South Korea Fears Japan Trade Dispute Could Scuttle Shipyard Merger

South Korean officials are concerned that Seoul’s increasingly strained trade relations with Japan could derail the country’s planned megamerger of the country’s two big shipbuilders.

Hyundai Heavy Industries Holdings Co. plans to seek antitrust approvals from Japan, China, Singapore and the European Union to combine operations with Daewoo Shipbuilding & Marine Engineering Co. , according to people with direct knowledge of the matter.

The merger would create the world’s biggest shipyard, with control over some 20% of the global market, and would compete with yards in those countries for new ship orders worth billions of dollars.

If any of those regulators turn down the approval request, the merger could be canceled.

“None of the approvals are certain, but the one from the Japanese government is especially tricky,” one person involved in the process said. “Trade relations between Seoul and Tokyo are quite tense and it’s not the best time to ask Japan on such matters.”

Japan and South Korea have been locked in an escalating trade dispute taking in major businesses in both countries since South Korea’s supreme court last year ordered Japanese companies to pay damages for forced labor of Koreans during World War II.

The tension intensified in July after Tokyo imposed export controls of three materials crucial to Korea’s manufacturing of semiconductors and display screens for electronic devices. In August, Tokyo removed Seoul from a list of trusted trade partners with preferential status, while South Korea withdrew from a regional military intelligence-sharing agreement that includes Japan.