[EAI Issue Briefing] From Bilateral Economic Cooperation to Joint Global Norm Building

I. Japan in the South Korean Economy, South Korea in Bilateral Relations

The 10th Joint Survey on Mutual Awareness between South Korea and Japan, conducted by the East Asia Institute and Genron NPO, reveals an increased perception of the importance of bilateral relations and the need for their improvement in both countries. Although expectations for resolving the conflict between the two governments stemming from the forced labor lawsuit rulings are low, there appears to be a growing consensus that the prolonged period of strained bilateral relations must be overcome. Amidst this, when asked about the importance of bilateral relations, both South Korea and Japan, similar to trends in previous surveys, identified the high interdependence of their economic relations as the core factor (ranked 1st in South Korea, 2nd in Japan) (see Figure 1).

The perception of the importance of bilateral economic relations is stronger in South Korea than in Japan, which can be attributed to the historical legacy of South Korea's industrial development, deeply intertwined with capital and technological cooperation with Japan. This was the reason why the policy of separating economic cooperation from conflicts in other areas and maintaining it stably over the long term was sustained. However, the response that economic interdependence is the reason for the importance of bilateral relations does not translate into a perception that Japan is critically important to the South Korean economy. In South Korea, Japan ranks only third among important countries for the economy, following the United States and China, and its perceived importance is steadily declining (see Figure 2). This perception aligns with reality.

At this juncture, the deterioration of bilateral relations surrounding historical issues over the past decade can be understood as a phenomenon that has led to the erosion of bilateral economic cooperation. For a long time, economic cooperation between South Korea and Japan served as the driving force that enabled cooperation to persist despite conflicts over historical perceptions and territorial issues. The principle of separating politics from economics symbolized the structural relationship between the two countries, where strong incentives for economic cooperation controlled conflicts in other areas. However, the sustainability of bilateral economic cooperation, epitomized by the principle of separating politics from economics, began to weaken in the 2010s, as exemplified by the suspension of the currency swap agreement. The decline in Japan's status within the 'South Korean Economy' signifies a weakening of the influence of the necessity of economic cooperation within bilateral relations in constraining historical conflicts within bilateral relations. Furthermore, Japan's export control measures against South Korea in 2019 gave the impression that economics within bilateral relations had become a secondary domain to history within bilateral relations. This fragmented impression has led to the perception that bilateral economic cooperation is no longer necessary.

II. Low Awareness of the Resolution of Japan's 2019 Export Controls and the Grand Bargain

Given South Korea's consistent perception that economic interdependence is critically important in bilateral relations, the most puzzling aspect of this year's survey results is the significant decrease in the proportion of respondents who cited the resolution of export controls as an agenda item to be discussed during future bilateral summits (see Figure 3). In 2021, 48.7% of respondents believed that discussing 'the lifting of export restrictions and measures for cooperation in trade and investment' was necessary, but this figure dropped to 24% in 2022.

Regarding the export control measures imposed by Japan's Ministry of Economy, Trade and Industry on South Korea in July 2019, Japan claimed they were due to issues with South Korea's management of strategic material trade, separate from the South Korean Supreme Court's ruling on forced labor victims. However, it was evident that these were retaliatory actions related to historical issues. Japan's export control measures not only provoked strong opposition from the South Korean government but also exacerbated negative perceptions of Japan in South Korean public opinion, leading to a boycott of Japanese products and damaging bilateral trade relations concerning consumer goods. Moreover, there were significant concerns in South Korea during the summer of 2019 about potential disruptions to the import of intermediate and capital goods, which constitute a substantial portion of South Korea's imports from Japan.

However, since the autumn of 2019, the impact of Japan's export controls was not as severe as initially feared, partially alleviating concerns on the ground regarding imports of intermediate and capital goods from Japan. Furthermore, amidst the COVID-19 pandemic and the global trend of securitization of the economy, the policy visibility of Japan's export control measures against South Korea has indeed significantly diminished.

Nevertheless, when considering bilateral relations alone, the perception among the general public remains unchanged: Japan's export control measures are viewed as a provocation by Japan against South Korea. The conditions of the COVID-19 pandemic and the securitization of the economy also remain the same in 2022. The reduced interest in export controls as an agenda item between the two governments in 2022 compared to 2021 should be attributed to changes in the attitudes of both governments towards the issue.

Until 2021, Japan can be seen as having refused to discuss pending issues in bilateral relations with the Moon Jae-in administration. It maintained a stance of waiting for a new administration before engaging in discussions. Since the inauguration of the Yoon Suk-yeol administration, there has been a more proactive approach to discussing pending bilateral issues. Of course, consistently throughout both the Moon Jae-in and current Yoon Suk-yeol administrations, South Korea has been required to present a solution for the follow-up measures to the Supreme Court's ruling on forced labor victims as a prerequisite. The decrease in the importance of export control measures as an agenda item appears to stem from the change in the South Korean government's attitude. While the Moon Jae-in administration aimed to manage historical issues and other areas separately from 2020 onwards, the Yoon Suk-yeol administration seeks to resolve all pending issues comprehensively through a so-called 'Grand Bargain.' In this context, the visibility of export control measures seems to have diminished.

