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Japan-South Korea dispute is a sign that the world order is 'collapsing,' says trade expert

Key Points
  • The two Asian countries are currently locked in a trade dispute that ignited in July when Japan restricted exports of high-tech materials to South Korea which are critical for producing semiconductors and display screens.
  • "I think that this Japan-Korea incident is a symptom of what happens when a system starts to collapse," Elms told CNBC's "Squawk Box" on Wednesday.
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The global order is now 'collapsing': Asian Trade Centre

The trade conflict between Japan and South Korea is a sign that the global order "is now collapsing," according to Deborah Elms, executive director at the Asian Trade Centre.

The two Asian countries are currently locked in a trade dispute that flared up in July when Japan restricted exports of high-tech materials to South Korea which are critical for producing semiconductors and display screens.

Since then, the two sides have threatened to drop each other from their respective preferential list of trusted trade partners, paving the way for potentially lengthy licensing processes — Japan's threat took effect on Wednesday. As things escalated, South Korea also scrapped a military intelligence-sharing pact with Japan.

"I think that this Japan-Korea incident is a symptom of what happens when a system starts to collapse," Elms told CNBC's "Squawk Box" on Wednesday. "You have trade disputes that escalate and there's no hand brake anymore, so they roll over into security disputes — and then again, there's no hand brake, so they can continue to percolate and there's no obvious way to end them."

"We are at a situation that, to be honest, really could have been reined in at any point, should have been reined in at some point ... and yet doesn't seem to be stopping," said Elms, whose projects include the Regional Comprehensive Economic Partnership (RCEP), according to the Asian Trade Centre.

South Koreans participate in a rally to denounce Japan's new trade restrictions and Japanese Prime Minister Shinzo Abe on August 24, 2019 in Seoul, South Korea.
Chung Sung-Jun | Getty Images News | Getty Images

Elms said the tensions between Seoul and Tokyo were "like two neighbors arguing over who planted the tree on the property line that is now encroaching on both sides."

"While we're arguing about a tree that is on the property line, there is a forest fire on the ridge line," Elms said.

Tensions between the two countries hark back more than six decades, since Japan occupied the Korean Peninsula from 1910 to 1945 during World War II. Both countries signed a treaty in 1965 — but relations continue to be strained over compensation for forced labor by Japanese companies and sexual slavery of Korean women in wartime brothels.

How the system could 'derail'

The ongoing trade fight between the U.S. and China has rattled world markets and raised concerns over the global outlook. Late last week, both Washington and Beijing announced new tariffs on billions of dollars worth of each other's goods.

"I think there are many things at this point that could derail the system," Elms said, when commenting on the current global order. "Anything can happen," she said citing countries such as the U.S. that are "less respectful of the rules-based system."

She said that when rules and norms break down, "lots of things change."

"I think, we're at that moment where things are starting to shift."

With a system that's facing multiple threats and "no anchor," policymakers have been left unclear on how to respond amid rising uncertainty and risk, Elms said.

— Reuters contributed to this report.