How Are Trade Wars Affecting Japanese and Korean SMEs?

Trade disputes between the United States and China have made big news over the past year. The Japan Times is a good source of for a third-party perspective with a strong interest in the situation. When the world’s two largest economies disagree, and with billions of dollars at stake, it usually make things difficult for the global business community. To make things worse for my clients, Japan and South Korea are now in a trade war of their own, based in historical differences.

Trade wars affect businesses of all sizes. If you own a small-to-medium enterprise (SME) in Japan or Korea, you’ve probably felt some effects. SMEs make up 99% of Korean businesses and 38% of the country’s exports. In Japan, they’re around 99.7% of all companies.

Big businesses get the media attention, but small businesses really suffer in trade wars. I see it among my customers. These are some of the main impacts on Japanese and Korean SMEs:

  • Korean SME exports are hurt on both sides, especially key industries
  • Japanese SMEs have higher risk when there are technology tariffs
  • Tariffs and bureaucratic measures slow supply chains
  • Uncertainty is a very bad condition for business owners

Trade wars are also a time to reconsider suppliers and trade partners, and to seek out new opportunities. Instead of cutting back on trade and communication, you should be doubling your efforts and looking at new markets. Let’s take a deeper look at trade wars affecting Japanese and Korean businesses.

Korean SME exports are hurt on both sides, especially key industries

I’ve found that Korean SMEs are particularly exposed to both of the trade wars.

China accounted for almost a quarter of exports by Korean SMEs so far this year, and falling by 6.5%. Major exports of cosmetics, semiconductors and synthetic resin have declined. Meanwhile, SME exports to the United States made up for lost ground, increasing by 5.9%. This was driven by demand for auto products.

Tariffs have become a fond weapon of Trump, as he can put them in place without too much debate or agreement among the strongly divided Senate and House. No to mention the strongly divided American people.

The Japanese government did something similar to the Trump approach. They slapped tariffs on Korean exports of semiconductors and electronics. These are two of Korea’s major economic drivers. The Japanese tariffs were in response to a Korean court ordering Japanese companies to repay victims of forced wartime labor.

This is a lingering and complex issue that keeps surfacing. Who’d to blame is not for me to decide. But the sad end-results is that the people of Japan and Korea are generally quite fond of each other. The politics and stubbornness are raising tensions and making business hard.

Japan has also chosen to limit its high-tech exports to Korea. These exports include key chemicals needed to feed the semiconductor supply chain. If I were an SME in this space I would be worried not only about where orders are coming from but also how to fulfill them.

Recent numbers show that the tariffs are starting to do damage. For the ninth consecutive month, as reported by the South China Morning Post, Korea’s exports dropped. In August, the decline amounted to 13% lower than in the previous year.

Japanese SMEs have higher risk when there are technology tariffs

Some analysts say Japan’s economy as a whole is fairly protected against the trade war between China and the US. Partly this is because the country has become less reliant on exports to drive growth. Japanese production for China is also largely for the domestic market and not for export to the US.

Some experts have even suggested Japan could capitalize on the trade war between China and the US — sounds easier said than done. But it’s true that Japan and the US have been engaged in their own trade negotiations, which have seen both sides make some compromises while they quarrel.

That doesn’t mean that Japanese SMEs are out of harm’s way. Additional US tariffs on Chinese tech goods would affect Japanese manufacturers more than they already have. The same is true if there is a sharp decline in consumer activity in China, Japan’s largest trading partner. Their trading relationship is the largest in Asia.

Another thing that concerns me is that SMEs in Japan have found it challenging to recover from past financial crises, even as other Asian economies have. This is partly because most SMEs in the country have difficulty filling human resource needs and seizing opportunities for growth — This would be even harder to do in the face of economic uncertainty. Lack of English proficiency also poses a barrier to SMEs if they want to diversify their international markets. That’s where we help, if companies are smart enough to seek help.

In terms of the Japan–Korea trade war, Japan clearly has the upper hand.

But Japanese tariffs have struck a bad note in South Korea. Many Korean businesses and consumers have decided to boycott Japanese goods, including beer. South Korea is the largest consumer base for Japanese beer, representing 61% of their exports. Though modest, initial reports suggest the boycotts are taking a toll on Japanese sales in hundreds of supermarkets, as this article explains. Another notable boycott is on the Japanese “fast fashion” powerhouse UNIQLO. And tourism, especially from Korea to Japan, has taken a huge hit.

Tariffs and bureaucratic measures slow supply chains

The US­–China tariffs have hit key sectors (e.g., farming, auto, tech) in each country and begun to send ripples through supply chains around the world. In a similar way, the trade war between Japan and Korea threatens to slow down the rate of business.

Japan has removed South Korea from its list of favored economic partners as of August 28, 2019. This means Japanese companies wishing to export materials to South Korea will have to go through a separate process, delaying the shipments for months. This would pose a nightmare to SMEs on both sides.

As I mentioned, the materials are needed to produce Korea’s most in-demand exports, including semiconductors and smartphones. Japan holds between 80% and 90% market share of key chemicals, while South Korean firms reportedly supplied over 90% of the world’s smartphone screens last year.

Uncertainty is a very bad condition for business owners

This is an important consequence of trade wars that last for a long time, but it doesn’t often get talked about in the media. It’s hard for businesses, especially ones with limited resources, to make cost-effective decisions for the future when US signals are changing week to week.

Without getting a good sense of how long tariffs will continue, SMEs have no choice but to react rather than to take any measure of risk.

The good news is that it seems governments around the world are paying close attention. In some cases, they’re adjusting national policies to try to lessen the effects of trade disputes. In Korea, the ministry responsible for SMEs reportedly set up a fund of $208 billion for companies affected by Japan’s trade restrictions. The government is also pushing for more industrial production within Korea to keep up the flow of resources.

Japanese officials have expressed concern for the manufacturing sector in light of the China-US dispute. They have also expressed confidence— enough to follow through with a planned sales tax increase, for example. Already, however, some lawmakers have expressed that it would be wise to reconsider the timing.

But it’s not a time to cut back on globalizing and communications

This article has focused on the negative aspects of the trade wars. Many companies, especially smaller ones, may see it as an excuse to cut back on overseas marketing and pursuing international trade.

That’s a simplistic way of thinking and you’re dooming your company to almost certain failure if you turn inward. This is the time to properly expand your English website so you can appeal to countries such as those in Southeast Asia and Europe (Western and Eastern). US–Japan and US–Korea ties remain strong. Check in with your US connections and see if there are ways you can help those that are struggling with their China suppliers.

Japanese and Korean businesses are continually stable, high-quality, and the countries have reliable democracies. The cultures share many aspects, such as in their formality, valuing systems and a job well done, and cultural formalities, such as business card exchange, that pass on to refined manufacturing processes.

How are the trade wars affecting your business? And what can we do to make sure you don’t shrink, but instead, you expand boldly? Get in touch to refine your writing, marketing, and SEO approach.

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