TOKYO/SEOUL -- Most weekends, the Uniqlo shop in the Hyundai Department Store just north of Seoul is buzzing with customers looking to pick up some of the Japanese chain's trendy, low-cost clothing. But on a recent Sunday in July, it was deserted -- a result of the growing "Boycott Japan" movement spreading across South Korea.

South Koreans have also stopped buying cars, beer, cosmetics and just about anything else bearing the label "Made in Japan." Some are even canceling their summer holidays. "We planned to go to Okinawa in August, but we changed our plan to Jeju," said Ha, a manager of a Seoul-based financial company. "My wife also told me not to go to Uniqlo anymore."

Well-organized protests are not uncommon in South Korea, and they tend to pass relatively quickly. But these boycotts -- which in South Koreans' minds are tied with the emotionally-charged issue of wartime labor and a sense that their most successful companies are under attack -- may be different.

The movement kicked off shortly after the decision by Japanese Prime Minister Shinzo Abe's administration on July 4 to tighten controls on exports of three chemicals essential for making semiconductors and flat panel screens used in smartphones and TVs. By choking off supplies of the chemicals -- Japan's market share for two of them stands at more than 90% -- the Abe administration was essentially taking aim at the engine that powers South Korea's high-tech economy.

Protesters raise placards reading “No Abe!” at a rally in Seoul. Japan’s new export controls have prompted waves of protests and boycotting of Japanese-made products by South Koreans. © Reuters

The move, which took place on the day that campaigning kicked off for Japan's upper house elections, launched a bitter trade dispute between Japan and South Korea that has worrying implications not just for their domestic economies, but also for a global trading system already roiled by U.S.-China tensions. Financial analysts have warned that the global supply chain for tech equipment also could be disrupted.

Samsung Electronics, South Korea's biggest company, is already feeling the heat, as are major chipmakers like SK Hynix. "It is one of the worst situations we have ever had," said a senior Samsung official, who asked not to be named. "Politicians take no responsibility for the mess, even though it has almost killed us."

Lee Jae-yong, Samsung's vice chairman, visited Japan in July hoping to receive assurances that supplies would continue to flow unabated. But when he returned to Seoul, Samsung sent a letter to local vendors asking them to stockpile three months' worth of the Japanese chemicals. Meanwhile, South Korean companies are scrambling to find other sources of the materials.

Samsung acknowledged the challenges as it reported its financial results on July 31. "We are facing difficulties due to the burden of this new export approval process, and the uncertainties that this new process would bring," Vice President Lee Myung-jin said during a call to discuss its second quarter earnings. "The visibility is low."

"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" A senior Samsung official

Abe's administration is expected to turn up the heat on Aug. 2 by formally stripping Seoul of its "whitelist" status, meaning Japanese companies will need government approval before exporting sensitive materials to South Korea.

Whitelist status, a symbol of mutual trust between governments, has allowed Seoul to join 26 other countries that are exempt from such scrutiny. Most of the machinery and components South Korea uses for its auto and semiconductor production is believed to fall under this category.

Washington has sought to ease tensions between Japan and South Korea, two of its biggest allies in Asia. According to a report by Reuters on July 30, a senior U.S. official has urged Tokyo and Seoul to sign a "standstill agreement" that would prevent further escalation of the dispute to allow talks to take place. But Japan's chief cabinet secretary, Yoshihide Suga, denied the report, saying "there is no such thing."

Tokyo's heavy-handed approach is widely believed to have been sparked by its concern over a Supreme Court decision in South Korea on Oct. 30, which awarded four wartime laborers at Japan's Nippon Steel 100 million won (around $85,000) each in reparations. The ruling was seen as a direct challenge to the diplomatic understanding that all such claims were settled "completely and finally" under a 1965 treaty that established diplomatic relations between the two countries.

The concern in Japan is that the verdict could open the floodgates for other victims and their relatives, totaling more than 220,000, to file lawsuits against an estimated 300 Japanese companies accused of using forced labor during the colonial era. The potential reparations could swell to $20 billion or more.

A South Korean court in January approved the expropriation of some of Nippon Steel's equity holdings in PNR, a joint recycling venture with South Korean steelmaker Posco, to fund payments to the plaintiffs, prompting fears that other Japanese assets could be seized in the future.

