative suppliers.”

The three materials subject to approval from the Japanese government for exports are polyimide, resist, and etching gas – all essential materials for chip and flexible display production.

The report said that “Korea is one of those economies in Asia excluding Japan which is most exposed to lingering U.S.-China trade uncertainties given its relatively high trade linkages with China and its export orientation.”

“The nascent export recovery has already stalled and given way to a double-dip in June,” it said.

Korea’s exports fell for the seventh consecutive month in June due to sluggish demand from China and a plunge in outbound shipments of semiconductors. Korea’s exports declined 13.5 percent last month from a year ago, according to the Ministry of Trade, Industry and Energy.

The Morgan Stanley report, in particular, noted that the uncertain pause in “U.S.-China trade tension after the G-20 meeting likely means that export growth will trough lower and later in the fourth quarter of 2019, as extended uncertainty weighs down on global sentiment and spending decisions.”

By Oh Soo-hyun and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]