III. The Nature of Uncertain Bilateral Economic Relations in the Era of Economic Security

The problem is that even if the 'Grand Bargain' solution succeeds and export controls are restored, a rosy future for bilateral economic cooperation is not guaranteed. Separate from historical issues, the complementarity between the industries of South Korea and Japan is steadily declining, while their competition is increasing. This trend is the result of South Korea's historical choice during its industrialization process, which, while pursuing industrialization under the influence of Japanese capital and technology, did not opt to become subordinate to Japan's production networks but rather sought to establish a similar integrated production system domestically. The decline in complementarity and the increase in competition are also the reasons for the declining perception of the importance of bilateral economic cooperation in both countries. In other words, even if historical issues are managed well, close bilateral economic cooperation at the governmental level will increasingly diminish in importance within overall economic diplomacy, and the necessity of bilateral economic cooperation will require increasingly elaborate domestic explanations.

As revealed in the perception survey, perceptions of economic complementarity and competition between South Korea and Japan are evenly divided in both countries (see Figure 4). This is partly because the nature of each industrial sector varies, and partly because the complementarity of bilateral industrial relations has become less visible to consumers within the global value chain. The issue is that in the context of the increasingly emphasized securitization of the economy, industrial policy pursuing the competitiveness of domestic industries is becoming the trend of the times. At this point, Japan's export control measures, while essentially retaliatory actions for historical issues, are not solely confined to that dimension.

From the logic of Japan's economic security policy, it is questionable whether South Korea poses a core exogenous risk to Japan's economy and industry. It is clear that Japan's economic security policy is designed with China in mind. However, since the establishment of the Office of Economic Security Policy at Japan's Ministry of Economy, Trade and Industry in June 2019, South Korea was the only country subjected to export control measures based on security logic. The export controls against South Korea can be seen as a dress rehearsal in the process of implementing Japan's economic security policy. Even excluding historical issues, there is no guarantee that the intensity and scope of Japan's economic security policy aimed at securing Japanese industrial competitiveness will not lead to situations detrimental to South Korean companies in the future. It is not entirely impossible that Japan's economic security policy could be pursued in a direction that weakens the international competitiveness of South Korean companies that compete with Japan.

IV. Importance of Shared Recognition between Korea and Japan on the Necessity of Maintaining the Free Trade Order

However, the fact that both countries occupy the same position in the international political economy structure is a crucial starting point for redesigning future bilateral economic cooperation. The high degree of competition between South Korea and Japan in the global market also implies that they occupy the same position in the international production structure. Furthermore, the dilemma faced by both countries in their economic relations with China amidst US-China competition is similar. Japan's pursuit of economic security policies aimed at strategic autonomy and indispensability are factors that South Korea is also considering, and both countries agree that maintaining a free market order serves their national interests.

Amidst the accelerating US-China technological hegemony competition, South Korea and Japan need to adapt to the trend of economic securitization while also maintaining the free trade order. As the US-China technological hegemony competition intensifies, transactions with specific regions or companies are becoming increasingly restricted. South Korean and Japanese companies trading with Chinese firms due to strengthened US export controls face the need to manage risks across their entire supply chains, as well as respond to the rapidly changing trade and investment environment in China due to Chinese countermeasures, thereby exacerbating their business environment.

However, even amidst intensifying US-China conflict, neither South Korea nor Japan can afford to abandon China's vast domestic market, nor can they completely sever ties with China in the global supply chain. Both countries have room for cooperation under the common goal of expanding the free trade system. As US-China competition unfolds in a direction that deviates from the liberal order amidst the trend of economic securitization, South Korea and Japan need to voice together in creating multilateral cooperative frameworks and norms at regional and global levels for the emergence of a liberal international economic order. Discussions on trade and investment governance and trade norms at the East Asian or Indo-Pacific regional level in the 2020s hold a leading position in global governance and norm creation. This signifies that the scope for South Korea and Japan to proactively engage in global governance and norm creation is greater than ever before.