"The Japanese government won't just watch South Korea seize Japanese assets," said Hajime Izumi, a professor of international relations at Tokyo International University, adding that further asset seizures by South Korea will be met by even tougher measures by Japan. "Japan would demand a return of any seized assets, no matter how long it takes, [whether] 100 years or 1,000 years."

A banner urges the boycott of Japanese-made products at a traditional market in the city of Suwon, South Korea, on July 28. (Photo by Jean Chung)

Karl Friedhoff, fellow in public opinion and Asia policy at the Chicago Council on Global Affairs, is concerned that the dispute may drag on, harming both economies.

"The only way that this reaches some sort of short-term truce is if the Korean courts decide not to liquidate the seized assets of Japanese companies as reparations for Korean forced laborers, and Japan removes its export curbs," Friedhoff said. "But that liquidation is going to take place, and when it does the genie will be well and truly out of the bottle. Japan will retaliate and both sides will then settle in for an extended battle which will make them both losers."

'Weaponizing trade'

South Korea has taken the dispute to the World Trade Organization, where its representatives argued that the curbs constitute unfair retaliation for the court rulings. This, they say, runs counter to the principle of free and fair trade. "South Korea is the top exporter of semiconductors. Japan's measures will harm third countries," warned Kim Seung-ho, deputy minister for multilateral and legal affairs at South Korea's Ministry of Trade, Industry and Energy.

But Japan claims that its move was unrelated to the wartime labor issue and was made on national security grounds, though it has offered little specific information publicly to back up this claim.

Japan's use of national security grounds to justify the export controls has worried some trade experts. Governments have historically been reluctant to cite national security in trade cases, but U.S. President Donald Trump has made something of a habit of it -- opening the door for others to follow. In 2018, the Trump administration cited national security when it slapped tariffs on steel and aluminum imports from U.S. allies Japan, Canada, Mexico and the European Union. More recently, his administration used the same label to describe cars from Europe and Japan, and equipment made by Chinese telecom company Huawei Technologies.

While Trump is a protectionist, Abe has wrapped himself in the cause of free trade. He championed the Trans-Pacific Partnership after the U.S. pulled out of the trade agreement, and has sought new rules for promoting cross-border data flows. But his administration's use of the national security argument may undermine those credentials.

"Japan is the latest country to mix trade with politics, following the U.S. and China," said Peter Kim, global strategist at Mirae Asset Daewoo in Seoul. "Very much like the 'Entity List' from the U.S. aimed at China, the measure is a continuing global trend of weaponizing trade at the expense of multilateral agreements and transparency."

A Japanese government official says preparations to impose the curbs began early this year, as tensions between Japan and South Korea were escalating over the reparations court ruling. Abe's office instructed the Ministry of Foreign Affairs, the Ministry of Economy, Trade and Industry and other government ministries to propose ways to apply pressure to South Korean President Moon Jae-in.

In the end, his office adopted a proposal from METI to tighten export controls on the three materials -- hydrogen fluoride, fluorinated polyimide and photoresist.

Japan decided to introduce the new export controls between the G-20 summit in Osaka -- where Abe praised the virtues of "a free and open economy" -- in late June and the upper house election on July 21. The Abe administration calculated that a tough stance on Seoul would be a winning issue with voters.

However, METI has long held concerns about South Korea's export control on materials used in devices of mass destruction, such as nuclear weapons, missiles and biochemical weapons.

"While Japan has a staff of 120 for screening and inquiring, South Korea has only 11 in charge," said Rui Matsukawa, a member of the Japanese upper house, speaking in a personal capacity to reporters on July 24. In addition, there are other loopholes in South Korea's export controls, the ruling party lawmaker said.

A South Korean government official refuted this, saying the country has 110 officials in three ministries and two state-run institutions who are dealing with approval and examination of strategic materials' export.

Tensions have been mounting for months: Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in failed to hold talks at the G-20 summit in Osaka in June. © Reuters

Of the three chemicals subjected to Japan's export restraints, hydrogen fluoride is the most sensitive. Not only is it used to produce semiconductors, but also in the enrichment of uranium and production of the lethal gas sarin. Concerns have grown in Japan about roundabout exports of Japanese-made hydrogen fluoride to North Korea via South Korea. But a METI official denied this speculation.

Given the sensitivity around hydrogen fluoride, it is likely that questions about exports to South Korea would have been raised whether the question of wartime labor came to the fore or not, insiders say.

