Korea preparing for trade restrictions, Hong says

Finance Minister Hong Nam-ki speaks at the National Assembly. [YONHAP]

Japan gave Korea until midnight Thursday to agree to the establishment of an arbitration committee to deal with compensation issues regarding Korean laborers forced to worker during World War II.

As Seoul is dead set against the proposal, the dispute between the two countries is likely headed to the World Trade Organization (WTO).

Finance Minister Hong Nam-ki on Thursday told lawmakers that the government will take necessary steps, including bringing the issue to the WTO, until Japan withdraws its export restrictions against Korea. He also said he will focus on providing support to minimize the impact of the restrictions on Korean businesses.

“Due to the growing external risks, we are concerned about the impact it will have on the local economy and the financial market,” Hong said.

He added that the government has been preparing for Japan removing Korea from its 27-country white list, which extends preferential treatment on export processing.

“[We] expect to come up with the preliminary [measures] by next week,” Hong said.

If the Japanese government takes action, it will likely do so around the end of this month or early August, the finance minister said.

“[The Korean government] understands that there are 1,150 items [on the white list],” Hong said. “We don’t think all of them will be included. We are almost at the end of listing items closely related to our economy.”

He said while the government is working diplomatically to convince Japan not to remove Korea from its white list, the government and Korean businesses are working on measures to minimize the impact.

While Hong said he couldn’t go into detail, as Japan is closely monitoring the Korean government’s moves, he said in general Korea will take three steps.

The first is preparing for the damage inflicted on Korean businesses in the short term. The second is to gain international cooperation, such as from the WTO, and the third would be to reduce Korea’s dependence on imported materials and parts by pushing localization.

“We will do our best so that we won’t have to be concerned over the value chain breaking down through the localization and stronger competitiveness of material and components,” Hong said. “We are obviously reviewing this from all angles.”

The finance minister said if the current situation with Japan continues, it will undoubtedly have a negative impact on the Korean economy.

But he said he couldn’t give an easy answer as to how much Korea’s economy would retreat.

The government on July 3 lowered this year’s economic growth outlook from the previous 2.6 percent to 2.7 percent to 2.4 percent to 2.5 percent. The minister said the government had not included the Japanese trade retaliation.

In a report released on Thursday IHS, Markit said the escalating trade tensions between the two countries will impact other Asian markets.

“The use of trade sanctions as a negotiating lever in government-to-government negotiations has escalated over the past two years, with negative repercussions for world trade growth and new export orders,” the report stated.

“Exports are a key growth engine for many Asian economies, and the shockwaves from increased trade sanctions are having a negative impact on many exporting companies across the APAC region.

“Trade disputes and trade sanctions are throwing sand in the wheels of world trade flows, eroding the progress made by decades of trade liberalization.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]