Seoul, South Korea (CNN) South Korea is scrapping its military intelligence-sharing agreement with Japan, the latest escalation in a trade dispute that threatens global supply chains for smartphones and other gadgets.

Kim You-geun, first deputy director of the Blue House National Security Office, said the move was in retaliation to Japan's decision to exclude South Korea from its list of trusted trading partners.

"Under these circumstances, the government judged that it would not be in our national interest to keep the agreement in place, which was signed for the purpose of exchanging sensitive military information for security (purposes)," Kim said.

The rising tensions between the two countries have sparked worries around the world.

"We encourage Japan and Korea to work together to resolve their differences. I hope they can do this quickly," said Lt. Col. Dave Eastburn, a Pentagon spokesman.

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