The Pandemic Depression
The Global Economy Will Never Be the Same
Since late last year, a conflict has been steadily building between two of the United States’ closest Asian allies. Last fall, the South Korean Supreme Court ruled in favor of a dozen plaintiffs seeking compensation from Japanese firms that used forced Korean labor during World War II. Relations between the two countries have been deteriorating ever since. Japan is now poised to remove South Korea from its “white list” of trusted countries for trade in sensitive materials—a decision that would hurt both countries’ economies and disrupt global supply chains in the high-tech sector. South Korea, meanwhile, is threatening to withdraw from an intelligence-sharing agreement with Japan that facilitates security cooperation between these two key U.S. allies.
Seoul and Tokyo have quarreled in the past, but their current feud has serious implications for U.S. interests in Asia. Left unresolved, tension between Japan and South Korea could not only damage the global economy but undermine the Trump administration’s policies toward North Korea and the Indo-Pacific. And yet the White House has shown little interest in mediating the dispute. Continued indifference would be a major mistake. The United States’ strategy in Asia depends on trilateral cooperation with Japan and South Korea. It should make resolving the conflict between its allies a priority.
Japan and South Korea might seem to be unlikely antagonists. The countries are democratic and developed neighbors with deep economic ties, common external threats, and close alliances with the United States. But although Seoul and Tokyo normalized relations in 1965, a stable partnership has remained elusive on account of their dark history. Japan colonized Korea from 1910 to 1945. During World War II, Japan forced Koreans into labor and sexual slavery. South Korea perceives Japan as showing little contrition for these past abuses. Japan, meanwhile, is frustrated with a demand for apologies and reparations that it sees as insatiable.
Although Seoul and Tokyo normalized relations in 1965, a stable partnership has remained elusive.
The current dispute began last fall. The South Korean Supreme Court upheld lower court rulings ordering Japanese firms to pay around $90,000 in damages to each of a dozen people who claimed they had endured forced labor. The court further declared the entire colonial period “illegal.” The Japanese government rejected the rulings. In 1965, the two countries had signed the Treaty on Basic Relations Between Japan and South Korea and an accompanying claims agreement. Under the treaty’s terms, Japan gave South Korea more than $500 million in grants and loans, which in Japan’s view “completely and finally” resolved all compensation questions. As a result, Tokyo urged Japanese firms to ignore the court rulings. Lawyers for the plaintiffs have since asked South Korean courts to seize the Japanese firms’ Korea-based assets. In January, a district court froze the assets of a Japanese steelmaker, but these have yet to be sold off.
The legal dispute came just after South Korean President Moon Jae-in made a controversial decision. Back in 2015, Japan and South Korea had established a joint foundation as part of a bilateral agreement on the issue of “comfort women”—South Korean women forced into sexual slavery by the Japanese military during World War II. Japan contributed $9 million to the foundation, which was supposed to pay compensation to surviving victims and their families. But the agreement was unpopular in South Korea and tainted by its association with Moon’s impeached predecessor, Park Geun-hye. In November 2018, Moon announced his decision to shutter the foundation. The South Korean government reviewed but decided to retain the comfort women agreement earlier in 2018, but by ignoring Japanese calls not to close the foundation it has undermined its credibility with Tokyo, which now fears that any bilateral agreement between the two will not be kept.
Earlier this year, Japan threatened to respond by curtailing visas for South Koreans and raising tariffs on South Korean imports. Then, in July, Japanese Prime Minister Shinzo Abe announced his intention to restrict the export of three chemicals that South Korean companies need in order to produce semiconductors for screens and cell phones. Going a step further, he threatened to remove South Korea from Japan’s white list of countries that face minimum trade restrictions. Tokyo cited national security reasons for the move, but Seoul called it “economic retaliation” for its recent Supreme Court rulings, and on July 19, threatened to pull out of its intelligence-sharing agreement with Japan. In addition, South Korea has vowed to seek out new export partners and reduce its dependence on Japan for high-tech components.
The diplomatic rift has inflamed public sentiment in both countries, making it difficult for either government to back down. Some two-thirds of South Koreans support the burgeoning movement to boycott Japanese products, exchanges, and tourism. More than 80 percent distrust Abe. In Japan, one survey found that 71 percent of Japanese supported Abe’s export restrictions, while only 17 percent opposed them.
Japanese commentators have reported widespread “Korea fatigue”—a feeling that South Korean leaders keep dredging up the past for political gain. Even before this summer’s dispute, one public opinion poll found that roughly half of Japanese respondents harbored negative views toward South Korea. Of that half, nearly 70 percent attributed their negative views to Seoul’s continued criticism of Japan over history.
In the past, the Japanese and South Korean business communities have helped defuse tensions over history or territory. But now South Korean business and political leaders are united in their opposition to Tokyo’s move, and Moon has counseled firms to prepare to do without Japanese components. Abe, meanwhile, has called for national unity in the face of potential economic fallout, such as losses for Japanese exporters. He may get it: Japanese firms fear that the South Korean Supreme Court has opened the floodgates for compensation claims. To date, more than 1,300 plaintiffs have filed nearly 20 lawsuits in South Korean courts against more than 70 Japanese firms, although some of these cases were filed before last fall.
The Japanese–South Korean feud should concern the United States. A trade war between the two countries could hurt the U.S. economy, given the importance of South Korean electronics manufacturers to the global supply chain. But the greater danger is that of normalizing the use of trade policy to resolve unconnected diplomatic disputes. Washington should denounce the export restrictions and boycotts and encourage both sides to compromise on the question of wartime compensation. Unfortunately, U.S. President Donald Trump’s own weaponization of trade policy gives him little credibility in this regard.
The rift between Seoul and Tokyo cannot go unaddressed, however—not least because it undermines the United States’ ability to pursue a coherent strategy toward North Korea. Any successful negotiation between Washington and Pyongyang will require Japan and South Korea to cooperate with the United States—and with each other—on issues such as enforcing sanctions against North Korea. Seoul’s threat to withdraw from its intelligence-sharing agreement with Tokyo is particularly troubling in this regard, as the loss of coordination among intelligence services in East Asia would make tracking shared threats, such as North Korean missile tests, very difficult for the United States.
Japan and South Korea are the strongest anchors of the U.S. alliance system in Asia. If they are unable to work together and present a united front against China and North Korea, Beijing will have a golden opportunity to increase its regional influence and Pyongyang may exploit divisions among U.S. partners. For this reason, resolving the dispute between the two countries should be a high priority for the Trump Administration in the pursuit of its broader strategy to “uphold stability and prosperity” and reinforce a “rules-based order” in the Indo-Pacific.
Yet so far the Trump administration has sent mixed signals about its intentions. Earlier this month, the U.S. ambassador in Seoul urged Japan and South Korea to resolve their differences among themselves. A few weeks later, Bolton and other senior officials flew out to Asia—but once there, they offered no indication of the U.S. position on the matter. Instead, Bolton discussed cooperating on security near Iran and the need for Tokyo and Seoul to contribute more to their alliances with the United States.
Ratcheting down tensions will take leadership and sustained effort from Seoul and Tokyo. But Washington can help, too. As it has done in the past, it should work behind the scenes and avoid publicly taking sides. Specifically, the United States should urge Seoul to agree to settle its compensation claims through neutral, third-party arbitration and advise Japan not to go forward with trade restrictions. Trump has often expressed skepticism about U.S. alliances, but he should recognize that U.S. strategy in East Asia depends on continued Japanese–South Korean cooperation. To abdicate its role in preserving that cooperation would hurt the United States as much as its allies.