China politics: Leaving the THAAD dispute behind

Content Type
Country Data and Maps
Institution
Economist Intelligence Unit
Abstract
No abstract is available.
Topic
Politics, News Analysis
Political Geography
China

The Economist Intelligence Unit expects South Korean-Chinese economic ties to deepen in 2018. Underlying sources of tension in the relationship, related to South Korea's military alliance with the US and China's support for North Korea, will remain, but pragmatism will prevail on trade issues. Our view is supported by the latest meeting between the South Korean president, Moon Jae-in, and his Chinese counterpart, Xi Jinping, held in China in mid-December 2017. This visit was a major step towards the "normalisation" of bilateral ties agreed in October.

The visit-prepared by a meeting between South Korea's foreign minister, Kang Kyung-wha, and her Chinese counterpart, Wang Yi, in late November-received broad press coverage in both countries. Although this visit marked a major step towards improving bilateral relations, some signs, including subtle clues that Moon Jae-in did not receive the full red-carpet treatment in China, pointed at lingering tetchiness over the deployment in South Korea of the US-led Terminal High-Altitude Area Defence (THAAD) anti-missile system, which China is opposed to. This was mainly evidenced by the fact that the two sides did not host a joint press conference at the end of the visit. However, this was agreed beforehand, in contrast to the US-China economic dialogue in July 2017, when a scheduled joint press conference was cancelled.

"Three No's"

The visit had two main objectives: discussing the North Korean situation and building on the agreement to normalise ties, which relies on South Korea's acquiescence to the "Three No's":

  • No addition to THAAD;
  • No participation in the US missile defence network; and
  • No establishment of a trilateral military bloc with the US and Japan.

In exchange, China will stop its unofficial campaign of economic retaliation against South Korean exports to and companies established in China. There is, however, little diplomatic room to go beyond these "no's" and no significant progress was made on the North Korean issue, apart from agreeing to set up a hotline between the two leaders. Each side was careful not to push the other too hard on sensitive issues: THAAD will stay in South Korea while China was not asked to cut off oil supplies to North Korea.

Four principles

The main outcome touted by both sides was an agreement on four principles:

  • A refusal to tolerate war on the Korean peninsula;
  • A call for a nuclear-free peninsula;
  • The pursuit of peace through dialogue; and
  • Calls for improved inter-Korean ties to help to resolve tensions.

With only the latter point emerging as a new principle from the visit, this is a relatively meagre diplomatic outcome. Nonetheless, this helps Moon Jae-in to reassert himself as a major stakeholder in the North Korean crisis as the administration of the US president, Donald Trump, increasingly flaunts military solutions as mainstream policy options towards the North's nuclear threats, to the displeasure of the US's East Asian allies. With the US government still sending erratic and often conflicting signals over its North Korean policy, mending ties with China offers a welcome diplomatic outlet for Moon Jae-in.

A single pragmatic yes on trade

As we expect that China's government will continue to support North Korea and that South Korea will maintain a close security alliance with the US, we forecast that the normalisation of diplomatic ties will remain challenging. Nonetheless, the countries' shared efforts to put the THAAD-related spat behind them are based on a pragmatic approach rooted in rising economic dependence. As we have highlighted previously, throughout the THAAD row China's economic retaliation was careful to leave merchandise trade untouched, no doubt for fear of hurting its own economy, which relies on the technological inputs of South Korean products. Indeed, South Korea's exports of goods to China grew by an average of 14.2% in 2017. A main driver of Moon Jae-in's visit was therefore bolstering economic ties with South Korea's largest trade partner. The countries signed a Memorandum of Understanding (MoU) to begin negotiations on expanding their bilateral free-trade agreement (FTA) to include services and the financial sector. This will expand the existing FTA, which came into force in 2015 and which covers only manufactured goods.

Despite the close trade relationship, the trajectory of bilateral ties is unlikely to be smooth. Bumps in the relationship will be mostly driven by diverging security alliances and the near-completion by North Korea of full nuclearisation. This will leave China as a source of both opportunity and distress for South Korea's economy. We forecast that rising Chinese incomes will provide new opportunities for consumer-oriented South Korean exporters. However, the THAAD dispute will encourage South Korean exporters to diversify further towards other markets, as it revealed China's willingness to use its economic influence to pressurise South Korea over diplomatic issues.

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