Global economists said such practices will end up hurting everyone as they could undermine the international trade system and destroy the value chain, warning that Japan could become a bigger loser if the confrontation lasts longer.
"The international trade system built over the last several decades is coming under strain as countries begin to stretch the definition of national security to place economic pressure on trading partners to achieve other objectives," said Troy Stangarone, senior director of Congressional Affairs and Trade at the Korea Economic Institute.
"Whether it's China's use of informal sanctions, the U.S. use of Section 232 or Japan's recent move, we should all be concerned about the increasing use of economic tools to achieve other ends."
Tokyo curbed exports to Korean companies of key resources material for semiconductors, July 4, as a retaliatory measure in response to South Korea's Supreme Court rulings that ordered Japanese companies to compensate Korean victims of forced labor under Japan's 1910-1945 colonial rule.
These restrictions on exports of crucial materials for the manufacture of semiconductors and screens will likely weigh heavily on Korean firms and the economy, with semiconductors accounting for 20 percent of Korea's exports. Japan has also warned that it could place similar restrictions on products that have implications for national security.
Japan's measures come following the U.S. and China's exchanging of tariffs on products traded between each other worth hundreds of billions of dollars.
"Everybody is learning the art of retaliation from the U.S. and China, which will end up fragmenting the value chain even further," said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis.
|Alicia Garcia Herrero|
"We already hear from major multinationals that they can no longer keep value chains with connectivity between China and the U.S. on sourcing, but this worrying news goes beyond as even Japan and Korea may experience issues in the connectivity of their value chains," the economist said.
"All of this is terrible for economic growth globally but also for efficiency and productivity."
Japan is requiring its businesses exporting fluorinated polyimide, photoresists and etching gas to Korea to apply for individual component licenses, which had previously been waivered. The process could take up to 90 days, and any delay in approval could result in supplier constraints and higher costs for Korean producers.
This is set to affect Japan's exporters as well.
"In the short term, South Korean and Japanese firms will be damaged, but in the medium term Japan risks suffering larger economic losses," Stangarone said, comparing the situation with the U.S. requirement for its businesses exporting to Huawei to acquire licenses.
While the U.S. government stated Wednesday it would issue these licenses under certain circumstances, the restriction for U.S. companies to obtain government approval for exports remains intact.
"As Huawei is dependent on components from U.S. suppliers, Huawei is an important customer for many of those U.S. suppliers. Samsung, SK Hynix and LG Display are key purchasers of these restricted items meaning that Japanese firms will be hurt as well," Stangarone noted.
"Japan's move also creates uncertainty in the region and the tech industry at exactly the time when more certainty is needed for cooperation."