Currently, bilateral cooperation between South Korea and Japan for building global norms in the international political economy is subsumed under cooperation with the US's Indo-Pacific Strategy as of 2022. Both South Korea and Japan are allies with the United States, and since the launch of the Yoon Suk-yeol administration in South Korea in 2022, their policy preferences regarding US-China competition have become very similar. This means that their cooperation in building global norms has become clearly aligned with cooperation with the United States. The US's establishment of a new regional order is manifested in the Indo-Pacific Economic Framework (IPEF) in the economic sphere. Although specific details remain unclear, its emphasis on the norms of freedom and fairness aligns with Japan's consistent emphasis on the norms of 'free and open.' South Korea's Yoon Suk-yeol administration also emphasizes value-based diplomacy, showing a policy stance consistent with this direction.

However, it is necessary to consider whether the norms of freedom and fairness, or 'free and open,' align with the economic interests of both South Korea and Japan, and whether they represent the true liberal order desired by both countries. Consideration is needed on whether the rhetoric of 'free and open' leads to the exclusion of China and whether a path to comprehensive economic peace can be found that reduces uncertainty in global supply chains.

Both countries understand the need to simultaneously pursue the creation of global norms that check China's unilateral and arbitrary actions while also developing economic relations with China. It remains uncertain whether South Korea and Japan can cooperate in this regard. However, the choice made by former Prime Minister Shinzo Abe's administration to pursue cooperation with China under the Belt and Road Initiative as a hedge against the Trump administration between 2017-2019 offers a significant lesson. This flexibility shown by a conservative Japanese government in the face of uncertainty from the US implies that Japan's pursuit of strategies based on strategic autonomy between the US and China can be variable. At that time, the South Korean government's policy orientation towards China was not significantly different. However, in the context of US-China competition, both South Korea and Japan pursued hedging individually, rather than attempting hedging through mutual cooperation.

The Japanese government's approach to China and its export control measures against South Korea occurred simultaneously between 2017 and 2019. During the 2017-2019 period, South Korea was a more contentious relationship for Japan than China. For South Korea and Japan to pursue hedging strategies through cooperation amidst US-China competition, it is necessary to set aside emotions and recognize that they share similar geopolitical challenges, transcending emotions surrounding historical issues. In the past, this task was solely placed on South Korea, asking it to refrain from excessive anti-Japanese sentiment. However, in the current bilateral relationship, the task of thinking strategically beyond emotions towards the other party is also strongly demanded of Japan.

V. The Future of Bilateral Economic Cooperation: Cooperation at the Global Level, Not Bilaterally

The direction of bilateral economic cooperation has become clearer since Japan's export control measures in 2019. That direction transcends the framework of bilateral relations. Efforts to newly discover incentives for bilateral economic cooperation led by the governments of South Korea and Japan are not appropriate at this time. In the era of US-China competition, bilateral economic cooperation should be transformed into diplomatic efforts by both countries at the regional and multilateral levels to foster global norms for the liberal order. Through this, the globalized liberal trade and production order, in which South Korea and Japan share economic interests, can be sustained. Within this framework, businesses in both countries will be able to freely develop mutual business relationships within global supply chains. This change is linked to the difficulty of finding the purposefulness of bilateral economic cooperation when considering it solely within the bilateral framework.

Meanwhile, it is also important to consider whether bilateral cooperation between South Korea and Japan for fostering global norms in the era of US-China competition can lead to the creation of an order that encompasses both the US and China. As of 2022, cooperation between South Korea and Japan is likely to proceed in a manner aligned with the normativity led by the United States. There is no need to consider mechanical balance between the US and China. The norms of freedom and fairness advocated by the US are also the foundation of the liberal order. However, if, as in the case of the Trump administration, the exclusionary nature towards China harms the interests and values of both South Korea and Japan, or if, as in the recent case of the Biden administration, it fundamentally conflicts with the future industrial development strategies of both countries, then consideration must be given to the scope for pursuing strategic autonomy policies in response to these US threats and the possibility of bilateral cooperation for this purpose. ■

[Figure 1] Reasons for the Importance of South Korea-Japan Relations

[Figure 2] Important Countries or Regions for the South Korean Economy

[Figure 3] Agenda Items to Discuss at South Korea-Japan Summits

[Figure 4] Opinions on Economic Relations between South Korea and Japan

■ Author: Lee Jeong-hwan_Earned bachelor's and master's degrees from Seoul National University's Department of Diplomacy and a Ph.D. in Political Science from the University of California at Berkeley. He served as a full-time researcher at Kookmin University's Institute of Japanese Studies and as a professor in the Department of International Studies at the same university. His main research areas are Japanese politics and economy, and Japanese foreign policy. His major publications include <Decentralization Reform and Public-Private Cooperation in Contemporary Japan> (2016), <The De-localizing Nature of Japan's Regional Revitalization Policy> (2017), and <The Transformation of Abe Administration's Historical Policy: The Abe Statement and Internationalism> (2019).

■ Responsible Editor: Park Eun-jin_EAI Researcher

    For inquiries: 02 2277 1683 (ext. 204) | ejpark@eai.or.kr