An aerial view of Hyundai Heavy Industries’ shipyard in Ulsan. (Photo: HHI)

Economic conflicts between Korea and Japan are spreading to the shipbuilding industry, beyond the semiconductor industry. The Japanese government filed a complaint over Hyundai Heavy Industries’ (HHI) merger with Daewoo Shipbuilding & Marine Engineering (DSME) with the World Trade Organization.

The Japanese government requested dispute consultations on shipbuilding between Korea and Japan on Jan. 31, criticizing Seoul of violating the WTO’s subsidies rules.

The request is the first stage of the WTO’s dispute settlement process. The dispute was made known by a document released by the WTO on Feb. 11.

Japan took issue with the Korean government’s taking a series of steps which were designed to provide financial support to its Korean shipbuilder, including the direct provision of money, in violation of the WTO’s rules on subsidies.

Japan objects to the plan that will see the Korea Development Bank receive 9.12 million convertible shares and 6.1 million common shares from Korea Shipbuilding & Offshore Marine Engineering (KOSE), the merged entity and holding company of HHI, in return for KOSE buying 59.7 million DSME shares. Japan also cited KDB’s pledge to provide up to 1 trillion won in additional financial support.

The Japanese Daily Yomiuri reported that behind Japan’s dispute with the Korean shipbuilding industry was the Office of Japanese Prime Minister Shinjo Abe.

The report said the Japanese had come under pressure to win a dispute with the shipbuilding industry this time, following a WTO’s decision over fisheries that ended up in favor of Korea.

Japan’s dispute with HHI’s merger with DSME may be interpreted as the Japanese government’s political maneuvering, not only to protect the Japanese shipbuilding industry, but also to justify itself on frozen relations between the two countries, such as Japan’s export curbs on Korea and the renewal of the General Security of Military Information Agreement (GSOMIA), a bilateral intelligence information-sharing pact. The Korean government originally scrapped the agreement but later reversed its decision and kept it intact for the time being.

Sources of the Korea shipbuilding industry said Japan’s dispute with HHI’s consolidation with DSME was feared to serve as a stumbling block to the completion of the merger, which is required to pass through scrutiny into KOSE by fair trading authorizes of six countries, including Japan. Japan is feared to raise objection in the scrutiny.

As to the matter, officials with the Ministry of Trade, Industry and Energy said in the past, Europe had filed similar complaints with the Korean shipbuilding industry, which ended up in favor of Korea in most areas of contention. Korea was studying with Japan’s latest dispute, but not with much worry, they said.

Experts and analysts with the Korean shipbuilding industry said at the background of Japan’s dispute with the Korean shipbuilding industry is Japan’s sagging shipbuilding industry, which lags behind Korea’s competitors.

Clarkson Research, the world’s biggest provider of shipbroking and integrated shipping services, said Japan saw its winning shipbuilding orders plunging from 23 percent in 2015 up to 13 percent last year. Korea’s share in the global shipbuilding industry, which stood at levels similar to those of Japan four years ago, shot up to 37 percent last year.

Japanese shipbuilders plan to scale back shipbuilding business or dispose of shipyards, as Japan Marine United (JMU), Japan’s No.2 shipbuilder, revealed a plan to continue marine shipbuilding until next first half. Under the current situation, HHIs merger with DSME, which will bring their combined market share to 21 percent and become the global No. 1 shipbuilder, is considered to threaten the existence of the Japanese shipbuilding industry, Korean analysts said.