Ex-Seoul-mate: Japan-South Korea spat escalates

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Hello and welcome to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Two crashes of Boeing's 737 Max planes cost hundreds of lives. The costs to Boeing, to the airlines that depend on its planes and and to the suppliers that depend on its orders are still being calculated. Right now it's about $4 billion a quarter. Of course, some travelers opt not to fly at all. Today, the teenage climate activist Greta Thunberg arrives in New York after crossing the Atlantic by sailboat. She wanted to highlight flying's environmental effects. But she's not the only one. In her native Sweden, there's even a word for flight shame. First up, though, in the waters between South Korea and Japan lies a cluster of tiny islands scattered like sharp pebbles flung into the water. Almost no one lives there. Even birds and trees barely cling to life. But this week, the islands have been at the center of a fight between the countries, one that's escalated into a row involving trade and national security.

So these islands are called Dokto by South Korea and Takeshima by Japan. And they're disputed territory in the sea between the two countries. They've been disputed since the end of the Second World War, when the Japanese Empire was being carved up and South Korea became an independent country.

Lena Shipper is our sole bureau chief.

The South Korean military has been conducting big naval exercises around these islands on Sunday and Monday. This week they've been flying helicopters around, sailing warships around them. And this has been the latest salvo in an escalating spat between Japan and South Korea.

What do you mean by that? What's the nature of the spat?

So it comes after several extremely worrying developments. A few days before they started those exercises, South Korea decided not to renew an intelligence sharing deal with Japan, which has been in place since 2016, was brokered by the United States at the time. And today, a Japanese decision to remove South Korea from a list of preferred trading partners came into effect. And this came after Japan claimed that it worried that some of the materials it exports to South Korea might end up in the wrong place, say, in North Korea.

And so how sort of dire is the escalation? Kind of as of now, what's the response to it been?

The deterioration in relations is pretty alarming because the relationship has always been seen as a pillar of stability in the region, where there's a lot of instability otherwise and a lot of tensions. And America has always relied on the stability of the alliance between Korea and Japan to help with dealing with those tensions. And they're really not happy about those developments.

So these are the two big regional democracies, notional allies. How did it come to this? How did this spat even begin?

The relationship between South Korea and Japan has always been a bit tricky, which goes back to Japan's occupation of Korea in the first half of the 20th century, and particularly the atrocities that are perpetrated during that time and especially during the second World War. So during the war, many Koreans were forced to work in Japanese factories. They got very little money, Sometimes they got none at all. Women from Korea and also from other Asian countries were trafficked to brothels and forced to work as sex slaves for Japanese soldiers. And there's obviously a lot of resentment about this in South Korea still. And back in 2015, to get to the more recent history, they finally struck an agreement or one of many agreements regarding the issue of these so called comfort women. So the Korean women who are forced to work in brothels. But last year, various things happened. So for one thing, the South Korean president decided to withdraw from that 2015 agreement. And the South Korean Supreme Court in October made a ruling that Korean victims of forced labor could sue Japanese companies for individual compensation. So Japan believes that those claims of forced laborers were settled by a treaty in 1965 and has called on the South Korean government to rein in the the Supreme Court. And the South Korean government has declined to do this because they said it would be interfering with the judiciary and they can't do that.

So in a sense, it's a reopening of old wounds, a politicization of all of this sort of long running tension.

Yes, that's exactly right. It's definitely politicization going on, particularly because the current governments in Japan and South Korea both have a highly nationalist base and they found it very politically useful to exploit this issue. So that's why it's escalated even more than it might otherwise have done.

So given that this is in Part playing to a nationalist base in both countries. I mean, do you see the effects of that? How does this play out with the Korean people?

So in South Korea, it's actually become quite visible among ordinary people as well, because South Koreans started calling for a boycott of Japanese products, which has been quite successful. I mean, if you go to a pub in Seoul now, it's very possible that you ask for an Asahi and they're not going to give it to you in an Asahi Japanese lager. For anyone who doesn't know, you can see signs and sushi restaurants saying, don't worry, our fish is from Korea. There are shops that no longer stock Japanese products.

And you mentioned that the cooperation between the two countries is kind of an island of regional stability. How far do you think this could go? What risks does it pose while these guys are fighting?

So, as you were saying earlier, South Korea and Japan are supposed to be allies. They're friends. They're also allies of America. And America has always relied on their cooperation in the region to stabilize East Asia. And South Korea and Japan not getting on will make it much harder to deal with numerous risks in the region. So obviously, the one big one that everyone has heard of is North Korea. Kim Jong Un has been launching lots of missiles over the past few weeks. He's tested several weapons systems. Russia and China flex their muscles in the region, and if Japan and South Korea don't get on, all of that just gets much harder to manage.

