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Japan-South Korea dispute at risk of worsening this year

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Akemashite omedetou gozaimasu or happy new year from Tokyo. The city is under a fresh state of emergency to control Covid-19 but the rules are mild; schools are still open and the main change is restaurants having to close at 8pm. The big question is whether it will be enough to stop the virus. Evidence from other countries might suggest not, but the Japanese public are good at following rules, and compliance with practices such as mask-wearing is exceptionally high.

With the Regional Comprehensive Economic Partnership and Japan-UK deals both agreed, the immediate trade agenda in Tokyo is light: there are long-running talks with Turkey, Colombia and over a possible Japan-China-South Korea trilateral agreement. The latter is by far the most significant, but today’s note discusses one of the main obstacles — the likelihood of a fresh crisis between Tokyo and Seoul over wartime history — and how Japan may choose to handle it.

Policy watch covers how Brexit is affecting the food industry, while our chart of the day examines the impact on foreign investment of Turkish president Recep Tayyip Erdogan’s tighter grip on power.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at robin.harding@ft.com

Relations sour between Japan and South Korea

By the summer of 2019, the global technology industry was getting used to tension between China and the US on trade, but it was taken aback when a dispute erupted between two of the most important and stable nations in semiconductor supply chains: Japan and South Korea. Citing a loss of trust between the two countries, Tokyo suddenly imposed export controls on fluorinated polyimide, photoresists and hydrogen fluoride etching gas — three crucial chemicals for which its companies have a dominant market share.

Underlying the stand-off was a dispute over forced labour during the second world war. South Korean courts have awarded damages against Japanese companies such as Mitsubishi Heavy Industries. Japan says all claims were settled when it paid compensation in a 1965 treaty. South Korea threatened to pull out of an intelligence sharing agreement, but the US persuaded both sides to stand down and the issue went quiet for a while.

It has not gone away, however. The rulings on forced labour have been working their way through the South Korean courts, and at some point soon they may order sales of local assets belonging to Japanese companies. Until now, there have been court rulings but no actual losses suffered; the forced liquidation of Japanese assets would mark a new and more serious stage in the crisis.

Protesters in Seoul demonstrate against Japan's removal of South Korea from a list of trusted trading partners in 2019
Protesters in Seoul demonstrate against Japan’s removal of South Korea from a list of trusted trading partners in 2019 © Jean Chung/Bloomberg

Tokyo would feel obliged to respond. The question is how. The 1965 treaty calls for arbitration, with each side appointing an arbitrator, and a third arbitrator selected either by the first two or by a neutral power. However, South Korea has declined to appoint arbitrators so this route is out, and while Japan might try for the legal high ground by bringing a case to the International Court of Justice, the Korean side is unlikely to agree to ICJ jurisdiction.

Japanese public opinion is also likely to demand stronger action. Direct, tit-for-tat retaliation targeting the assets of South Korean companies would run foul of Japan’s domestic law and constitution, which states that the “right to own or to hold property is inviolable”. Even an act of the Diet, Japan’s parliament, would probably not allow the arbitrary taking of assets from local subsidiaries of foreign companies.

Instead, Japanese government lawyers will be scouring the precedent books for some kind of state-level retaliation — be it sanctions, tariffs, export controls, regulation, visas or some other area of international co-operation — that causes more pain in Seoul than Tokyo, passes legal muster and does not lead to instant defeat in the court of international opinion. The 2019 export controls did considerable harm to Japan’s image as a reliable supplier. Nevertheless, that is unlikely to stop Tokyo from taking action to defend what it regards as a vital interest.

Ultimately, the only way out of the dispute is negotiation, but there is a gulf between South Korea — where the public increasingly regards the 1965 treaty as illegitimate — and Japan, where the public does not believe South Korea will respect any agreement to settle its wartime history. Joe Biden, the incoming US president, will try to keep the peace but look out for a new trade crisis in east Asia during 2021.

Charted waters

Turkey’s geopolitical ambitions under President Recep Tayyip Erdogan have long been a source of concern for other world leaders, including many of those in Europe.

As our Istanbul correspondent Laura Pitel writes in the first of a series of articles on Turkish foreign policy, Erdogan’s actions, both within and beyond the country’s borders, have had a dramatic impact on the economy. The turbulence has weighed on foreign investment. FDI has been substantially less than the OECD average since a failed coup attempt in 2016 led Erdogan to tighten his grip on power.

