Japan-Korea Trade War Is Bigger Problem Than You May Think: S&P
Japan-Korea Trade War Is Bigger Problem Than You May Think: S&P
(Bloomberg) --
An escalation of the trade war between Japan and South Korea will have a greater ripple effect than is priced in markets, as it could disrupt the technology supply chain starting with China, S&P Global Ratings warns.
While there may be isolated winners in the stock market, an ongoing dispute will have global implications, boosting production costs for technology components or cutting output, said Shaun Roache, the chief economist Asia-Pacific at S&P Global Ratings. If Japan were to stop granting export licenses, South Korea would have to either curtail production or pay a “much higher price” to secure crucial materials, a move that will impact China, he said.
“If anything interferes with this bilateral trade between Japan and Korea, China’s technology supply chain is going to be disrupted,” Roache said in an interview in Tokyo. “Even small disruptions further upstream, could have very, very large impacts downstream.”
The best case scenario is for the dispute to go away completely, but even if it were to be resolved, Roache sees the potential for long-term trust issues.
“It’s going to be persistent damage to trust between the two countries and trust in the global trading system, which is already what we’re starting to see,” he said. “Trust goes down. And it has a permanent effect on the way firms think about their risks and strategies.”
South Korea may fare worse than Japan.
According to S&P, a continuation of the current “stalemate,” with minimal direct disruptions, would create a moderate downside risk for the firm’s economic growth forecasts of 2% and 2.6% in 2019 and 2020 for Korea. The impact on Japan may be “milder,” although it may exacerbate an expected slowdown in the wake of its consumption tax hike. S&P forecasts growth in Japan of 0.8% and 0.1% for 2019 and 2020.
South Korea announced its 2020 budget in August, saying that it will spend 2.1 trillion won ($1.75 billion) to achieve self-reliance in materials and parts. Self-reliance is “inefficient, it’s costly. It’s going to undermine the fundamentals of the firms in those sectors,” Roache said.
The nation’s export are poised for a 10th monthly slide as trade disputes and a tech sector downturn weigh on demand. Shipments during the first 20 days of September tumbled 22% from a year earlier, the biggest decline since August 2009, according to data from the Korea Customs Service.
“Broadly, most people are going to lose,” Roache said. “The technology sector is going to be a big loser overall. I wonder sometimes if that’s being fully factored in.”
To contact the reporters on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net;Finbarr Flynn in Tokyo at fflynn3@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Naoto Hosoda, Margo Towie
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