Well, well, well. What have we here? Another week, another trade war. This time around a row between Japan and South Korea escalated on Saturday, with contested accounts of a frosty meeting the day before that had failed to make progress on a dispute that could threaten global supplies of microchips and smartphone displays. Surprisingly, the two seem to have every reason to cooperate. Yet here we are.
Cue Japan and South Korea. The two countries have slipped into their own trade war over the past few weeks, a conflict that now threatens the foundations of Japan’s supplier industry, Samsung Electronics, and global smartphone and computer shipments.
But why a trade conflict? If the U.S./China trade war emanates from the dark recesses of President Trump’s brain, then this new trade war emanates from the dark chapters of Japan and South Korea’s collective and sad history.
One of the saddest of those chapters is the plight of Korean comfort women — women who were forced into sexual slavery by wartime Japan in the 1930s and 1940s to service soldiers throughout the Japanese empire. Given the dates of those atrocities, many of those women are now reaching the late stages of their lives, as are men who were impressed into wartime labor in Japanese factories to fight the Allies.
Late last year, Korea’s highest court ordered Mitsubishi to pay essentially reparations for the company’s use of slave labor throughout the Japanese occupation and World War II, a decision that mirrored the court’s earlier judgment against Nippon Steel & Sumitomo Metal a few weeks before.
As the Korean court system has attempted to claw back those reparations from Japanese companies, Japan has not sat still. The country’s prime minister Shinzo Abe and his government have responded by placing a broad trade embargo on South Korea of high-technology goods under “national security” grounds, arguing that Seoul has failed to find a path forward to mend the fences between the two countries.
This past week, the two countries met to try to resolve the tensions, but failed to agree on a solution. That leaves the export bans in place, jeopardizing the supply chains for many electronics products.
Take Samsung Electronics for instance. The Korean company is the number one manufacturer of memory DRAM chips, accounting for more than 40% of the nearly $100 billion market, and also the number one manufacturer of NAND flash chips, with 35% share. SK Hynix — another Korean company — was the second largest manufacturer of DRAM chips with a roughly 31% share. Samsung and other Korean manufacturers are also market leading in industries like semiconductors and LCD displays.
Korea’s electronics companies have deep supply chains in Japan, which produce everything from photoresist chemicals and materials for semiconductors to the actual manufacturing equipment and parts required to operate factories. Thus, Japan’s trade embargo was expected to compromise two of Korea’s leading manufacturers, a punch to Korea’s fragile economy and a wake-up call for President Moon to reach a compromise with Prime Minister Abe.
Except, as often happens in the wacky world of trade, the export ban had unexpectedly positive consequences.
An anticipated glut of DRAM memory chips this year had pushed prices to new lows, slashing profits at Samsung Electronics in the company’s worst drop in four years. The company’s stock has been battered: from August last year until January, the company lost a third of its value.
And then Japan interceded. Supplies of DRAM chips are suddenly dropping — and prices are rising in turn. As the Wall Street Journal noted Thursday, Japan’s curbs are actually shoring up the memory chip market and leading to better than expected results for Samsung and other Korean manufacturers. While it has had a topsy-turvy few weeks, the stock price for Samsung Electronics is now almost back to where it was this time last year.
In other words, Japan’s punch was more like a stimulus. Whoops.
Such short-term gains may be amusing for trade policy watchers, but any returns are likely to be short-lived of course. And the news is much worse for semiconductors. As the Nikkei Asian Review noted this week, “Any disruption in the supply of EUV photoresist — a coating product used in the extreme ultraviolet lithography vital to the most complex semiconductors — could set back Samsung’s plans to launch its 7-nanometer chips around the turn of the year.” The company has stockpiled some materials, but if the trade war extends from weeks to months, it will eventually have to succumb from the damage to its supply chain.
All of which is to say that what started as a trade spat might boil over into shrinking quantities of memory chips, displays, and next-generation semiconductors — in other words, pretty much everything you need to build a computer or smartphone today.
There are a couple of lessons for the tech industry here. First, while Silicon Valley and other tech regions enjoy a mostly a historical outlook, the antecedents of the world are always brimming just beneath the surface. The comfort women situation may seem tangential to the day-to-day challenges of building a hardware product, but politics — particularly visceral, human politics — has a way of interceding far from its remit.
Second, even in a globalized world where national politicians lust for economic growth (and certainly Prime Minister Abe and President Moon are heavily invested in growing their respective economies), networked and cross-border supply chains are increasingly fragile. Just as Huawei discovered the dangers of relying on American technology over the past year, now Korean companies are learning about the dangers of depending on Japan’s high technology industry for critical components.