With these military drills going on this week and these export controls coming into effect today, how do you think this plays out? What happens next?

So I think what we're probably going to start to see over the next few weeks is more of an economic impact, because the export restrictions on those chemicals that Japan put on in July haven't yet had that big an impact because they've been continuing to authorise shipments so far. And as you just said, the other restrictions just came into force today, so we're presumably going to start seeing more of an effect from the traditional red tape that companies have to deal with. There might be some disruption to regional supply chains and also to global ones.

And what about politically? What do you see happening there?

So, in terms of where this conflict's going to go next, politically, it's a bit more difficult to tell because the messages have been really mixed. So you've had a few conciliatory showns on the South Korean side recently. On August 15, the South Korean president gave a speech saying he would happily join hands if Tokyo chose the road of dialogue today again they the government said if Japan retracts these trade restrictions then they might rethink the decision about the intelligence sharing pact. So there seems to be some openness to dialogue. But at the same time, the domestic pressures that we discussed earlier make it very difficult for every side to back down at this point. So there's also a danger that they just remain locked in this vicious circle of nationalist one upmanship.

Thank you very much for joining us, Lena.

Thanks very much, Jason. Good to be here.

Boeing is a central cog in American industry. It's the country's largest manufacturing exporter. One in a hundred American workers is employed either directly by Boeing or by one of its domestic suppliers. The company's best selling plane, the 737 Max, has been grounded by regulators since March after two crashes killed more than 300 people. The software failure linked to the crashes came with immeasurable human cost. But there's been a financial blow too, and not just to Boeing.

The impact of the grounding doesn't only hit Boeing. Its airlines and the supply chain are also suffering.

Simon Wright is the Economist's industry editor.

We've done a rough calculation and we think it's costing all of them at least $4 billion a quarter. If you were to visit Boeing right now, you would see their car parks filling up with the planes that they're still making that have been grounded since March after the two fatal crashes. Boeing is still churning out 42737 maxs a month. It had intended in fact to be turning out 57 by now. And it's that problem that is having an impact both on the airlines that Boeing's customers and also suppliers that sell it the parts for those planes.

And what's the state of play with the Max itself is it's still not airworthy.

The faulty software is being fixed and Boeing intend to resubmit the fixes to regulators in September. They hope that sometime early in the fourth quarter, and that's as specific as they're being, that the plane will receive its recertification and start flying again sometime after that.

And once they do, do you think there will be sort of knock on effects of people who are just simply frightened to fly in it or people who are worried about buying them?

The airlines don't really have any choice. The 737 Max is Boeing's best selling plane. It's far more fuel efficient than the previous version and there's this relentless pressure to cut costs. There's a duopoly in supplying these sort of planes. Airbus is the only other company they could go to and they have an enormous waiting list. You'd have to get to the back of a very long queue if you wanted to switch. Now, it's instructive that all. Although there have been no more orders for 737 Maxs since the grounding, no one's cancelled any orders either. People have done surveys of passengers asking them if they'd fly a 737 Max or if they prefer to fly another plane, and they all say, well, we'd fly another plane. But I think once it comes down to it, and the question is, you can fly a 737 Max or not fly at all, or you can fly a 737 Max or pay a much higher fare to go on a completely different route, I think it'll be different then, particularly after it's been back in the air for a few months and without incident.

So let's talk about who's been affected so far. How has this hit the airlines to have this plane grounded for this long?

Well, it's hit them in two ways. Boeing have already delivered about 390 of these planes to airlines. So the airlines that have had the planes have had to ground those planes, but also because it was going to be building 57amonth. That's 57 planes that airlines haven't been getting to. So Southwest, which has the biggest fleet of Maxs, has cancelled numerous flights. It took a big hit to its profits in the second quarter. It's the same with other airlines as well. Ryanair, for example, which hasn't had any Maxs yet, was expected to get quite a few next year and has cut its estimates for how much it's going to grow by next year. It'll be cutting some routes and abandoning some small airports entirely.

And presumably the suppliers of parts for these planes are also suffering.

They are to a lesser extent, because Boeing is still making the plane and is still paying the suppliers, but of course, it's only making 42amonth rather than the 57 it had been originally. And also it's different for GE, which, with Safran, a French company, supplies the engines. They only get paid once those planes are delivered, so they've taken a bigger hit to their cash flows. Some suppliers are worse hit than others. I mean, most suppliers fly both Boeing and potentially Airbus, but also not just for the Max, but for a wide range of planes. Or, you know, they're just sort of general engineering companies. So Boeing is part of their business, but not a Huge part of their business. But that's not true of a company, say, like Spirit Aerosystems, which makes a lot of the fuselages for 737 maxs. They get half their revenues from Boeing, so they've taken a bigger hit.

