These Charts Show Japan Has the Advantage in Its Trade Spat With Korea

(Bloomberg) --

Japan’s trade surplus with South Korea and its role as a supplier of key technology components mean it’s positioned to land the bigger blows as its removal of its neighbor from its "white list" of preferred trading partners takes formal effect Wednesday.

South Korea has already decided to downgrade Tokyo on its own list, and has decided to terminate a U.S.-endorsed intelligence-sharing pact with Japan, drawing expressions of disappointment from Washington. Earlier, Japan had tightened rules on exports of supplies critical to South Korean tech manufacturing.

The charts below illustrate the state of trade between the two nations as tensions rise:

South Korea’s trade deficit with Japan is its biggest, despite relying on imported oil, much of it from Saudi Arabia, to meet most of its energy needs.

Japan’s export restrictions on materials that are critical to South Korea’s production of semiconductors and display screens, key drivers of its economy, rang alarm bells in Seoul. But South Korea relies on Japan for a wide range of materials and components that underpin factory operations across a range of sectors, according to the Korea Institute for International Economic Policy.

Japan also buys primarily raw materials from South Korea, but in smaller quantities despite having a much bigger economy. And Japan is far less reliant on South Korea for key components. Only 8.8% of Japan’s imports of semiconductors come from South Korea, meaning Japan could relatively easily weather any disruptions in South Korea’s chipmaking ability or any retaliatory measures from Seoul.

The number of South Korean tourists visiting Japan has more than doubled in recent years, from 2.8 million in 2014 to 7.5 million in 2018. South Korea could retaliate against Japan by restricting tourism, much as China did in its dispute with Seoul. That could hurt Japan, where tourism has been a significant source of economic growth in recent years. Yet South Korean visitors to Japan spend only about a third as much as Chinese tourists, who also outnumber their Korean counterparts.

Cross-border foreign direct investment between the two countries has surged recently, rising by triple-digit percentages both ways from 2016 through 2018. Yet Japan also has a slight edge when it comes to direct investment, injecting far more in South Korea’s smaller economy than vice versa.

©2019 Bloomberg L.P.