The New York Times International - 30.08.2019

THE NEW YORK TIMES INTERNATIONAL EDITION FRIDAY, AUGUST 30, 2019 | 5

Business

As tensions between Tokyo and Seoul
have surged in recent months, South Ko-
reans have shown their anger with their
wallets. Japanese beer is going unsold.
Shoppers are avoiding Uniqlo. An ani-
mated Japanese children’s movie called
“Butt Detective,” whose protagonist has
a posterior-shaped head, bombed in
South Korean theaters.
This week, Japan widened the wedge
between the two Asian economic power-
houses even further. It formally re-
moved South Korea from a “white list”
of countries to which it extends prefer-
ential trade status.
But it will take more than new rules
and consumer boycotts to drive apart
the two American allies, at least when it
comes to business. The two countries
have become deeply intertwined over
the decades, with a trade relationship
now worth about $85 billion a year. Ja-
pan in particular holds considerable
power as a main supplier of essential
raw materials and components to South
Korea’s high-tech economic machine.
Until that changes, a process that
could take many years, the two coun-
tries have little choice but to stick to-
gether. Any serious attempt to break
trade ties “would be a disaster,” said
Rory Green, an economist specializing
in South Korea and China at TS Lom-
bard, an analysis firm in London.
“It’s something they’d have to look at
doing over a number of years, slowly de-
coupling these heavily interlocked sup-
ply chains,” he said. “It’s not something
that could happen painlessly.”
A South Korean company called Sejin
Tech, for example, builds intricate ma-
chines with over 1,300 parts for packag-
ing food like soup and kimchi. While
many of the components it uses are
made in South Korea, some can be
sourced only from Japanese companies.
Japan’s recent moves “have woken us
up and created a momentum to teach us
that Korean companies, including mine,
rely too much on Japan’s industrial tech-
nologies,” said Lee Gahp-hyun, Sejin
Tech’s chief executive.
“Perhaps Korean manufacturers in-
cluding myself could have tried harder
to develop our own Korea-made prod-
ucts to replace imports from Japan,” he
added. “But businesses, especially
small businesses, weren’t prepared for a
situation like the political strife between
Korea and Japan affecting them.”
Those ties matter well beyond Asia.
American officials need Japan and
South Korea to get along as they con-
tend with North Korea’s nuclear ambi-
tions and China’s growing sway in the
region. Last week, South Korea said that
it would abandon an intelligence-shar-
ing pact with Japan, despite the Trump
administration’s urgings to renew it.

Many in South Korea are coming to

terms with how much they depend on

Japan.

That realization began sinking in last

month, when Japan announced that it

would tighten restrictions on the sale to

South Korea of three chemicals used to

make high-end computer chips and dig-

ital displays. Japan said it was con-

cerned that importers had improperly

handled the products, which have po-

tential military applications, though offi-

cials have not offered proof.

Seoul painted the moves as an attack,

motivated by disagreements over the

historical legacy of Japan’s occupation

of the Korean Peninsula before and dur-

ing World War II.

One of those chemicals, known as

photoresist, is critical for top-of-the-line

products produced by Samsung Elec-

tronics, the giant South Korean maker of

chips and gadgets, among others. Japan

controls around 90 percent of the

world’s supply. Getting permission to

import the chemical could take up to

three months, companies were told,

sparking panic about the potential im-

pact on global supply chains.

In the end, it was about a month be-

fore Tokyo issued the first approvals.

But the implications were clear, said

Yuichi Takayasu, a professor of econom-

ics at Japan’s Daito Bunka University.

Seoul “understood that if imports

from Japan were to stop, they would no

longer be able to make semiconductors,”

he said. “Just aiming at that Achilles’

heel is a big threat to South Korea.”

South Korea’s removal from Tokyo’s

white list is also intended to send a mes-

sage rather than cause economic harm,

Mr. Takayasu said. “It has a symbolic

meaning. South Korea hates being

downgraded.”

The change covers virtually all Japa-

nese exports to South Korea other than

food, clothes and products made from

wood.

Its focus is on a list of more than 1,

goods and technologies that could be

used to produce weapons of mass de-

struction. That includes chemicals that

can be used to make nerve gas or enrich

uranium, and a long list of products es-

sential to South Korea’s tech industry,

from precision machine tools to ad-

vanced carbon fibers, some of which

would be difficult, if not impossible, to

source from other countries.

The Japanese government has em-

phasized that it would use its authority

only to ensure that exports ended up in

the right hands and were used for their

intended purpose. For most buyers, the

effect will “be at the level of a little in-

crease in paperwork,” said Makoto Abe,

a senior researcher at the Japan Exter-

nal Trade Organization, a trade promo-

tion group affiliated with the Japanese

government.

This time around, South Korean busi-

nesses are less concerned than after the

first round of restrictions in July, accord-

ing to Sanjeev Rana, a Korea technology

analyst at the Hong Kong-based broker-

age CLSA.

Some South Korean consumers have

responded by starting boycotts and set-

ting up websites that suggest local alter-

natives to Japanese products, and they

say they have no plans to stop.

