On Dec. 17, 1965 South Korea's then President Park Chung-Hee ratifies the Treaty on Basic Relations signed on June 22, 1965 between Japan and South Korea. It established basic diplomatic relations between the two nations. To his left is Foreign Minister Lee Dong-won. At left is Prime Minister Chung Il-Kwon. At far right is Kim Dong-Jo, chief negotiator of the Korea-Japan talks for normalization.

One of the most positive surprises in international relations over the past few years has been Japan’s stepping up to regional and global leadership, especially in economic affairs. Filling a void left by the United States, Tokyo has won plaudits for its effective diplomacy on trade, infrastructure investment, and digital rulemaking. Unfortunately, Japan’s strategic gains are now at risk because of its escalating dispute with South Korea over history and trade.

To be sure, Tokyo has reason to be frustrated with Seoul. The pair of rulings by South Korea’s Supreme Court in the fall of 2018 to award reparations to a small group of Korean citizens forced into wartime labor by Japanese companies infuriated Tokyo. The government of Prime Minister Shinzo Abe has argued with good reason that these issues were resolved “completely and finally” in a 1965 treaty that established diplomatic relations between Japan and the Republic of Korea (ROK).

Nor were Tokyo’s two recent actions—first announcing tightened controls on exports to South Korea of three key materials used in producing semiconductors and flat-screen displays, then on August 2 declaring that Korea would be removed from Japan’s “white list” of countries eligible for blanket export approval—without foundation. Japan’s Ministry of Economy, Trade, and Industry (METI), which administers the country’s export-control regime, has long believed that Seoul’s lax enforcement has allowed leakage of sensitive technology to North Korea and other untrustworthy countries. In its July 1 statement, METI justified the initial action by saying that “the Japan-ROK relationship of trust” had been “significantly undermined.”

Finally, Tokyo is warranted in feeling that the Korean reaction to its actions has been exaggerated. For one thing, the METI actions do not amount to an export ban, as some Korean commentators have asserted, but a return to the status quo ante of case-by-case approval of export licenses for controlled items. Moreover, Seoul’s toleration of consumer boycotts of Japanese products validates Tokyo’s claim that the Korean reaction has been overly emotional. President Moon Jae-in’s quixotic call for a “peace economy through inter-Korean economic cooperation” to compete with Japan will do little to restore trust in Tokyo.

All that said, the Abe administration should do some soul-searching of its own about its actions and consider whether they advance Japan’s overall interests. The timing of the initial decision—coming shortly after Japan rejected a Korean proposal for a joint compensation fund and shortly before Japan’s Upper House elections in mid-July—does feed suspicions that the move was political. But even if motivated by genuine and pressing national-security concerns, the action is likely to do damage to Japan’s broader interests.

The first of these is economic. True, the Japanese and Korean economies are not as integrated as one might expect of such close neighbors, with each accounting for only about 5-8 percent of the other’s exports. But both countries have reduced their already-weak growth forecasts as a result of the dispute. Tit-for-tat retaliation could also do significant damage to key industries in both economies, including semiconductors in South Korea and consumer products in Japan. Moreover, a trade dispute between the world’s third- and twelfth-largest economies could have knock-on effects for a global economy already facing downsides risks from trade and geopolitical uncertainty.

The strategic implications for Japan of the dispute are even greater. First, it distracts from cooperation the two countries should be prioritizing in the face of pressing security threats to both, including North Korean missile tests and Russian incursions into Japanese and Korean airspace. Moreover, Tokyo and Seoul have a shared strategic interest in working together to push back against Chinese coercion and violation of international norms in the region.

This leads to a subtler problem for the Abe administration: the negative impact of the dispute on its economic diplomacy in the region. As mentioned, Tokyo has won praise for stepping into the void left by the Trump administration’s early decision to withdraw from the Trans-Pacific Partnership (TPP). Against all expectations, Japan was able to broker a deal among the remaining 11 members of the arrangement. Japan has also been a champion of “quality infrastructure,” winning the agreement of global economic leaders to a set of principles in this area at the Group of 20 summit in Osaka in late June. Prime Minister Abe also won endorsement at Osaka of his concept of “data free flow with trust,” a successful effort to launch a global conversation about the appropriate balance between allowing data flow on the one hand and ensuring privacy and security on the other.

Not only has Japan’s image as an economic leader been tarnished by the dust-up with its neighbor, but the prospect that South Korea—potentially an important voice on trade, infrastructure, and digital rulemaking—will join Japanese-led initiatives in these areas has been greatly diminished. Already, Seoul has reportedly suspended consideration of joining the restructured TPP agreement.

It is in the strong interest of both Tokyo and Seoul to step back and avoid further escalating their dispute. They should agree to immediate working-level talks on the concerns underlying Japan’s export-control decisions. As long as Seoul is engaging in those talks in a constructive manner, Tokyo should suspend implementation of the measures. Meanwhile, the Moon government should also agree to international arbitration over the historical forced-labor issue, as the Abe administration has proposed.

Without picking sides, the United States should find a way to quietly nudge the two disputants toward dialogue and dispute resolution. Some would argue that the Trump administration enabled the problem to fester by neglecting traditional alliance management and being late to intervene. But offering to convene all three countries’ export control experts, for example, could still play a useful role in moving toward a pragmatic solution.

But at the end of the day, it is up to Tokyo and Seoul to find a way to manage their differences. As the larger, more experienced, and more confident actor, Japan has a special responsibility in this regard. If Tokyo wants to continue enjoying the strategic benefits of its regional and global leadership over the past few years, it should accept the burdens of leadership as well and find a way to rise above the fray.

The above writer, Matthew P. Goodman, is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.