Tensions between South Korea and Japan and Implications for Korea’s Inward FDI Policies

Tensions over history between South Korea and Japan, dating back over 100 years, have now spread to economic and military issues. Although the two countries normalized relations in 1965, history issues have remained sensitive to this date. Recently, a South Korean court ordered Japanese companies to pay compensation to Koreans forced to serve as wartime laborers. In response, Tokyo ended South Korea’s favored trade partner status and imposed export controls on some electronics sectors, which may damage Korean firms such as Samsung Electronics. To retaliate, South Korea terminated its military intelligence-sharing agreement (the General Security of Military Information Agreement or GSOMIA) with Japan. What is wrong with this ever-escalating tit-for-tat tension between the two countries? And what is the solution? Japan made the first mistake as it should have kept tensions within the realm of historical issues rather than extending them to the economic one. South Korea then made a similar mistake by extending the dispute into the military realm, an extremely sensitive one considering the current situation on the Korean peninsula. How should Korea effectively respond to Japanese economic retaliation? It initially should have tried to circumscribe the dispute to the historical and legal realm by condemning Tokyo’s economic retaliation about fundamentally historical and legal issues as inappropriate. If Japan continues to retaliate economically by restricting Japanese firms’ export to South Korea, South Korea can switch import sources to other countries or even attract Japanese firms’ foreign direct investment (FDI) to South Korea. The strategic implication is that when your trading partner pursues any sort of protectionist trade policy, you can effectively respond it with non-protectionist trade policy such as attracting FDI through improving favorable business environment. This strategy can also be applied as a Chinese strategy for dealing with the recent trade tension with the United States (US).