An Uncertain Future: How the Current Japan-Korea Dispute Signals Deteriorating Trade Norms

March, 2020

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Derek Kang
Vol. 41 Associate Editor

Since July 1, 2019, Japan and South Korea have been locked in a bitter trade war, bringing relations to their lowest point in 41 years.[1] Arising out of historical and political tensions, this standoff between the world’s third and twelfth largest economies has destabilized an already fraught region and disrupted major supply chains around the globe.[2], [3] Tensions have receded with the new year, but the threat of trade weaponization continues to loom large over East Asia. The catalyst of this dispute was a pair of decisions by the South Korean Supreme Court in late 2018.[4] In these landmark rulings, South Korea ordered three Japanese steel manufacturers to pay reparations to Korean laborers forced to work in their factories during the 1910-1945 colonization of the peninsula.[5] Failure to provide compensation could be met with court seizure of the company’s assets in South Korea.[6] This dramatic development stemmed from the Court’s reinterpretation of the controversial 1965 Treaty on Basic Relations between Japan and South Korea.   For decades, Japan has read the 1965 treaty to have settled any and all South Korean claims concerning its actions prior to and during WWII.[7] As consideration, Japan provided $500 million USD in loans and grants to the then-fledgling South Korean government and subsequently established diplomatic relations.[8] In support of this view, Article II of the treaty states “that [the] problem concerning property, rights and interests … [and] claims between [Japan and South Korea] and their nationals… is settled completely and finally.”[9]   Conversely, the South Korean Court now holds that the 1965 treaty is limited to claims concerning debt and property and does not apply to individuals’ claims for pain and emotional suffering.[10] This has opened the floodgates for over 1300 similarly situated plaintiffs across more than 500 pending cases.[11] With claims ranging from $10,000 to $133,000, damages may climb to over $175 million.[12]   Japan has responded in force. Citing concerns of national security, Japan has instituted strict export controls on materials critical to South Korea’s top export industry, semi-conductor production.[13] Japan has also removed South Korea from its “white-list” of nations deemed secure enough to import such materials.[14] Japanese exporters of electronic components must receive case-by-case approval from the Japanese government for any South Korea-bound goods.[15] These measures threaten to cripple the South Korean economy as Japan controls over 80% of the global supply of semi-conductor materials.[16] As the country scrambles to find alternative sources and develop domestic capabilities, the South Korean economy may lose billions.[17]   In September 2019, South Korea countered by formally initiating dispute proceedings against Japan in the World Trade Organization (WTO).[18] As WTO members, Japan and South Korea are obligated “not to discriminate among trading partners… and ensure that non-tariff barriers do not constitute unnecessary obstacles to trade.”[19] Consequently, implementing trade-restricting measures like export bans against fellow WTO members constitute a breach of WTO commitments.[20] South Korea argues that the unilateral targeting of South Korea-bound goods without sufficient justification or notice violate international law.[21] South Korea can likely rely on a 2013 decision by the WTO’s Appellate Body, which found that China’s export restrictions on raw materials violated its WTO commitments and recommended that such measures be reversed.[22]   Such actions may, however, remain lawful in limited circumstances. The most prominent of these in recent years is the “national security exception.” Under Article XXI of the GATT, members may impose sanctions and other trade-restrictive measures “which [the member] considers necessary for the protection of its essential security interests.”[23] Article XXI specifies three instances where this exception applies: 1) where nuclear material is involved, 2) direct or indirect trafficking of war material to a military establishment, and 3) in times of war or other emergencies in international relations.[24]   Despite this, Japan will likely be unable to rely on the national security exception. In a groundbreaking April 2019 ruling, a WTO dispute settlement panel established a higher standard for when the national security exception may be invoked.[25] The panel rejected the view shared by the US and Russia that the invoking state alone could determine what an “essential security interest” was.[26] The panel also required that for the exception to apply, the invoking state must show: 1) its situation falls under the three specific instances laid out in Article XXI and 2) the measures taken had a plausible connection to addressing that instance.   Here, Japan has provided no clear evidence to indicate that its actions fall under the Article XXI instances. Japan has not claimed that the exported items were 1) related to nuclear weapons, 2) linked to the trafficking of war material to a military establishment, or 3) restricted in response to a state of emergency. While news outlets have since reported that there have been 156 incidents of “strategic goods” being illegally exported from South Korea over the last five years, Japan’s measures will have a massively disproportionate economic effect upon South Korea.[27]   Were Japan to take advantage of the vague language of the “state of emergency,” the WTO panel has strictly defined this as “a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state.”[28] A WTO panel is unlikely to view South Korea’s current state as one of “general instability” just after it has raised the bar for when the national security exception can be invoked. Ultimately, the ex-poste nature of this justification and the WTO’s more critical stance disfavor a panel finding that the national security exception would apply here.   The future for Japan-South Korean relations is unclear. While South Korea has suspended WTO proceedings against Japan on the issue of export controls, tensions remain high.[29] On February 4, 2020, Japan filed its own WTO complaint against South Korea, alleging unfair trade practices by the latter’s support of domestic shipping companies over foreign ones.[30] This tit-for-tat filing of WTO complaints and Japan’s willingness to read the national security exception broadly erodes the WTO’s fragile legitimacy. Concerted efforts by the US and Russia have already incapacitated the WTO’s ability to oversee appeals of dispute settlement panel decisions and the Japan-South Korea dispute places even greater strain on the dispute settlement mechanism as a whole. Against the specter of increasing trade weaponization, the WTO will have to choose between standing behind its precedent of a limited national security exception or capitulating to maintain its legitimacy among the world’s most powerful states.