Line chart of foreign direct investment inward flows as a % of GDP, showing that foreign investment into Turkey has slowed

Policy watch

A container ship at Belfast port. Supermarkets in Northern Ireland are running short of fresh produce due the vast volume of new paperwork now required to process shipments from Great Britain
A container ship at Belfast port. Supermarkets in Northern Ireland are running short of fresh produce due the vast volume of new paperwork now required to process shipments from Great Britain © REUTERS

We’re almost a fortnight into Brexit and one of the areas of disruption that’s garnering a lot of attention is food.

The Guardian has a somewhat comical story on how Dutch TV has shown border officials seizing ham and cheese sandwiches from those making the trip from the UK to the Netherlands. That’s down to a ban on meat and dairy products meant for personal consumption entering the EU.

Businesses are also experiencing issues, including, as the Financial Times reports, supermarkets such as Marks and Spencer, Sainsbury’s and Tesco in Northern Ireland. The problems stem from the Northern Ireland protocol, the mechanism agreed by the UK and EU in 2019 to avoid a hard border between Ireland’s north and south.

Under the protocol, as the reporters write, Northern Ireland continues to apply EU internal market and customs rules to maintain frictionless trade over the land border with the republic. This means vast volumes of new paperwork are required to process Irish Sea checks on shipments from Great Britain to the region. The outcome being that supermarkets are running short of items such as fresh fruit and vegetables and chilled meat, all of which are time sensitive.

We’d anticipate that they will be far less significant a few months from now, once supermarkets have become more adept at filling in the paperwork. For now, though, it’ll be a source of disgruntlement for many shoppers in a region that voted to remain.

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Ford plans to stop manufacturing vehicles in Brazil this year, ending more than a century of production in South America’s largest economy. Its operations there have been a cash drain since the country’s economic downturn in 2013.
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Robert Armstrong asks why banks struggle to go global. 
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Emerging Markets

Ebay to sell South Korea unit for $3.1bn as local rivals target Coupang

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Ebay is set to sell its South Korea business to a local consortium for $3.1bn, according to people with knowledge of the matter, as rivals seek to turn up the heat on SoftBank-backed Coupang in the world’s fourth-largest ecommerce market.

The consortium, which consists of South Korea’s biggest bricks-and-mortar retailer E-Mart and internet group Naver, plans to buy an 80 per cent stake in eBay Korea for Won3.5tn ($3.1bn) with the US company retaining the remainder, said the people.

The purchase could help the consortium to overtake fast-growing Coupang, which raised $4.6bn in an initial public offering in New York in March to become the biggest player in South Korea’s highly competitive ecommerce market. Japanese technology group SoftBank is a large investor in Coupang.

Ebay Korea was the country’s third-largest ecommerce company with a 13 per cent market share last year, according to research group Euromonitor. Its three platforms — Gmarket, Auction and G9 — recorded Won20tn in transactions last year, data from Meritz Securities showed.

Euromonitor has forecast that South Korea’s ecommerce market will grow by 11 per cent this year to $116bn. But it is a fragmented market of more than a dozen players, with Coupang and Naver controlling 19 per cent and 14 per cent shares in terms of transaction volume, respectively.

South Korea is one of the world’s largest and fastest-growing ecommerce markets, driven by its tech-savvy population, high-speed internet infrastructure and densely populated environment. Ecommerce accounted for 35.8 per cent of the retail market last year, compared with 28.6 per cent in 2019, Euromonitor data showed.

E-Mart plans to fund the deal with Won3tn of asset-backed loans with the remainder paid by its cash holdings, while Naver will contribute Won100bn, according to an industry official close to the situation.

“Despite the funding structure, E-Mart needs Naver to make up for its weak online networks,” said the official.

Conglomerate Lotte Group and E-Mart were the final bidders for eBay Korea. Both have struggled to catch up with Coupang, which is investing heavily in logistics to boost its delivery times. Coupang almost doubled its revenues last year to $12bn as more consumers shifted to online shopping during the Covid-19 pandemic.

“Both Lotte and E-Mart were eager to take over eBay’s operations but E-Mart offered about Won500bn more,” added the industry official.

Naver is one of Korea’s most popular internet portals and more than 40 per cent of eBay Korea’s customers access it via the former’s search engine.

Shinsegae, E-Mart’s parent company, and Naver partnered in March by swapping stakes in each other worth Won250bn.

Ebay Korea declined to comment. E-Mart said in a regulatory filing that it was in talks with eBay but a sale had not been finalised. Naver said in a separate filing that the deal had not been concluded.



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ByteDance revenues more than doubled in 2020 to $34.3bn

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ByteDance increased its revenues 111 per cent last year to $34bn and had 1.9bn monthly users across its apps at the end of the year, said its incoming chief executive Liang Rubo on Thursday, according to people familiar with the matter.

