China’s actions over the past three months indicate its intention to punish South Korea over its decision to deploy the U.S. Thaad anti-missile system on its soil. With the deployment date scheduled for later this year, foreign manufacturers with supply chain operations in East Asia should anticipate possible tariff hikes and physical barriers that could obstruct the flow of goods and services across the region.
South Korea’s defence ministry announced on 8 July 2016 that it planned to deploy the U.S. Thaad missile defence system due to increased military aggression from North Korea. With the two countries still technically at war, Pyongyang’s demonstrably increased military capacity remains a constant concern to military planners in Seoul.
North Korea in 2016 staged two nuclear tests, launched more than 20 military rockets and a satellite and claimed to have miniaturised a nuclear warhead small enough to mount on a ballistic missile. Although these claims are often difficult to verify and broadly viewed as propaganda by the Pyongyang regime, many are concerned that North Korea is rapidly acquiring deployable nuclear and missile capabilities.
Nevertheless, deployment of Thaad is contested both at home and abroad. Domestically, the decision was made without seeking legislative support. Some politicians are correctly concerned that Thaad will antagonise neighbouring China, a key ally of North Korea, and provoke military responses from both parties. Others oppose it for environmental and health and safety reasons.
Unsurprisingly, China also disapproved of the deployment on the grounds that Thaad is capable of penetrating its territory, threatening its national sovereignty and disrupting the regional security balance. Several top ranking Chinese officials, including Foreign Minister Wang Yi, have warned that trust between China and South Korea is at stake, with Thaad being able to ‘destroy Sino-South Korean relations in an instant’.
Trade retaliation measures
There were early hopes in Seoul that the Thaad deployment could lead Beijing to reconsider its generally passive policy toward Pyongyang’s nuclear programme. Instead, the Chinese responded by targeting South Korea’s most vulnerable spot – its economy. ‘Soft’ cultural industries, notably South Korea’s entertainment sector which is hugely popular in China, were initially targeted. South Korean pop stars have now been barred from entering China and Chinese companies are banned from featuring Korean celebrities as brand ambassadors.
By the end of 2016 commercial targets were in the crosshairs. In late November and early December the Chinese authorities conducted a series of tax, fire safety and facility inspections on Lotte Group operations across China. Lotte is South Korea’s fifth-largest conglomerate and largest retail company. Its ventures in China include 150 facilities in Shanghai, Beijing, Shenyang and Chengdu, with operations ranging from chemical plants to supermarket outlets. One of the fire inspections resulted in an unresolved construction stoppage at Lotte’s KRW3 trillion (USD2.6 billion), 1.45 million square metres theme park project in the north-eastern Chinese city of Shenyang.
Lotte has repeatedly sought to minimise the impact of geopolitics on its business, and no Chinese officials have confirmed these actions are related to Thaad. However, the timing and targeting are no coincidence given Lotte had acceded to the South Korean military’s request to acquire land it owned in the south-eastern county of Seongju as a base for Thaad on 16 November 2016.
South Korea’s strategic dilemma
China’s conduct has placed South Korea in a dilemma. Trade links with Beijing are unbalanced as Seoul’s export-oriented economy is overwhelming dependent on China, the country’s principal trading partner. At the same time, Seoul has long-standing defence ties with Washington reaching back to the Korean and Cold Wars. While this military alliance has thus far served to deter the more extreme North Korean provocations, to some South Koreans it is also becoming seemingly incompatible with the country’s economic reliance on China.
Beijing’s increasing assertiveness is reflected in the ruling communist party’s desire to leverage its significant economic power to advance its geopolitical agenda. It has shown in previous cases the ability to exact economic costs by targeting precise pressure points. In September 2010, for example, Beijing banned exports of rare earth minerals to Tokyo, a resource that Japan’s industrial companies relied heavily on China to provide. The Chinese decision came after the Japanese authorities detained the captain of a Chinese fishing trawler in the disputed Senkaku/Diaoyu islands. The captain’s subsequent release was later ascribed to China’s rare earth ban, although this view has been disputed by other sources who pointed to the fact that China’s action had triggered a successful global search for other sources of rare earth.
Through Lotte, China’s signal to South Korea against further integration into U.S. security arrangements is apparent. From South Korea’s perspective, however, China’s failure to restrain North Korea’s continued bellicose attitude leaves it with little alternative other than to seek closer U.S. military co-operation to defend itself. This interpretation means that South Korea’s economy is effectively a hostage in an evolving power struggle between Beijing and Washington in the Western Pacific. There is little manoeuvre room for Seoul to protect its large national corporations or industries with major interests in China…