[1] Shohei Kanaya, Japanese Sentiment on South Korea Sinks to 41-year Low, Nikkei Asian Rev. (Dec. 21, 2019, 2:34 AM), https://asia.nikkei.com/Spotlight/Japan-South-Korea-rift/Japanese-sentiment-on-South-Korea-sinks-to-41-year-low. [2] Prableen Bajpai, The 5 Largest Economies in the World and Their Growth in 2020, Nasdaq (Jan. 22, 2020 2:24PM), https://www.nasdaq.com/articles/the-5-largest-economies-in-the-world-and-their-growth-in-2020-2020-01-22. [3] Rory Green, There’s Another Major Trade War that’s Starting to Heat Up while Everyone is Focused on the US and China, Bus. Insider (Sept. 14, 2019, 8:44AM), https://www.businessinsider.com/us-china-tariffs-drawn-focus-japan-south-korea-trade-war-2019-9. [4] Brian Kim, Korea and Japan Clash Over History and Law, Lawfare (Aug. 15, 2019, 8:00AM), https://www.lawfareblog.com/korea-and-japan-clash-over-history-and-law. [5] Id. [6] Choe Sang-Hun, South Korean Court Orders Mitsubishi of Japan to Pay for Forced Wartime Labor, N.Y. Times, Nov. 29, 2018, https://www.nytimes.com/2018/11/29/world/asia/south-korea-wartime-compensation-japan.html. [7] Id. [8] Kim, supra note 4. [9] Agreement on the Settlement of Problems Concerning Property and Claims and on Economic Co-operation, Japan-Republic of Korea, art. 2, ¶ 1, June 22, 1965, 583 U.N.T.S. 8473. [10] Sang-Hun, supra note 6. [11] Troy Stangarone, Japan’s Economic Restrictions on South Korea Are Overkill, Diplomat (Aug. 5, 2019), https://thediplomat.com/2019/08/japans-economic-restrictions-on-south-korea-are-overkill/. [12] Id. [13] Yasuyuki Todo, The Fallout from the Japan–South Korea Trade Ruckus on Global Trade Rules, East Asia Forum, (Jan. 20, 2020), https://www.eastasiaforum.org/2020/01/20/the-fallout-from-the-japan-south-korea-trade-ruckus-on-global-trade-rules/. [14] Ben Dooley & Choe Sang-Hun, Japan Imposes Broad New Trade Restrictions on South Korea, N.Y. Times, (Aug. 1, 2019), https://www.nytimes.com/2019/08/01/business/japan-south-korea-trade.html. [15] Spotlight: Japan Remove S. Korea from Preferential “Whitelist” of Trusted Trade Partners as Row Intensifies, Xinhua (Aug. 28, 2019, 10:32AM), http://www.xinhuanet.com/english/2019-08/28/c_138344549.htm. [16] Green, supra note 3. [17] Id. [18] Press Release, World Trade Organization, Korea Initiates WTO Dispute Complaint Against Japanese Export Measures (Sept. 16, 2019). [19] Elena Klonitskaya, Is the WTO the Right Forum to Hear National Security Issues, 9 Global Trade & Cust. J. 508, 508 (2014). [20] Id. [21] Request for Consultations by the Republic of Korea, Japan – Measures Related to the Exportation of Products and Technology to Korea, WTO Doc. WT/DS590/1 (Sept. 16, 2019). [22] China — Measures Related to the Exportation of Various Raw Materials, World Trade Organization (Jan. 28, 2013), https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm. [23] General Agreement on Tariffs and Trade art. XXI, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194. [24] Id. [25] William Reinsch & Jack Caporal, The WTO’s First Ruling on National Security: What Does It Mean for the United States?, Center for Strategic & International Studies (Apr. 5, 2019), https://www.csis.org/analysis/wtos-first-ruling-national-security-what-does-it-mean-united-states. [26] Russia – Measures Concerning Traffic in Transit – Report of the Panel, World Trade Organization (Apr. 26, 2019), https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds512_e.htm. [27] Satoshi Sugiyama, Japan, ‘surprised’ by South Korean response to export control, accuses Seoul of trying to make the issue about free trade, Japan Times (Jul 10, 2019), https://www.japantimes.co.jp/news/2019/07/10/business/japan-surprised-south-korean-response-export-control-accuses-seoul-trying-make-issue-free-trade/. [28] Panel Report, Russia – Measures Concerning Traffic in Transit, ¶ 7.76, WTO Doc. WT/DS512/R (Apr. 5, 2019), 42. [29] Thisanka Siripala, Japan-South Korea Ties on Ice Until Bilateral Trade Meeting, Diplomat (Dec. 06, 2019), https://thediplomat.com/2019/12/japan-south-korea-ties-on-ice-until-bilateral-trade-meeting/. [30] Japan’s WTO Petition over South Korea Shipbuilding Signals Renewed Tensions, Japan Times (Feb. 3, 2020), https://www.japantimes.co.jp/news/2020/02/03/business/japan-wto-south-korean-shipbuilding/. The views expressed in this post represent the views of the post’s author only.