South Korean protesters hold up cards during a rally against Japan in front of a building that houses the Japanese embassy in Seoul, South Korea, Aug. 2, 2019.  The signs read " Japanese Prime Minister Shinzo Abe."
South Korean protesters hold up cards during a rally against Japan in front of a building that houses the Japanese embassy in Seoul, South Korea, Aug. 2, 2019. The signs read " Japanese Prime Minister Shinzo Abe."

Updated on Aug. 2, at 9:25 p.m.

SEOUL — South Korea says it will remove Japan from its list of preferred trading partners, in retaliation for Japan making the same move against South Korea, the Yonhap news agency said Friday. 

"We will take the step of strengthening export controls by excluding Japan from the White List," said South Korea's minister of economy and finance, Hong Nam-ki, referring to the list of so-called "white countries" that have preferred trade status with Seoul.

Yonhap said that Sung Yun-mo, minister of trade, industry and energy, declined to elaborate on how many items could be affected by South Korea's removal of Japan from the list.

The action follows Japan's decision to remove South Korea from its list of preferred trading partners, a major escalation in a trade dispute rooted in historical tensions. 

The cabinet of Shinzo Abe, Japan's conservative prime minister, approved the plans earlier Friday.

Beginning August 28, Japanese companies must now seek case-by-case approval from Japan's trade ministry before shipping certain products, which could be diverted for military use, to South Korea. 

South Korean President Moon Jae-in called the move “selfish” and a “grave challenge” to Korean-Japan relations, warning it could damage the global economy.

Earlier, a South Korean presidential Blue House spokesperson vowed a “resolute” response.

Japan last month restricted exports of high-tech materials to South Korea. The materials are used to produce semiconductors and displays in smartphones and other electronics that serve as the backbone of South Korea’s export-driven economy.

FILE - Japanese Prime Minister Shinzo Abe speaks during a press conference at Abe's official residence in Tokyo, June 26, 2019.

Retaliation for court rulings

Japan’s moves are widely seen as retaliation for recent South Korean court rulings ordering Japanese companies to compensate Koreans who were forced to work during Japan’s colonial occupation of Korea.

Tokyo insists its trade decisions were motivated by national security concerns. It has cited “improper incidents” involving exports to South Korea, but hasn’t provided many details. Some Japanese officials have also appeared to link the decisions to historical disputes.

A trade war between Japan and South Korea, the world’s third and 11th largest economies respectively, would have wide-ranging ramifications.

It could threaten global technology supply chains, since South Korea produces 70 percent of the world’s memory chips.

Impact depends on Japan

The economic impact depends on how exactly Japan decides to enforce its restrictions, says Tobias Harris, a Japan analyst at the Teneo consultancy group.

When Japan imposed the first restrictions on trade with South Korea last month, officials in Tokyo strongly implied it would be very difficult for Japanese companies to export the affected products to South Korea, Harris notes.

“This time around, the messaging from Tokyo has been marginally less strident, noting, for example, that this simply puts Korea at the same level as Japan’s other trading partners in Asia,” he adds. “Presumably it won’t be a total embargo so as to limit the direct impact on Japanese firms.”

The move could also hamper U.S. efforts to present a unified front to challenges like North Korea and China.

South Korea's Foreign Minister Kang Kyung-wha, left, talks to U.S. Secretary of State Mike Pompeo before the East Asia Summit meeting in Bangkok, Thailand, Aug. 2, 2019.

U.S. officials have encouraged both sides to resolve their differences, but Washington is reluctant to get too involved in issues related to Japan and Korea’s historical disputes.

“Japan and South Korea are both incredibly important relationships,”  said U.S. Secretary of State Mike Pompeo, who is in Thailand for a meeting of the Association of Southeast Asian Nations.

“We’re very hopeful that those two countries will together themselves find a path forward, a way to ease the tension that has risen between them over the past handful of weeks,” said Pompeo, who said he plans to meet with leaders of the two countries Friday.

FILE - Victims of Japan's forced labor and their family members arrive at the Supreme Court in Seoul, South Korea, Nov. 29, 2018. The sign reads " Mitsubishi Heavy Industries apologize and compensate victims."

Historical dispute

The trade dispute is the latest flare-up in tensions rooted in Japan’s brutal 1910-1945 occupation of the Korean Peninsula. A major source of friction is how to compensate those forced into labor and sexual slavery in the colonial era.

Japan says the reparations issue was resolved with a 1965 treaty that normalized Japan-South Korea relations. Japan has complained that subsequent South Korean governments have not accepted further Japanese apologies and attempts to make amends.

The issue re-emerged last year after South Korea’s Supreme Court ordered Japanese companies, including Mitsubishi Heavy, to compensate Korean forced labor victims. The companies have not complied with the rulings, leading some victims to begin the legal process to seize or liquidate the companies’ assets in Korea.

Japan says the rulings are unacceptable. But South Korea says it cannot overturn them, saying that doing so would amount to interference in South Korea’s independent court system.

“Tokyo’s frustration with the forced-labor issue and concerns about technology leakage are understandable, but this move is likely to set back the progress Japanese Prime Minister Abe has made over the past few years as an economic leader in the region and the world,” said Matthew P. Goodman, senior vice president and senior adviser for Asian economics at the Center for Strategic and International Studies.

People watch a TV that shows a file picture of a North Korean missile for a news report on North Korea firing short-range ballistic missiles, in Seoul, South Korea, July 31, 2019.

The trade dispute could also hurt U.S. interests in Asia. If the dispute worsens, South Korea has said it may pull out of an intelligence sharing agreement with Japan. The accord, known as GSOMIA, was negotiated with the help of the United States. It is aimed in part at countering North Korea.

“As Japan cited security reasons for its trade restrictions, I said we will have no option but to review the various elements that form the framework of security cooperation with Japan,” South Korea’s foreign minister Kang Kyung-wha said this week.

The trade dispute has prompted a backlash among South Korea’s citizens, with customers boycotting a wide range of Japanese products.