“People of all ages are participating in

the boycott and enjoying it,” said Seo Ky-

oung-duk, a professor at Sungshin Uni-

versity in Seoul who is active in the boy-

cott effort. “I think that, later on, this

movement will be remembered in text-

books.”

Earlier this month, South Korea re-

sponded to Japan’s announcement of its

delisting by saying it would remove Ja-

pan from its own white list. But the move

just drove home how unequal the rela-

tionship is, said Lee Cheol-woo, the di-

rector of marketing and technical rela-

tions at AMS, a small company in the

South Korean city of Busan that exports

goods to Japan. Many of Japan’s imports

from South Korea could easily be found

elsewhere, he said, and his company is

beginning to lose customers.

Clients have begun asking him why

Japanese buyers would “want to import

from Korea now with all the new restric-

tions,” Mr. Lee said. “Japanese

customers could replace your items

with imports from Taiwan.”

At the moment, neither country can

bear much economic pain. Japanese ex-

ports worldwide have been dropping

since December on cooling global de-

mand. South Korea’s sales abroad have

fallen even more precipitously as an

anemic smartphone market has left

chips to stack up in the country’s ware-

houses.

South Korean companies are worried

about being cut off. While large compa-

nies have the experience and resources

to sort out the issues, smaller firms may

not even be aware of what products are

affected.

Data from Japan’s Economy Ministry

shows that between 2007 and 2011, more

than 96 percent of “illegal exports” were

the result of misunderstanding or sim-

ple failure to comply with regulations.

Trade promotion agencies, trade as-

sociations and chambers of commerce

in South Korea are advising companies

on how to deal with the new restrictions,

including finding suppliers outside Ja-

pan and producing components locally.

Japanese companies will neverthe-

less remain a strong presence in South

Korea.

Breakup hard for Japan and South Korea

Above, demonstrators denounced the Japanese leader at a rally in Seoul this month. Below left, Prime Minister Shinzo Abe of Japan, left, and President Moon Jae-in of South Korea

at the Group of 20 summit meeting in June. Below right, “Butt Detective,” an animated Japanese film that bombed in South Korea amid trade tensions between the countries.

LEE JIN-MAN/ASSOCIATED PRESS

POOL PHOTO BY KIM KYUNG-HOON

SEOUL, SOUTH KOREA

Ties that bind are strong

for 2 nations, even though

tensions are increasing

BY SU-HYUN LEE
AND BEN DOOLEY

Australia’s economy is experiencing its

28th year of a record-shattering expan-

sion, with strong employment growth

and high economic potential.

But the Australian central bank cut

rates to a record low last month — a de-

velopment that underscores how inter-

twined the global economy has become

and how big a threat President Trump’s

trade war poses in such an environment.

On paper, there is no reason Austral-

ia’s economy should be in big trouble.

The country has seen rapid popula-

tion growth fueled by immigration,

something many developed markets

have lacked.

Australia seems to be weathering the

fallout from a cooling off of the domestic

housing market. Slow wage gains are

weighing on consumer spending, and

pay increases have lagged, partly be-

cause workers are pouring into the job

market, which reduces competition for

employees.

Crucially, the nation has little expo-

sure to global manufacturing supply

chains, which insulates it from the early

fallout in America’s trade fight with

China.

But the ability of the central bank, the

Reserve Bank of Australia, to raise sala-

ries, achieve steady price increases and

keep the job market expanding hinges

partly on interest rates in other coun-

tries.

More than 30 central banks have cut

interest rates this year in response to

slowing global growth, Mr. Trump’s

trade war and other geopolitical tur-

moil.

“If the world interest rate changes, we

have to change ours too,” Philip Lowe,

who heads the Reserve Bank of Austral-

ia, said last weekend at an economic

symposium in Jackson, Wyo. “If we

don’t, the exchange rate will appreciate,

and it will have adverse consequences

for our inflation and employment goals.”

Mr. Lowe’s central bank cut interest

rates to 1 percent in July and is expected

to lower them again before the end of the

year.

The cut was a bid to shore up domestic

demand, which has been weak, but Mr.

Lowe said that global rates had also

“been a consideration in our recent

thinking.”

That even Australia cannot remain an

island of untroubled prosperity against

a fraught global backdrop — made more

fraught by Mr. Trump’s announcement

last week that he planned to further es-

calate America’s trade war with China

— speaks to the broader challenges fac-

ing the world’s economy.

Whether in Australia, with its strong

demographics and high growth poten-

tial, or Japan and Europe, with their ag-

ing populations and weaker prospects,

the level of interest rates that a healthy

economy can sustain without slowing

down has fallen. Also lower are inflation

and the level of unemployment, which

could stoke faster wage growth.

Those changes are the result of aging

in many advanced-economy popula-

tions, a heightened appetite for low-risk

saving options and globalization. Finan-

cial markets, which have become larger

and closely interwoven, ensure that the

trends are shared across economies.

