On Friday, Japan announced that it was revoking South Korea’s trusted status, which means that South Korean firms will have a far harder time importing goods with potential military uses. In particular, this is likely to affect the export of key chemicals to South Korea. This, in turn, has huge potential consequences for South Korea’s electronics industry, which relies on these chemicals to produce semiconductors and flat-panel screens. As the Nikkei Asian Review reports, Japan’s actions are leading to a widespread boycott of Japanese goods in South Korea. South Korea has also revoked Japan’s trusted status in retaliation.
This is just one especially clear example of a broader phenomenon that we describe in our new article for International Security, Weaponized Interdependence: How Global Economic Networks Shape State Coercion. We are accustomed to thinking about globalized economic networks — such as the supply chain networks between Japan and South Korea — as a source of economic efficiencies. Increasingly, however, they are being used for coercive purposes, as states take advantage of choke points to coerce other states or businesses.
The fight between Japan and South Korea is over politics, not trade
As Celeste Arrington explains, the dispute between Japan and South Korea stems from long-standing disagreements over Japan’s historical behavior toward South Korea. These disputes have become increasingly politicized in South Korean politics, leading recently to legal judgments in South Korea against Japan’s Nippon Steel for forced labor. Japan claims that these matters were settled in a 1965 treaty between the two countries, and it fears that there will be a deluge of other claims seeking compensation for Japan’s wartime behavior.
The restrictions that Japan has announced on chemical exports are purportedly justified by security fears over export controls, but it is common belief that they are retaliation against the judgments. This is leading to an increasingly bitter political disagreement between the two countries, where leaders in each state take a strong stand against the other to win political divides.
Japan is exploiting its control over a supply chain choke point
Japan is able to exert economic pressure because it enjoys a near monopoly in certain industrial chemicals: hydrogen fluoride, fluorinated polyimide and photoresist. Japan controls nearly 90 percent of the market for these chemicals, putting its regulators in a dominant position. And South Korea’s firms are suffering: Nikkei reports a Samsung executive as saying: "It is one of the worst situations we have ever had. Politicians take no responsibility for the mess, even though it has almost killed us.”
This is one example of a much broader phenomenon. Over the past two decades, manufacturing has been transformed by the creation of global supply chains. Products often involve myriad components and processes that rely on many different suppliers in many different countries.
This has usually been seen as a source of enormous efficiency. Companies are able to save a lot of money by sourcing globally, looking for the cheapest and best suppliers. The result has been the creation of vast and complex production relationships that span the globe.
However, these global supply chains may have choke points. Sometimes, only one or a couple of businesses are capable of producing some particularly sophisticated component or chemical. Sometimes there are more than a few businesses that can produce a component or chemical — but they are mostly located in a specific country or are somehow exposed to that country’s laws.
As South Korea is now discovering, this can create an opening for strategic coercion. It may allow a government, like Japan’s, that has regulatory authority over those companies to apply pressure. Governments that have potential control over choke point components, inputs or processes, like the industrial chemicals in the Japan-South Korea case, can use this authority to squeeze other governments for political advantage.
Weaponized interdependence is reshaping the world economy
As our article explains, there are many other cases of weaponized interdependence. The United States has been particularly willing to exploit its control of global economic networks to pursue political advantage. The international financial system depends heavily on the U.S. dollar and the “dollar clearing system,” which directs international financial transactions through institutions under U.S. regulatory authority. The SWIFT system of financial messaging provides another choke point. The United States has used these choke points to effectively cut countries such as Iran out of the global financial system.
Most recently, the United States has used its control of choke points in global supply chains to strategic advantage. Chinese companies such as ZTE and Huawei rely on semiconductors that are made in the United States or using U.S. intellectual property. This has allowed the United States to threaten to block access to these critical components, potentially posing an existential threat to these businesses and, perhaps, undermining large parts of China’s technology sector.
Countries are starting to resist weaponized interdependence
The threat of weaponization is changing the way in which the world economy works. Countries such as China are trying to rapidly develop their own chipmaking industry to secure themselves against outside pressure. Many in the U.S. security community want to see a “decoupling” of the United States and China economies to lower the risk of China exploiting U.S. weaknesses. It is almost certain that South Korea’s electronics industry too is investigating how to secure itself against future coercion.
As this continues, it is likely to reshape the world economy. Global supply chains and financial relationships will change, as businesses cease their single-minded pursuit of efficiency and are forced to think about the political risks associated with global economic relationships that make them dependent on the decisions of foreign governments.
Abraham Newman is a professor at the Edmund A. Walsh School of Foreign Service at Georgetown University.