Since the launch of the new Moon Jae-in administration, relations with China have been showing signs of improvement, with Beijing easing some of the economic retaliatory measures it placed due to the deployment of THAAD. Chinese tour agencies which had halted all group package tours to Korea have started making inquiries once more, and Korean corporations hit hard by the recent row have also been noticing some changes. We will take a closer look at what kind of changes are taking place in Korea-China relations and what kind of improvements should be made with Jo Yong-chan, the head of the US China Economics Research Institute. Let’s first take a look at the changing atmosphere in China.

Since the Moon Jae-in administration took office, changes have been noticeable in many different areas. Demand for Korean beverages and snacks have been on the rise, while orders for Korean milk have been on the recovery. Chinese group tourists, who had stopped all visits to Korea for the past two months, are also starting to come back. According to industry watchers, Jin Air is preparing to re-launch its irregular route between Korea and China in September, while Eastar Jet is planning on resuming flights to five Chinese cities that had been suspended due to the THAAD situation in the near future. Hyundai Motor, which had been especially hit hard by the recent row, held a promotional sales event celebrating its 15th anniversary in Guangdong Province and sold 833 vehicles on the spot. Hyundai Kia Group saw sales in China drop 52% in March and 65% in April, so companies like Hyundai Kia, Lotte Mart, and others are breathing a sigh of relief over improved relations.

Since the THAAD deployment was announced in July last year, China started putting restrictions on its nationals from visiting Korea and Korean cultural content. It also started putting sanctions on Lotte Group, which provided the site for the missile defense system. However, the hardline stance has been softening recently with Lotte Mart’s Chinese website up and running again for the first time in two months and some Chinese tour agencies resuming visa services for trips to Korea. Advertisements with Korean stars have also been making a comeback. So, what could have caused relations between the countries to thaw?

The decisive factor occurred on May 11th. It was when Chinese President Xi Jinping gave a congratulatory call to President Moon Jae-in on his election victory. Xi was the second major world leader after US President Donald Trump to give President Moon a call, indicating his desire for improved Korea-China relations. He also expressed his hope that Korea would send representation to its Belt and Road summit, which was held on May 14th and 15th in Beijing. Moon responded immediately by sending lawmaker Park Byeong-suk of the Democratic Party of Korea as a special envoy to Beijing, which is thought to have reflected positively on the new administration. China even arranged a brief meeting between President Xi and special envoy Park, greeting the Korean delegation warmly. All of these developments are contributing to the changing mood in Korea-China relations.

China sent a congratulatory message to the new president and President Xi Jinping made a congratulatory call to President Moon on May 11th. It was the first time that a Chinese president called a South Korean president to congratulate them on their inauguration. Korea responded quickly by sending a delegation to China’s One Belt, One Road Summit soon after the inauguration. Also, President Moon’s special envoy to China, former Prime Minister Lee Hae-chan, visited China from May 18th through 20th to encourage the normalization of Korea-China relations.

Foreign affairs and trade experts are saying special envoy Lee Hae-chan’s visit to China is the first step in China lifting some of the retaliatory measures against Korea. He brought a personal letter from the president on North Korea’s nuclear issue and restoring Korea-China ties, and it seems clear his visit is a new breakthrough for relations between the two sides. Also, the AIIB Annual General Meeting that will be held next month in Jeju-do is expected to be another watershed moment. If the new Moon administration had not taken office and things did not move as quickly as they are now, both sides would suffer astronomical economic losses and it would take years for relations to go back to normal. However, at this rate, the two leaders will meet sometime around the G20 Summit in Germany in July, or during the 25th anniversary for diplomatic relations between Korea and China in August, with prime ministerial-level meetings taking place in between. Hopefully, Korea-China relations will recover to previous levels by that time.

Special envoy Lee Hae-chan met with Chinese foreign minister Wang Yi and President Xi Jinping to discuss the new Moon government’s foreign affairs policy direction and solutions to the current row over the deployment of THAAD. China’s foreign ministry expressed anticipation over the developments, saying it will become the “new starting point for improvement in Korea-China relations.” In fact, the two countries have close economic ties and the recent row has led to losses for both sides.

A report by the Hyundai Economic Research Institute says Korea and China will suffer losses of up to 8.5 trillion won and 1.1 trillion won respectively due to Beijing’s economic retaliation against THAAD. China put a stop to all tour packages to Korea on March 2nd and put restrictions on cultural content related to Korea. Hallyu stars were forbidden from working in China, while K-pop and K-drama websites were blocked. China also suffered losses as 4.4 million Koreans visit China per year as of 2015, accounting for 17.1% of the total number of tourists. During the peak travel period of March through May, figures show the number of Korean tourists visiting famous tourist sites, such as Zhangjiajie and Mt. Huangshan, dropped by 70%. With the Chinese boycotting Lotte Mart and Orion in China, not only are the companies hurt, but 13,000 local employees working at these companies are being affected, as well as their local suppliers and affiliates.

Losses for Korea’s tourism industry, cultural content, the retail industry, and investments have been snowballing due to the THAAD situation. The number of Chinese tourists visiting Korea was a mere 360,000, dropping 40% from the same period last year. The cumulative service account deficit for the first quarter was $8.86 billion, a record high. China also saw the number of Korean tourists plummet and with damages suffered by Korean corporations that entered the local market, the wages fell and affiliate companies also suffered damages. As such, both countries are in need of an exit strategy.

The relations cannot be thawed instantly. Realistically, it will be difficult to go back on the THAAD deployment issue with the US because of the Korea-US alliance, but China is saying it cannot accept THAAD on Korean soil. So, it will not be easy to come up with a solution for this issue. Chinese scholars and media say China is not upset at the fact that THAAD has been deployed on the Korean peninsula, but that the Korean government did not discuss the issue with China before the deployment. If the new government is able to persuade Beijing that the deployment was inevitable given the dire circumstances over North Korea’s nuclear issue, and continue to cooperate with China on its mid- to long-term national projects like the One Belt One Road initiative, there could be an exit strategy for both sides in the current predicament.

This year marks the 25th anniversary of Korea-China diplomatic relations. The current THAAD row has brought on the biggest crisis for the two sides since forging ties. By resolving the current THAAD crisis, the two countries should find a way to move forward in a future-oriented partnership.