Growing trade tensions between South Korea and Japan may look like a local dispute — but if they drag on, they could disrupt the high-end tech industries on a global scale, says the chief executive officer of South Korea's sovereign wealth fund.
South Korea downgraded trade relations with Japan on Wednesday and dropped Tokyo from its list of preferred partners that receive fast-track approvals. The move was said to be in retaliation against Tokyo's decision last month to remove Seoul from its own preferential list of trusted trade partners.
If the trade conflict between the two neighboring countries continues in the long run, it could have a big impact "because it might disrupt (the) global value chain — especially in high technology sector," Heenam Choi, chairman and CEO at the Korea Investment Corporation, told CNBC's Amanda Drury at the Singapore Summit. "We are ... really worried about that kind of trade tension."
Some of these high tech products that both countries buy from each other include electronic equipment, parts like integrated circuits and various materials used to produce computers, smartphones and cars. Global production for these high-value products could be disrupted if their trade fight continues.
Tensions between the longtime rivals intensified in July when Japan announced stricter restrictions on exports of three crucial high-tech materials used by South Korean tech companies, like Samsung, to make memory chips and smartphone displays. Seoul, for its part, has launched a complaint to the World Trade Organization.
While Japan has not explained in detail what's driving its trade actions against South Korea, media reports have suggested Tokyo's decisions could be in retaliation against their ongoing dispute over forced labor during World War II. Amid calls to boycott Japan, sales of Japanese products in South Korea — from cars to clothes to beer — have plummeted.
Local media in South Korea also reported that lawmakers have proposed a bill to revise the Korea Investment Corporation Act to stop the sovereign wealth fund from investing in Japanese companies involved in wartime slave labor. Choi said if a law is enacted, KIC will have to stop investing in those firms.
Still, the bigger note of concern for the sovereign wealth fund is the trade war between the United States and China, Choi said.
That trade fight has roiled markets, created uncertainty for businesses and dampened the global growth outlook. For its part, KIC — which ended last year with $131.6 billion assets under management — is prepared to be more flexible in terms of asset allocations as the dispute between Washington and Beijing continues.
Last year, the sovereign wealth fund recorded a loss of 3.66% on total assets, which was down from a 16.42% gain in 2017. KIC said in its annual report that some challenges it faced last year in the global financial market included a tighter monetary policy in the U.S., trade war and worries about a global economic slowdown.
Choi told CNBC that while it may not be easy for both the U.S. and China to reach an immediate consensus in the trade war, there is a "strong incentive" for them to reach some sort of agreement.
In the end, it may not be a "winner-takes-all" game, he said, and might even become a "lose-lose" situation for both.
"They are going to make (a) compromise in some areas. On trade tension, even though it looks ugly, but I'm already a bit optimistic about that."
In contrast, Choi said the outlook for some kind of resolution between Japan and South Korea appeared less certain as the dispute has only just begun. Both countries play a "very important role in (the) global supply chain," and neither of them wants to disrupt that, Choi explained.