From China Fever to China Fear: Korea Between Chinese Sanctions and US Missiles

• In Event: Chinese State Capitalism: Labor, Corporate, and International Strategic Issues

Abstract

Despite China’s usual opposition to foreign governments’ use of economic sanctions, the Chinese government has increasingly resorted to economic statecraft to advance its political and strategic goals. In response to several rounds of North Korean nuclear missile tests, South Korea formally agreed with the US to deploy the terminal high-altitude area missile defenses (THAAD) in July 2016. What immediately followed were the Chinese government’s vehement criticism of the decision and state-led boycotts against Korean consumer products including cars, pop-culture, and cosmetics. Chinese group tourism to Korea was also banned, which affected Korea’s airline, hospitality, and duty-free industries. This was not the first time China had used state-led unofficial sanctions to signal its displeasure and warn of stronger retaliation if the action were not reversed: in response to territorial disputes, China has blocked exports of rare earth minerals to Japan in 2010 and placed an import ban on Filipino fruit in 2012.

Through a study of the South Korean case, this paper will illuminate the various ways in which China has used its economic leverage in coercive ways, and uncover the mechanisms that produce divergent behaviors among multinational companies in response to political tensions and economic risks. First, what sets the Korean case apart from the previous cases is the conspicuous involvement of the Chinese state in retaliating against individual Korean companies such as Lotte Group, whose land swap provided the grounds for THAAD installation. Second, Korean companies show sectoral variations in recouping from the sanction measures due to difference in market and product strategies. Third, what rang the true alarm bell for the Korean economy is what the Chinese government decided not to put sanctions on — intermediary goods such as semiconductor chips and related components for information technology. Given that 78 percent of Korean exports to China in 2017 consisted of intermediate goods, China fever will turn into China fear as Chinese companies catch up with Korean rivals and achieve technological self-sufficiency under heavy subsidization and favorable industrial policies.

Author

• Seung-Youn Oh, Bryn Mawr College