And what about for Boeing itself? How is it bearing up?

Well, Boeing's a very big and very profitable company. Having said that, it announced its worst quarterly results in the second quarter primarily because it has set aside nearly 5 billion to compensate airlines, its customers because of the disruption. I mean, at the moment it can take the financial pain, but if the plane doesn't get back in the air in the fourth quarter, and that's the question hangs over that because that relies on the regulators who don't march to sort of Boeing's timetable, then it could get worse.

What about that possibility? Boeing is itself an enormous employer. Its suppliers add a bunch of employees to that. This is a big part of the economy. I mean, is it literally too big to fail?

Well, the Federal Aviation Administration has a difficult task to perform. It was one of the last regulators to ground the 737 Max. And after the grounding it became clear that Boeing had been allowed a fair degree of self certification. So I don't think it's going to want to rush its recertification of this plane because its own reputation is at stake. On the other hand, there's a lot of commercial pressure on it to do so. So I think it's a moot point where the Boeing's timetable and the FAA's timetable are the same.

Simon, thank you very much for your time.

Been my pleasure.

There's another place where the aviation industry is feeling some commercial pressures. Sweden. Today, Greta Thunberg, a 16 year old school skipping Swedish climate activist, arrives in New York by sailboat after a grueling two week journey. She chose not to fly to the upcoming United Nations Summit on Zero emissions. Instead, arriving by nearly zero emissions means.

I am not telling anyone what to do or what not to do. I'm just doing this because I want to do this myself. And I am one of the very, very few people in the world who actually can do this. And then I think I should take that chance to do this.

But she's not the only Scandinavian with similar motivations.

So there's been a growing movement, particularly in Sweden, of people eschewing flying because of feeling guilty about the environmental effects of it.

Rachel Dobbs writes about Europe for the Economist.

Over the past 18 months, the amount of Swedes who say that they will travel by rail instead of by air, if it's possible, has nearly doubled. It's gone up from 20% to 37%, according to SJ, which is Sweden's largest train operator. The numbers make it look like people are actually doing this. In 2018, SJ sold 5% more tickets than the previous year for rail journeys. And at the same time, the number of passengers on domestic flights in Sweden fell 8% from January to April. Previously, up until mid-2017, flights were growing year on year.

So how did this come about? Is this the impact of Greta Thunberg's agenda, or is she in turn responding to something that came sort of before she was on the scene?

Moving away from air travel has been a growing movement in Sweden. For a little while, Sweden has typically been a nation of very frequent fliers. In 2017, the Swedes flew five times the global average. But there has been increasing shame and worry about the environmental impact of all of this flying. A word was coined called flygsam, which is flight shame, which is the embarrassment that travellers feel about their environmental impact. This became kind of the rallying cry of a movement championed by Bjorn Ferry, who was an Olympic biathlete who very publicly stopped flying in 2015. And then in 2017, he was joined in his boycott by 10 celebrities. And then last summer, there were heat waves all over Europe, But Sweden felt the effects particularly severely. There were huge wildfires across the country and the movements then started to really take off, I think, because people were feeling the impacts of climate change for themselves. There was also at the same time, a social media campaign called fleekfliet 2019, which asked people to pledge not to fly for a year. And 14,500 people signed up to that. And the organisers are now trying to boost that to 100,000 people pledging not to fly in 2020.

So all of this is just basically a result of the fact that climate change has come to Sweden's front door, and they're particularly responsive to that.

I mean, there are other factors in play with the flight consumption slowing down. So one of them is a slowing economy. There are fears about a recession in Sweden. There was a new tax introduced on flights last year to try and dissuade people from taking air travel if there were other options available for environmental reasons. There was also a bankruptcy last year of nextjet, which is Sweden's regional airline. However, even with all of these factors, industry watchers think that the main driving force for Swedes flying less is this sense of shame over the environmental effects that it has.

And Is it just confined to Sweden or is the shame more widespread?

So there is evidence that the campaign, particularly on social media, has spread to other countries. Other countries have their own word for flight shame. It's called flugsham in German. There's also words in Finnish and Dutch, although there is no evidence yet that while the social media campaign is there and the awareness might be there that people are actually taking fewer flights, there's a 4.1% year on year rise in overall European air passenger traffic for the first five months of 2019, which is obviously going in the opposite direction to the Swedish trend.

Rachel, thank you very much for joining us.

Thank you, Jason.

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