Use Diplomatic Tensions with Japan as a Chance to Ease Business Regulations

As diplomatic relations between South Korea and Japan have turned hostile, significant damage to our economy and businesses is expected. After imposing export restrictions in early July on three materials used in semiconductors and displays, the Japanese government went on to remove South Korea from its list of preferred trading partners (the “white list”) on August 2.

These consecutive external shocks have become major sources of instability for business management. Amid rising uncertainty caused by China’s economic retaliation following the 2016 decision to deploy THAAD (Terminal High Altitude Area Defense), and the U.S.-China trade war that has continued since 2018, diplomatic conflict with Japan cannot help but deal a serious blow to our companies.

The immediate result of Japan’s removal of South Korea from its preferred export list is that not only semiconductors, but industry as a whole, will be negatively affected. From now on, if our companies want to purchase Japanese goods, they must go through procedures requiring approval from the Japanese government. What used to take about a week may now take up to three months, which means companies are facing an urgent crisis.

Strangely enough, businesses suffering from blocked imports of Japanese products have instead become the target of public resentment. Centered around the political sphere, criticism began to emerge that the real problem was that companies had relied on Japan to manufacture their products. The president himself rebuked firms, saying they had “grown complacent with Japan’s cooperation and failed to actively pursue change,” while Minister of SMEs and Startups Park Young-sun pointed out that “domestic small and medium-sized enterprises can make these products, but the problem is that large corporations do not buy them.” It was as if the very fact that companies had traded with Japan was itself the problem.

Government policy toward Japan’s economic retaliation is merely a “stopgap measure”

The measures prepared by the government as a response also cannot easily escape criticism for disregarding businesses, the market economy, and the external trade system. On August 5, the government announced that it would secure core technologies, expand domestic production, and diversify import sources to break industry’s dependence on foreign countries.

To this end, it allocated about 7.8 trillion won over seven years. But the root cause of the current problem lies in diplomatic conflict with Japan. The government should prioritize resolving that conflict through diplomatic efforts. Instead, it is troubling to see it proposing countermeasures that should be left to the private sector and businesses, while signaling its intention to intervene in the market.

It is virtually impossible for our companies to possess the world’s best technology in every field, including both components and finished products. World-leading technology is the result of each company investing time and resources over many years. This is not an area where the government can easily produce results simply by pouring in a 7.8 trillion won budget.

Until now, our companies have searched for components that improve the performance of finished products, built final goods using the best available technology, and exported them to global markets. Those efforts were the secret behind Samsung and SK Hynix dominating the global market. It is not easy to scour overseas markets and find the right components, and if companies had focused only on localization, they would not have been able to achieve in such a short period what they have today.

It is most efficient for businesses themselves to decide which components to use and in which fields to invest. That is because this is what they do best. Claims that, simply because Japan is disliked, companies should stop buying Japanese parts, or that domestic SMEs can just replace them, reflect ignorance of business realities. Companies did not trade with Japanese firms because they were Japanese; they did so because their products offered the best quality in the world. If localization leads to lower quality or higher prices, no consumer will tolerate it. Telling companies to sell less competitive products is no different from telling them to give up exporting to global markets.

Our economy belongs to a global division-of-labor structure based on free trade. Companies in each country sell goods in which they have a comparative advantage and purchase less competitive parts from abroad. The advantage of this system is that competitive products can be traded without constraints such as national borders. As a trade-oriented nation, we too have achieved economic growth through cooperation at the international market level. In this situation, insisting only on localization could end up pushing us out of the international economy and into self-imposed isolation.

In a market economy, trade produces a win-win result in which both sides benefit. It means that both sellers and buyers can each gain from a transaction. Japan’s trade restrictions are painful, but arguments that we should respond by refusing to sell goods to Japan or buy Japanese products are not a prescription for our economy. At first glance, it may seem that if we stop selling to Japan, only Japanese companies will lose. But in reality, our companies would suffer from being unable to secure top-quality components, and our consumers would be unable to enjoy high-quality products. If this continues for the long term, it could pose a serious threat to our economy.

Deregulating businesses is more effective than pouring in massive budgets

If the government truly wants to help companies in crisis, easing business regulations would be more effective than committing massive budgetary resources. Rigid labor policies and various regulations based on domestic political logic have long held back the competitiveness of our firms. Pro-labor policies such as the sharp increase in the minimum wage and the 52-hour workweek may have won support from labor unions, but they have also become major factors undermining the global competitiveness of our companies.

Calls are growing louder for a sweeping overhaul of regulations that threaten corporate management. The government has announced that it will relax the 52-hour workweek system for semiconductor parts-related businesses. It has also eased regulations against funneling work to affiliates within large business groups, opening the way for affiliated companies to procure related items from one another. Japan’s latest export restrictions have effectively revealed just how threatening government regulation has been to companies competing in the global market and to our economy.

At present, the 20th National Assembly has some 3,200 regulatory bills pending, including the Revised Commercial Act and revisions to the Fair Trade Act that threaten companies’ ability to defend managerial control. Instead of such regulatory legislation, there is a need to change policy direction so that more business-friendly and market-friendly bills can emerge and revitalize the economy.

The Art of War already says that one should secure victory before fighting the enemy (可勝者 攻也). It means that war should begin only after the conditions for victory are fully in place. Japan, taking into account its repeated conflicts with the Korean government, appears to have a strategy and scenario designed to win completely.

By contrast, our government and political circles look every bit like losers who start a fight first and only then try to figure out how to win. They are merely putting forward hardline measures that inflame anti-Japanese sentiment, such as confronting the Japanese government and leading boycotts of Japanese goods.

Economic problems cannot be solved simply because the government steps forward and makes a political declaration that it will no longer lose to Japan. If our companies are unable to produce goods and sell them overseas right now, survival itself becomes impossible. Many investors are already viewing the future of the Korean market negatively. The uncertainty surrounding our economy is clearly reflected in today’s stock market and exchange rate.

Rather than relying on anti-Japanese sentiment, the government should demonstrate a commitment to restoring trust with Japan. It should also refrain from rashly intervening in the market and wasting public finances in the name of coming up with countermeasures. The government only needs to clear the path by easing regulations so that companies can overcome the crisis. The government should do its job, and businesses should do theirs; we need an attitude of overcoming this crisis by each doing what we can from our respective positions.

Eun-kyung Kwak, Head of the Corporate Culture Office, Center for Free Enterprise (CFE)

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Original title: 일본과 외교 갈등, 기업규제 완화 계기로 삼아야

Author: Eun-kyung Kwak

Date: 2019-08-21

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=24&idx=20447