Korea and Japan trade spat: could it affect Vietnam?

There is a political-historical dispute between Korea and Japan that moved into a trade spat earlier this month. Quick recap: the Korean courts allowed individuals to sue Japanese companies for their treatment during the Japanese invasion and occupation of Korea. About 14 individuals won their cases and were awarded some money (around $90,000 each). This is not much money, but there are a flood of cases coming through that could result in much bigger payments.

The Japanese refused to pay, so the courts said that the individuals could seize assets in Korea. Then the Japanese retaliated by putting export controls on certain high tech products (list here). Specifically, these export controls are targeted at Samsung Electronics, SK hynix and LG Display.

So basically, this is a big mess, and who knows how it will be resolved. The Koreans are trying diplomatic tools, but don’t appear to be willing to force the courts to change judgments. So, it could persist for a while. Some Korean analysts think it might help domestic suppliers:

While the reliance on Japanese exports of these products makes these new restrictions a cause for concern, industry experts seem optimistic about South Korean companies’ ability to survive on reserves in the short term and then begin to shift supply chains to accommodate the change. Some even expected manufacturers to shift more toward domestic Korean suppliers, which would make Japan’s harsh policies more of a boon for the South Korean economy in the long run.

What does this have to do with Vietnam? The following are important to remember:

• From our most recent series on the VNM ETF, Korean tech companies make up about 16% of the index. These appear to be highly dependent on Samsung and other big companies.

• Samsung by itself is responsible for about a quarter of Vietnam’s exports. For the whole country! That’s a lot. If Samsung’s supply chain has difficulties, it could mean weaker exports for Vietnam.

• LG decided to move its phone production from South Korea to Vietnam earlier this year, so they also are at risk.

Global trade is great until there is a hitch in the system. And since supply chains seem to be getting more and more complex, we could see even more areas where a bottleneck hurts everyone down the line, including countries.

It is unclear at this point if 1) Japanese companies could export these products directly to Vietnam (not sure if this is possible or feasible) or 2) that the Vietnamese plants even need these materials, because they may not need these inputs (although it seems likely that they do).

I can’t see any reports on these plants, but it will be interesting to see what happens. I would expect that the VNM ETF is probably not going to do well over the next few weeks.