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Lotte shops in mainland China were shut as the tensions between Beijing and Seoul escalated. Pictured is a Lotte store in Lianyungang, Jiangsu province on March 7, 2017. Photo: AFP
Opinion
Across The Border
by Laura He
Across The Border
by Laura He

Beijing-Seoul tensions over missile defence system won’t hurt South Korean economy for long, analysts say

Similar experiences from Taiwan and Japan show that the impact from boycotts of travel tours and consumer goods are short-lived, analysts say

The South Korean economy looks poised to take a blow from the diplomatic row over the deployment of a US missile defence system on the Korean peninsula, but the overall impact will likely be short-lived, based on similar experiences from Taiwan and Japan, analysts say.

Anti-South Korean sentiment has flared up in China, after the US began shipping the Terminal High-Altitude Area Defence (THAAD) system to South Korea last week to counter Pyongyang's missile capabilities. Beijing has criticised the deployment of THAAD a threat to its “security interests”.

“Beijing views the planned deployment as a kind of betrayal by South Korea and potentially the first significant step toward the creation of a bigger missile defence system involving Japan to contain China,” said Kevin Lai, an analyst for Daiwa Capital Markets, in Hong Kong.

Travel curbs imposed by Beijing could have a negative impact on the South Korea economy, he added.

South Korea’s benchmark Kospi index ended 0.3 per cent higher on Friday, as investors shrugged off concerns over worsening bilateral relations with China. Photo: EPA

Daiwa has cut its forecast for South Korea’s 2017 GDP growth to 1.75 per cent from a previous 2.3 per cent, estimating the country’s exports of goods and services to suffer a 1 per cent loss this year due to restrictive measures imposed by China.

Krystal Tan, Asia economist for Capital Economics, agreed that China’s actions might add to South Korea’s economic risks.

“Chinese retaliation ... is an added concern for South Korea’s already struggling economy,” Tan said.

She expected the South Korean economy to grow 2 per cent in 2017 and the central bank to cut interest rates “at least once” to accommodate growth.

Korean retail giant Lotte Group, which derives around 29 per cent of its sales from China, has borne the brunt of the tensions, after it recently signed a deal to provide land for the THAAD system.

Many nationalists protested at Lotte’s retail stores in China, and called for a boycott of “all things South Korean”, from beauty products, music, TV dramas, video games, to kimchi and Korean barbecue. In at least one instance a bulldozer was used to crush Lotte products near a store frontage.

South Korea’s economy is diversified. Here an employee inspects bags of non-polyvinyl chloride intravenous solutions on a production line at the JW Life Science factory in Dangjin on March 2, 2017. Photo: Bloomberg

Chinese authorities have shut down more than 20 Lotte stores, citing fire safety reasons. Many Chinese businesses also pledged to stop selling Lotte products.

Perhaps more worryingly, the Chinese authorities have imposed a ban on the sale of tour packages to South Korea from March 15.

However, the impact on South Korea’s economy is unlikely to prove lasting, if history is any guide, according to Tan.

“Our best guess is that the impact on the economy will be quite severe, especially for certain sectors such as tourism, but also relatively short-lived,” Tan said.

More than 8 million mainlanders visited South Korea in 2016, accounting for nearly half of the nation’s total visitor arrivals. According to Capital Economics, spending by Chinese tourists in South Korea is equivalent to around 1.3 per cent of the country’s GDP.

“A fall in Chinese visitor arrivals to Korea on the same scale of that to Japan in 2012, when a territorial dispute strained relations, could knock around 0.3 percentage point off Korea’s GDP,” Tan said.

However, she said the South Korean government could mitigate the impact following the example of Taiwan, which saw the number of total visitors pick up last year despite a similar travel boycott, as the Taiwanese government stepped up efforts to court visitors from the rest of Asia by streamlining tourist entry procedures.

Customers stand outside a closed Lotte store in Jilin, northeast China's Jilin province on March 9, 2017. The store was closed on March 9 with announcements on the doors saying that fire safety issues needed to be rectified. Photo: AFP

On the trade front, Tan doubted the sector will be “too severely affected”.

It’s unlikely for the Chinese government to impose “an outright ban” on South Korean imports, as such a move would violate WTO rules.

Even as Chinese authorities encourage consumers to boycott South Korean goods, its not clear this will have a big effect. South Korean exports of consumer goods to China account for less than 4 per cent of its total exports to the country, equivalent to 0.4 per cent of GDP.

“Even if Korea’s consumer exports to China were to halve, the hit to Korea’s growth would be 0.2 percentage point of GDP,” Tan said.

She added that it was unlikely South Korean consumer goods would lose their appeal among mainland Chinese in the long term, citing how similar diplomatic rows between China and Japan proved temporary.

A customer tries a lipstick at a cosmetics counter in central Seoul. Photo: Reuters

“For example, sales of Japanese automobiles in China slumped after the Chinese government tried to orchestrate a boycott in 2012, but rebounded strongly after a few months,” Tan said.

On the other hand, China may hurt itself economically if it takes too aggressive action against South Korea companies, she added.

A boycott of component imports, which account for more than 70 per cent of South Korea’s exports to China, would disrupt the supply chains of Chinese businesses.

Besides, “aggressive action against South Korean businesses, which accounted for 4 per cent of foreign direct investment in China in 2016, would not be in China’s economic interest, as it could force Korean manufacturing plants operating in China to cut jobs,” Tan said.

This article appeared in the South China Morning Post print edition as: S Korea economy to survive missile stress
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