RIETI Report May 12, 2023

The impact of export controls on international trade: Evidence from the Japan–Korea trade dispute in the semiconductor industry

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This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition, we present topics related to trade restrictions enacted for national security reasons. RIETI Research Associate Ryo Makioka and RIETI Senior Fellow Hongyong Zhang analyzed the impact of Japan’s export controls in the semiconductor industry on South Korea in 2019. They say that policy considerations need to be taken into account in applying trade sanctions especially for industries where global value chains are pervasive.

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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

The impact of export controls on international trade: Evidence from the Japan–Korea trade dispute in the semiconductor industry

MAKIOKA RyoResearch Associate, RIETI

ZHANG HongyongSenior Fellow, RIETI

Trade restrictions have increasingly been used for national security reasons in recent years. This column studies the impact of export controls in the semiconductor industry applied by Japan on South Korea in 2019. It finds these controls drastically cut trade of affected chemical inputs between Japan and South Korea, but increased trade of both countries with the US. Furthermore, the production of affected chemicals increased in South Korea, following a government programme to promote domestic production. Ultimately, policy considerations need to take into account these complex trade reallocation effects, particularly for industries where global value chains are pervasive.

Trade policy being used to address national security concerns has been pervasive in recent years. Notable examples are the US trade restrictions against China in 2018, the US trade sanctions against Russia following its invasion of Ukraine in 2022, and the US export controls on the Chinese semiconductor industry in 2019. Research on trade policies has also been growing over the last ten years (e.g. Amiti et al. 2019, Fajgelbaum et al. 2020, Bown 2021, Fajgelbaum et al. 2021, Latipov et al. 2022, Hayakawa et al. 2023). While most of the research analyses the effect of tariffs on domestic economies, there is still relatively little empirical evidence on the effect of non-tariff trade policy on exports and imports in an industry with extensive global value chains (GVCs). What is the effect of such trade policy on international trade in an industry where the production process is characterised by global value chains? Is unilateral export control effective in an industry where firms change their production and sourcing patterns in response to export controls? In a recent paper (Makioka and Zhang 2023), we investigate the effect of non-tariff trade policy implemented in the name of national security on international trade in an industry characterised by global value chains – the semiconductor industry. We use a recent Japan–Korea trade dispute as a case study.

In July 2019, the Japanese government announced potential export controls on South Korea for three chemical inputs, namely hydrogen fluoride, photoresist, and fluorinated polyimide, all of which are essential in semiconductor production. As a result, Japanese exporters of these three chemical materials are required to apply for individual export licenses, rather than bulk export licenses, reporting information on end-user, product specifications, technology, and so on for each export contract. The semiconductor industry has what is a typical example of a global value chain. The US, Taiwan, and China have dominant sales shares in all design, manufacturing, and outsourced semiconductor assembly and test (OSAT) stages, while the design stage itself tends to be located in Europe and Japan, the manufacturing stage in Israel and South Korea, and the OSAT stage in Singapore and Japan. Given its sequential features, protectionist trade measures can potentially affect the entire production process and input sourcing patterns.

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“The Impact of Export Controls on International Trade: Evidence from the Japan–Korea trade dispute in the semiconductor industry”
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