The owner of the short-video apps TikTok and Douyin recorded a surge in users as coronavirus lockdowns across the world left people searching for more entertainment online. Douyin, the Chinese sister app to TikTok, was ByteDance’s largest driver of revenue and has become a destination for shoppers looking to buy products from livestreaming presenters.

Facebook, the world’s biggest social media group, reported 2.85bn monthly users as of March 31.

ByteDance recorded an annual gross profit of $19bn but a net loss of $45bn for the year because of non-cash items including share-based compensation and fair-value changes of its shares, and heavy investment in new businesses, the people said. The company had 110,000 employees at the end of they year.

The financials were first reported by the Wall Street Journal and Chinese media.

Its chief rival in China, Kuaishou, reported a net loss of $15.4bn on $8.5bn in revenue last year — four times less than ByteDance — and 481m monthly users during the period. Kuaishou is trading in Hong Kong at a market capitalisation of HK$801bn ($103bn), while ByteDance has yet to reveal its plans for an initial public offering.

ByteDance raised about $5bn in December at a $180bn valuation, according to people familiar with the matter. The Beijing-based company is the world’s most valuable start-up, according to CB Insights. 

Liang made his first all-hands staff meeting speech on Thursday after he began the transition to chief executive last month, following founder Zhang Yiming’s announcement that he would step down at the end of the year. Zhang said he wanted to focus on innovation and “longer-term initiatives”.

Liang, a ByteDance co-founder who staff regard as Zhang’s loyal right-hand man, was previously head of human resources. Even after a six-month handover period, staff said they expected him to not make big changes and to continue taking direction from Zhang.

As Beijing increases its scrutiny of tech giants, several high-profile founders and chiefs have stepped back this year. Colin Huang stepped down as chair of ecommerce platform Pinduoduo in March, days after Eric Jing resigned as chief of Ant Group.

Liang told employees he was disclosing the financial figures as part of a drive for greater transparency at the company.



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Coronavirus latest: Royal Caribbean delays inaugural sailing of ship due to Covid cases

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Monique Roffey in London with a poster of her novel ‘The Mermaid of Black Conch’
Monique Roffey in London with a poster of her novel ‘The Mermaid of Black Conch’, which is published in paperback this month by Vintage © Monique Roffey

In April 2020, as coronavirus spread around the world, Monique Roffey published her seventh book.

She went with UK-based Peepal Tree Press, a small Caribbean-focused independent company, to publish The Mermaid of Black Conch after the majors rejected her fantastical tale of a mermaid from another era.

“Indie published me in the eye of the storm,” Roffey says. “I did everything I could to get it noticed.”

The Trinidadian-born author crowdfunded £4,500 for a publicist for her novel but as the healthcare crisis took hold she feared her mermaid tale would slide by unnoticed.

She was struggling to pay the rent while the Covid-19 crisis cancelled book tours and festivals.

“Covid was potentially disastrous for my book,” she says. “It was in danger of falling into the Covid chasm.”

But then the lyrical tale of loneliness, love and otherness caught the attention of the literary world and judges applauded it. In January, the novel won the prestigious £30,000 Costa book award, with judges calling it “extraordinary”, “captivating” and “full of mythic energy and unforgettable characters”.

And, bingo, suddenly everyone wanted to read about the mermaid Aycayia, says Roffey, who (full disclosure) attended the same school in the outskirts of Port-of-Spain as I did. 

The story has sold about 60,000 copies in print and online and this month it is published in paperback format by Vintage. For two consecutive weeks this year the novel topped The Times bestseller list. Film rights could well be next.

“Against all the odds, I have done well during Covid,” Roffey says from her home in London. “In 20 years of writing, with many ups and downs, I have seen nothing quite like this.”

Her novel of fantasy and folklore tapped into a desire for reading and imagination during the dark days of coronavirus-induced lockdowns. Roffey joined many authors pivoting online with book launches and literary festivals, which meant she gained global readers.

“In 2020, the nation turned to books for comfort, escapism and relaxation,” says the Publishers Association, the UK’s trade organisation that serves book and journal publishers. “Reading triumphed, with adults and children alike reading more during lockdown than before.”

Income from fiction rose 16 per cent last year to £688m, while the total for consumer publications rose 7 per cent in the UK to £2.1bn, the UK trade body says. 

“Basically a book, which was roundly ignored, rejected, published in the first Covid wave and that nobody registered,” was relaunched, Roffey says.

From nobody wanting the book, suddenly billboards of its cover are cropping up around town, she adds.

This is the sixth article in a series for the blog that explores the effects of the pandemic on people and businesses around the world



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