South Korea and Japan seek to resolve trade dispute, amid dim economic outlook

After Seoul announced that Japan and South Korea will be holding senior-level talks in December, some analysts said the development suggests relations may be thawing for now.

Waqas Adenwala, Asia analyst at The Economist Intelligence Unit, said that he believes tensions “have de-escalated compared to what the situation was in summer.” He told CNBC on Friday that the “slight positive sign” in the situation is that South Korean President Moon Jae-in and Japanese Prime Minister Shinzo Abe are now “trying to” meet on the sidelines at the China-Japan-South Korea summit in Chengdu, China.

South Korea’s trade ministry said on Friday it had agreed to hold senior-level talks with Japan in the third week of December to discuss export controls, according to a Reuters report. The two Asian powerhouses have recently been locked in a trade dispute that started in July when Japan restricted exports of three chemicals to South Korea which are critical for making semiconductors and display screens.

“Japan and Korea relations are very much on the mend, both sides are working hard to normalize relations. Despite different views on historical events persist, pragmatism on the economic policy and trade front are poised to prevail,” said Jesper Koll, senior advisor at WisdomTree Investments.

The leaders of the two nations have realized they “have a responsibility to demonstrate to other Asian nations that rules-based free trade is the best foundation for shared prosperity not just in Korea and Japan, but all across Asia and the world,” Koll told CNBC via an email.

Military fallout

Since their fallout this summer, tensions have escalated with the two nations taking each other off preferential trade lists and South Korea threatening to scrap a military intelligence-sharing pact with Japan.

“While a near-term deal of some kind that prompts both sides to restore bilateral trade relations to their pre-dispute state cannot be ruled out, we think the feud will continue well into 2020,” said Scott Seaman, Asia director at policy consultancy firm Eurasia Group.

South Korea ultimately renewed the military agreement, named GSOMIA, just before it was about to expire.

EIU’s Adenwala said that decision could have been influenced by the U.S., as scrapping that deal “would have hurt the interests of the U.S. as well in the region.” But he pointed out that even after re-signing the pact, the two nations could not agree with how to move forward with the trade dispute.

“These instances reflect that any short-term solution they reach will only be a shaky one at best as they still have deep-seated mistrust against each other,” said the EIU’s Adenwala.

Seaman said the military intelligence agreement between the two nations “will likely hold together for the foreseeable future” but it is uncertain if Moon will use it as a threat again “if efforts to resolve the trade dispute falter.”

He added, however, if North Korea were to “ramp up provocations” next year that would lead to “strengthening the argument that the US, South Korea, and Japan must cooperate as closely as possible to be able to effectively manage this threat.”

Both economies hurt

On Monday, Reuters reported that both South Korea and Japan’s factory activity contracted again in November.

“The outlook for both economies is not particularly bright, and an even more intense and acrimonious trade fight would certainly not benefit either country,” said Eurasia Group’s Seaman.

For Japan, Wisdomtree’s Koll said that s mostly due to the typhoon disruption, the consumption tax hike and overall weakness in global demand, particularly in auto vehicles.

“The figures for October are super weak but it’s a combination of factors, the most important of which is the rise in consumption tax,” Adenwala said, referring to Japanese economic data.

The consumption tax was raised from 8% to 10% on Oct. 1 for most goods and that was “a highly contentious topic in Japan and has led to a fall in private consumption,” Adenwala explained. Thus, naturally, with consumer demand falling, the domestic industrial activity has suffered too as manufacturers scaled back production levels, he said.

On top of that, the U.S.-China trade war and dispute with South Korea have all contributed to a fall in overall industrial production levels, the EIU analyst said.

Nonetheless, getting consumption levels up is certainly a priority for the Abe administration, said Koll, adding that “the Korea issue is unlikely to have a significant positive or negative impact either way — it is important for national pride and popularity of Abe administration.”

Meanwhile, Goohoon Kwon, senior Asia economist at Goldman Sachs told CNBC’s “Street Signs” on Friday that “all indicators suggests that things (in South Korea) are bottoming. So we think that next year (things will) get better.”

Kwon said that once the U.S.-China trade war de-escalates, export economies such as Korea’s will slowly return to normal but the growth will be “minor” until at least the second quarter.

Source: CNBC