“International linkages have risen

dramatically over recent decades,”

Mark Carney, the head of the British

central bank, the Bank of England, said

at the Jackson Hole gathering, an annu-

al meeting hosted by the Federal Re-

serve Bank of Kansas City, a branch of

the United States central bank.

And because America’s currency and

debt markets are so central to the global

financial system, the nation’s political

and economic dramas guide the world’s.

“The global financial cycle is a dollar

cycle,” Mr. Carney said.

Bank of England research indicates

that increases in America’s policy inter-

est rate have twice the effect on foreign

growth that they did in the 1990s, even

though America now makes up a small-

er share of the global economy, Mr. Car-

ney said.

A move in interest rates by the Fed-

eral Reserve or an increase in trade ten-

sions from Mr. Trump echoes across the

world through currency repricing and

slower growth.

There are hazards to such an integrat-

ed global monetary and financial sys-

tem. It leaves central banks with low in-

terest rates to begin with and with little

ability to diverge from their trading

partners’ monetary policy settings.

At the first sign of trouble, many na-

tions may lower rates in tandem.

That seems to be happening now. As

the United States, the eurozone and Ja-

pan turn toward rate cuts and other

forms of monetary economic help this

year, central bankers in emerging mar-

kets have slashed their own borrowing

costs.

Monetary authorities could enter the

next recession with relatively little am-

munition, heightening the risk that a

garden-variety economic slowdown

could turn into a drawn-out, painful

global slump with widespread costs to

jobs and prosperity.

And while the global economy’s brit-

tleness is rooted in slow-moving eco-

nomic fundamentals, Mr. Trump’s trade

war could be the spark that sets off the

time bomb.

Mr. Trump looks at a tightly inter-

twined global economy and sees a win-

ner-take-all game in which the United

States can and should prosper at the ex-

pense of other countries. He has criti-

cized the Federal Reserve for not cut-

Ripples from trade war felt in Australia

“If the world interest rate changes, we have to change ours too,” said Philip Lowe, the

head of the Reserve Bank of Australia, which cut interest rates to 1 percent in July.

LUKAS COCH/EPA, VIA SHUTTERSTOCK

AUSTRALIA, PAGE 6

WASHINGTON

Central bank cuts rates,

showing distance is no

shield against disruptions

BY JEANNA SMIALEK

For stock investors, the trade war has
been nothing but trouble. For bond in-
vestors, it’s been a dream.
Unable to stomach turbulence driven
by the escalating conflict between China
and the United States, and leery of a
darkening outlook for the economy, in-
vestors have been pulling money out of
the stock market and buying bonds, the
traditional place to park cash during
times of uncertainty.
The rush has turned parts of the ordi-
narily boring bond market into a better
bet than stocks. The gains are unusual;
by some measures, bonds are having
their best year since 2002. And they do
carry risks for investors who are buying
now. If the concerns that have lured in-
vestors into the bond market dissipate
— because Washington and Beijing
reach a trade deal, for example — then
bond prices could start to fall.
When investors expect the economy
to grow, they typically turn to invest-
ments like stocks that might rise fast as
company profits increase.
But lately, the S&P 500 stock index
has been on a jagged path, as bad news
on the global economy, or sudden
threats and escalations by President
Trump or the Chinese government, have
unsettled investors.
The upshot of these swings is that
even with a decent gain this year, the
benchmark is roughly the same as it was
in early 2018.
“For a lot of clients, they feel like
they’ve just been bouncing up and
down, and stocks are not going much of
anywhere,” said Michael Ball, president

of Weatherstone Capital Management,

an asset management firm in Denver.

“That gets people on edge.”

For investors weary of such volatility,

bonds have become a go-to alternative.

Bond prices do not fluctuate as much as

stocks, and the returns they offer are

typically more certain than those of

many other investments. On top of the

interest payments companies are obli-

gated to make, the price of the bond it-

self can rise — as they have this year —

generating an investment gain for bond-

holders.

So, as investors sold almost $70 billion

of stock investments like mutual funds

and exchange-traded funds in the year

through July, according to data from

EPFR, nearly $260 billion of cash

flooded into vehicles that invest in the

American bond market.

Interest rates in places like Europe

and Japan are even lower than they are

in the United States, making bonds in

the United States appealing to global in-

vestors as well.

One of the broadest gauges of the

American bond market, the Bloomberg

Barclays Aggregate index — the S&P

500 of the American bond market — is

sitting on gains of more than 9 percent,

including both interest payments and

price appreciation.

If it were to finish the year at that lev-

el, it would be the index’s biggest in-

crease since 2002.

Longer-term bonds have done even

better. If you simply bought the 10-year

Treasury note at the end of last year,

you’d be up almost 13 percent. In other

words, an investment that is seen as vir-

tually risk free (because repayment is

considered guaranteed by the United

States government) has done as nearly

as well as the much riskier stock mar-

ket.

These price gains are the obvious cor-

B ONDS, PAGE 6

Bond market shows

it can pay to be boring

Uneasy about stocks,

investors are parking

their money elsewhere

BY MATT PHILLIPS

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