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August 4, 2020

Asia

JAPAN/SOUTH KOREA: Japan threatens retaliation if seized assets sold off

BY Tobias Harris

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  • A South Korean court is preparing to sell assets seized from Nippon Steel in order to compensate former forced laborers and their descendants.
  • While the sale could take time, Japan has promised dramatic retaliation if the assets are sold.
  • The dispute stems from a fundamental conflict over the nature of their relationship, suggesting it will be difficult for Seoul and Tokyo to repair their relationship without significant domestic change.

The Daegu District Court announced on 4 August that it had completed the process of serving notice to Nippon Steel that it would sell the assets seized from the company. This clears the way to begin liquidating shares in a joint project with South Korean steel-making company POSCO that were expropriated in January 2019. While the move was long anticipated, it will nevertheless have wide-reaching effects on the relationship between Japan and South Korea, not only confounding efforts to build a closer political partnership but also encouraging Japanese businesses to disengage from South Korea.

The gap between Seoul and Tokyo remains unbridgeable. The Moon administration insists that the liquidation of seized shares is a judicial matter over which it has no control but is open to diplomatic negotiations to find a way for Nippon Steel and other companies that have been sued by wartime forced laborers to satisfy court orders for compensation. In 2019, for example, Seoul proposed that Japanese and South Korean companies could both make voluntary contributions to a fund for former labor conscripts, a proposal Japan rejected. The Japanese government maintains that the 1965 basic treaty and an accompanying agreement on the settlement of claims ensured that, as the settlement agreement declared, “problems concerning property, rights, and interests… have been settled completely and finally.” This legalistic approach makes it difficult for Tokyo to compromise, because the Japanese government fears that any concession that results in Japanese companies compensating forced laborers would fundamentally undermine its position on the 1965 treaty and open the door to further claims by South Koreans.

The Abe government has therefore signaled that, far from negotiating a settlement, it is instead prepared to escalate the dispute further. It already signaled a willingness to take drastic steps in the dispute last year when it removed South Korea from the “white list” that grants countries preferential treatment for imports of sensitive products from Japan. Chief Cabinet Secretary Yoshihide Suga explicitly warned that if the district court moves ahead with the sale, Japan would retaliate, with actions ranging from withdrawing its ambassador, to imposing financial sanctions or trade restrictions or revoking visas. It is unclear whether Nippon Steel or the Japanese government will seek arbitration in accordance with the 2002 bilateral investment treaty with South Korea, which offers protections from expropriation.

It could still take time before any of the 194,000 shares seized from Nippon Steel are sold. Nippon Steel has until 11 August to file an appeal and halt the process; the company has indicated that it plans to appeal. If its initial appeal is rejected, it has the option to file a second appeal. It could therefore be several months before the company’s legal options are exhausted and the court is able to proceed with the liquidation. Tokyo may wait until a sale is completed before it retaliates. If Japan were to retaliate, the Moon administration would likely have little choice but to respond in turn, which could mean renewing the threat to withdraw from its General Security of Military Information Agreement (GSOMIA) with Japan, which South Korea was prepared to terminate last year but only changed course under pressure from the US.

Their dispute could also continue in other arenas. Boycotts may continue to make it difficult for Japanese brands to operate in South Korea. The two governments are squaring off at the World Trade Organization (WTO), which agreed to convene a panel to review the legality of Japan’s initial decision to remove South Korea from the white list for three chemical products. Japan, meanwhile, is likely to campaign against the candidacy of South Korean Trade Minister Yoo Myung-hee for the WTO’s director-generalship and has lobbied against expanding the G7 to include South Korea.

The implication is that, over the long term, Japan and South Korea will likely continue to drift apart without domestic political change or an external shock that forces them to recalibrate their interests. The two governments – with the support of majorities in both countries – have fundamentally different conceptions of what the basic political framework of their relationship should be, and it is increasingly difficult to paper over these differences.

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