Politics first? Do changes in bilateral political relations affect imports from South Korea to Japan?

Abstract: Have Japan’s imports of South Korean products changed in response to changes in the levels of political tension between the two countries, and have this affected the success of attempts made by South Korean firms to enter the Japanese market? The absence of transnational South Korean firms such as Hyundai, Kia and LG on the Japanese market, a geographically and psychically proximate market to the South Korean market, suggests that factors other than those put forth by established international trade models such as the Gravity model and market entry models such as the Uppsala model have affected South Korean imports to Japan. Pollins (1989) argues that firms take bilateral political tension between countries into account when managing risk, and that governments and consumers are likely to react negatively to heightened political tension, including boycotts and decreased demand for goods from the other country. By using a multiple regression analysis we have examined how and if Japan’s imports from South Korea have been affected by changes in political tension between Japan and South Korea, both on an aggregated level and on an industry level. The results of our research indicate that changes in political tension did not have a negative effect on Japan’s imports from South Korea during the period 1999-2012 that Pollins suggested that it would, neither on the aggregated level nor in industry level.