On the last day of October, South Korea and China agreed to patch up their differences over the deployment of the Terminal High Altitude Area Defense, or THAAD, system on Korean soil and to normalize their strained relations. On another positive note, a South Korea-China summit is scheduled for this week during the Asia-Pacific Economic Cooperation, or APEC, meeting, boding well for a solution to some economic problems triggered by the THAAD dispute. Here is Dr. Han Jae-jin at the Hyundai Research Institute to analyze possible changes from the thawing relationship between South Korea and China. First, Dr. Han explains the significance and background of the recent bilateral agreement.
Foreign ministries in both countries announced the agreement on October 31. It’s been 15 months since conflict erupted between the two nations after the South Korean government decided to install the THAAD battery in July 2016. From the beginning of this year, it had been widely anticipated that the Chinese government would change its foreign policy after its major party congress to ease its rather tense relations with South Korea and seek more engagement with it instead. As expected, China sent a signal indicating that message after the party congress ended. Obviously, both South Korea and China felt the need to mend their ties. China, on its part, seems to have believed that the prolonged conflict with South Korea would be detrimental to its own economy.
South Korea and the U.S. began to discuss the placement of the THAAD system after North Korea conducted its fourth nuclear test in January last year and test-fired a long-range rocket the following month. North Korea later pushed ahead with more missile launches, and the South Korean government decided to deploy THAAD in July last year. The decision drew a strong backlash from China, and conflict between South Korea and China intensified. Fortunately, the two sides have recently promised to settle the dispute and put bilateral cooperation and exchanges back on the right track. Behind the agreement, Chinese President Xi Jinping showed his commitment to improve ties with South Korea, while the Seoul government has made efforts to dispel Chinese worries about the security alliance between South Korea, Japan and the U.S. Also, both sides shared the view that a protracted economic conflict would cast a cloud over their future.
The Hyundai Research Institute has released a report on trade, investment, tourism and the cultural content industry involving South Korea and China. The report estimates that Chinese economic measures against South Korea over the THAAD issue, if they are in place until the year’s end, will result in a loss of 8.5 trillion won, or 7.4 billion US dollars, this year. It is more than 0.6 percent of South Korea’s gross domestic product, or GDP. In fact, China is also estimated to suffer from losses of over 1 trillion won, or nearly 1 billion US dollars. If South Korean firms in China close their businesses, local workers will lose their jobs. For China, that’s not a desirable scenario. The shrinking number of Chinese tourists to South Korea has hurt local industries in Korea, including the duty-free sector. In the cultural area, bilateral exchanges have almost come to a halt since last year due to China’s ban on South Korean pop culture.
China’s retaliation over the THAAD row started with the so-called “hallyu ban,” which regulates the circulation of Korean cultural content in China. Later, China barred its tour groups from visiting South Korea, leading to a drastic decrease in the number of Chinese tourists to Korea. As a result, the Korean tourism sector saw its revenue drop by 6.51 billion US dollars. South Korean companies doing business in China have also been hit hard. For instance, sales of automobiles in China by Hyundai Motor fell 37 percent between January and September this year, compared to the same period of last year. In September, Lotte Mart decided to shut down its China operations. But China’s economic retaliation against South Korea has also dealt a blow to its own economy. South Korean companies’ investment in China declined 43.7 percent in the first seven months of the year, and China is expected to see a loss of 1.1 trillion won due to various factors, including job reductions. After all, the THAAD conflict has incurred damage on both sides. Will the two countries be able to end the vicious circle and improve the situation?
It’s hard to expect any visible effect right away, since the two countries have just agreed to improve their ties. I guess things will show signs of recovery early next year. The tourism sector, in particular, is expected to see a boost, and the sales of Korean cosmetics in China will likely increase, as they are one of the highly competitive products in the Chinese market. In the automobile sector, however, locally-made vehicles in China are strengthening their competitiveness rapidly. So, it is difficult to expect a quick recovery in auto sales by Korean carmakers. In this respect, those in the automobile and related industries need to improve the quality of their products and sharpen their competitiveness.
Now that South Korea and China have agreed to restore their ties, the THAAD risk is likely to ease significantly. China is expected to lift its ban on hallyu and tourism, and Korean cosmetics and food manufacturers will hopefully be able to recover their lost sales in the Chinese market. Lotte Group has been at the center of China’s retaliatory moves against Korean businesses, but it is expected to accelerate its large-scale investment projects in China, including its suspended amusement park, Lotte World in Shenyang. But it is hard to see that the THAAD conflict has completely been resolved, since the recent South Korea-China agreement simply expressed the two countries’ respective positions. The first step toward truly restoring ties will be a bilateral summit.
The APEC meeting will take place in Vietnam on November 10 and 11, and the ASEAN Plus Three meeting will be held in the Philippines on November 13 and 14. During this period, South Korea and China are unlikely to discuss details about bilateral economic matters or the North Korean nuclear issue, but will touch on the topics briefly and reaffirm their promise to work to settle the THAAD feud. South Korean President Moon Jae-in might visit China in December, although plans have yet to be finalized. But if a bilateral summit takes place in China, more specifics could be discussed there. Also, Chinese President Xi Jinping will visit South Korea next year for the PyeongChang Winter Olympics. If things proceed in this way, Seoul-Beijing relations could return to how they were early next year.
During the period between the APEC Summit in Vietnam this week and the PyeongChang Winter Games in February next year, leaders in South Korea and China will have a series of meetings, which will be the beginning of a new relationship between the two countries. Their icy relations will be thawing fast, and a warm breeze will be blowing into the Korean economy. If local businesses related to China are restored to their former levels, South Korea will be able to achieve economic growth of 3 percent this year and next year as well. To fulfill that goal, Korea should make its own efforts to keep up with the change required for a new era of a strategic partnership between South Korea and China.
Japan suffered conflict with China in 2010 and in 2012. In a strategic move, Japan chose to be less dependent on China. It has since advanced to the ASEAN market, but its core business of auto sales still stays alive in China. A Japanese automobile company president once said that he would never give up on the Chinese market. As he said, high-value added industries are a major market that should not be given up. For South Korea, it is necessary to carefully watch the trend among wealthy Chinese consumers, since the local consumer market is becoming increasingly large. High-income earners in China are greatly interested in the latest trend, where the information technology sector merges with the service industry. As its future task, South Korea should focus on ways to develop the premium market even further and boost its potential.
In the second term of the Xi Jinping government, the Chinese economy and industries will improve their quality significantly. We cannot rule out the possibility that a second THAAD dispute may arise, depending on the ever-changing political environment. In this situation, what South Korea should do is to boost competitiveness. If the nation improves product reliability based on its technological prowess and continues to explore new markets, the THAAD conflict will serve as a tough yet valuable lesson for the Korean economy.