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

In July 2019, the Japanese government announced export controls to South Korea of three chemical inputs essential in semiconductor production. The paper investigates the short- to middle-run effect of these Japan–Korea export controls on trade patterns (i.e., Japanese export and production and Korean import, export, and production) along the global value chain of the semiconductor industry. The results show that the export controls caused a large decline in Japanese exports to South Korea of one of the three restricted inputs, hydrogen fluoride, but not in the other two restricted inputs, photoresist and fluorinated polyimide. Second, the restrictions increased Japanese exports of hydrogen fluoride to the U.S., and thus did not cause a decrease in the Japanese production of semiconductor-related products. Third, South Korea reallocated input sourcing from Japan to economies such as Belgium, the U.S., and Taiwan. Fourth, South Korea increased the export of semiconductor manufacturing equipment to China, possibly because of its semiconductor production relocation to China. Fifth, Korean firms' domestic production and Japanese affiliates' local production in South Korea increased after the export controls. These results suggest a potential role of export controls in sourcing patterns and production relocation in the semiconductor industry.