'Fight and win'

The trade tensions come as both South Korea and Japan are facing slowdowns in their economies. Neither side wants new headwinds, given the challenge of the trade war and the deceleration of the Chinese economy. But it appears they are also determined to teach each other a lesson.

Japanese and South Korean delegations gather at the World Trade Organization in Geneva in July. A Japanese government official says preparations to impose the curbs began early this year, as the dispute over reparations worsened. © Reuters

This is a far cry from the relationship envisaged by the two countries' business leaders: a pair of U.S. allies forming an integrated market of 180 million people that can compete against China.

"The 21st century is said to be the Asian century, but which country will be leading the world?" asked Nobuya Takasugi, a counselor at the Asia-Eurasia Institute who was a business executive in South Korea for 19 years. "Is it OK to allow China to become the leader? Should Japan and South Korea not work together and take leadership?"

South Korea provides highly educated, international talent for Japan, which faces a labor force shortage amid an aging and shrinking population. Samsung symbolizes South Korean industrial strength in designing the Galaxy, a smartphone that stands head-to-head against Apple's iPhone. But it depends on Japan for technology and components to bring such products to market.

The tit-for-tat economic reprisals are not benefiting anyone -- and may hurt the Japanese suppliers of the three chemicals, who will see increased competition if the Moon administration's plans to jump-start domestic production are successful. The chemical exports are estimated to be worth about $500 million a year, a relatively small market that Tokyo may be willing to sacrifice for Japan Inc. But the business community is not happy.

"No industry wants to see its fate depend on a government policy," said Sota Kato, research director at the Tokyo Foundation for Policy Research and a former senior official at METI. "The Japanese semiconductor industry doesn't have its own lobbying organization because the Japanese government never previously resorted to a trade war; but if it does, then the industry needs a way to protect its interests."

He was referring to an open letter issued by the U.S.'s largest tech industry groups on July 24, pressuring Tokyo and Seoul for a negotiated solution to the dispute. Japan has economy-wide groups like Japan Business Federation, known as Keidanren, but lacks an industry group that actively lobbies the government.

However, some in Japan's chip equipment industry downplayed the impact of the trade spat. Even if South Korea loses "white country" status, it would simply be on the same footing as China, Taiwan and Singapore, said Ken Sasagawa, vice president of accounting at Tokyo Electron, a major chipmaking machinery supplier to Samsung Electronics and SK Hynix. "We have been able to deliver a substantial quantity of machines to these countries in a timely and precise fashion," he told reporters on July 26.

The restrictions may be hurting South Korea's economy already. Bank of Korea Governor Lee Ju-yeol cited Japan's export restrictions as a factor behind the central bank's decision to cut its growth forecast to 2.2% from an earlier projection of 2.5%.

"If export restrictions are realized and expanded, we cannot say that its impact on exports and the economy is small," Lee said July 18. "It is not desirable that it expands and worsens. It needs to be resolved."

With South Korea’s general elections approaching next year, some politicians are fanning anti-Japanese sentiment. (Photo by Jean Chung)

But South Korea's politicians are encouraging the anti-Japan sentiment, betting it will help boost their popularity ahead of general elections next year. Cho Kuk, a high-ranking official in the Moon administration, leads the trend.

"Japan's state power is apparently stronger than that of South Korea," Cho said in a Facebook post. "But let's not be afraid of this. South Korea's state power has grown up to the level that cannot be compared to 1965 when the South Korea-Japan treaty was signed."

He said diplomacy is the best option for ending the battle. "But, if we cannot avoid legal and diplomatic battle, we should fight and win," he said.

"If we cannot avoid legal and diplomatic battle, we should fight and win" Cho Kuk, a high-ranking official in the Moon administration

South Korean media coverage of the reportedly chilly working-level discussions between officials of the two countries on July 12. © Kyodo

The ruling Democratic Party of Korea set up a committee to deal with the matter, titled "The Special Committee on Japan's Economic Invasion," criticizing Tokyo of using a "suicide bombing" strategy that hurts its own economy.

Such rhetoric suggests that politicians in both countries are unlikely to back down any time soon.

"I can't foresee a short-term resolution to this. It's clear that both sides made miscalculations in letting this get to this point, but are now so invested that backing away is going to be politically damaging," says Friedhoff.

Contributing writer Steven Borowiec in Seoul and Nikkei Asian Review columnist Yasu Ota and Nikkei Asian Review chief business news correspondent Kenji Kawase in Tokyo contributed to this report.