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5 "Tells" that the Stock Markets Are About to Reverse

Here’s Why China Unofficially Ended the Dispute with South Korea

Politics / China US Conflict Dec 21, 2017 - 10:21 PM GMT

By: John_Mauldin

Politics

BY PHILLIP ORCHARD : The countries of East Asia are worried about the coercive power of Beijing’s pocketbook. And perhaps they should be.

China is flush with money, and as it continues to pour massive amounts of aid and investment into the region, it’s only a matter of time before Beijing tries to cash in.


China’s overseas investments are partly being pushed for strategic reasons. This is evident in the high number of projects included in China’s One Belt, One Road initiative that make little commercial sense and fail to perform their stated purpose. (I wrote about China’s geopolitical challenges and its long-term strategic goals in my exclusive e-book, The World Explained in Maps, which you can download here)

In areas such as the Philippines, the primary goal appears to be the cultivation of political influence in foreign capitals or, more cynically, the creation of dependence on Chinese investment or consumers, which Beijing could someday exploit.

But as the case of South Korea shows, China’s capacity for economic coercion has as many limitations as it does strengths.

The China-South Korea Dispute

Tensions between the two countries revolve around the deployment of the US Terminal High-Altitude Area Defense (THAAD) anti-missile system in South Korea.

Fearing that the THAAD system’s powerful radar could penetrate deep into Chinese territory and threaten its ability to respond to missile attack, Beijing opposed the deployment. And it was compelled to do something about it.

What resulted was a set of informal retaliatory measures that amounted to sanctions in everything but name. Hundreds of South Korean firms working in China claim to have been subjected to a surge in inspections, visa denials, increased customs hurdles, and store closures.

Sales of South Korean automobiles in China dropped roughly 44%. Beijing also banned package tours to South Korea, leading to a 50% drop in Chinese visitors through the first 10 months of 2017 and more than $5 billion in losses.

All told, the THAAD issue dented South Korean gross domestic product by 0.4 percentage points this year, according to Bank of Korea.

But for Beijing, the whole effort has been utterly fruitless… and possibly counterproductive.

Why China’s Sanctions Didn’t Work

After the THAAD deployment was completed in September, Beijing surrendered its position and agreed to normalize relations with Seoul.

China’s official position on THAAD has not changed, but Chinese tour groups have begun returning to South Korea. China’s recent hearty welcome of South Korean President Moon Jae-in's state visit confirmed the return to the status quo.

So why were Beijing’s pressure tactics so ineffective?

History shows that such sanctions achieve their desired outcomes only when the target has strategic reasons to comply. And the strategic stakes for the country pushing the sanctions must be high enough to risk heavy diplomatic and economic blowback.

In the case of THAAD, neither of these dynamics was at play.

Beijing’s concerns about the THAAD deployment never really matched the intensity of its protestations. China has good reasons to be wary of US defense systems on its doorstep, but THAAD itself does not jeopardize China’s nuclear deterrence capabilities as claimed.

Even if Beijing had been willing to go further, it’s doubtful that the Chinese could have implemented economic measures strong enough to outweigh Seoul’s immediate security imperatives or longer-term strategic considerations—namely, North Korea.

Beijing’s economic retaliation therefore never really rose to a level that would inflict real pain on the South Korean economy, which is still expected to grow at a brisk 3.2% clip this year.

In fact, China was unwilling to push measures that would require any amount of economic sacrifice on its own part.

The notion that Seoul would weaken its missile defense to boost the prospects of its tourism sector isn’t one to be taken seriously. Beijing presumably never expected that it would, and realized that in its posturing it was backing itself into a diplomatic corner that threatened its credibility in the region.

Thus, as soon as Seoul called Beijing’s bluff on THAAD, the Chinese took the first chance to move on.

The Dispute Is Against China’s Interests

It’s important to note that the THAAD measures were also at odds with China’s long-term goal to weaken the US position in Northeast Asia.

The US and South Korea are in disagreement on how to manage the North Korean nuclear threat. The US is more willing to deal with it militarily. South Korea would rather live with a nuclear North Korea than be bombarded by North Korean artillery.

This gives China a strategic opportunity to turn South Korea against the US.

We don’t think the US is going to attack the North; doing so could destroy its alliance with the South. But the possibility of war is real enough that China is eager to drive a deeper wedge between Seoul and Washington.

If the US ultimately decides to live with a nuclear North Korea, the resultant deterrence strategy may well create other opportunities for China to drive the same wedge.

Either way, it makes little sense for China to undermine the narrative it has crafted, which is that China is more willing and able to protect the region than the United States is.

Admittedly, the THAAD disagreement doesn’t tell us everything we need to know about how effective China will be in economically coercing its neighbors. But what it does tell us shouldn’t be particularly encouraging for Chinese strategic planners.

It’s one thing for Beijing to use overwhelming aid and investment to effectively buy the loyalty of a weaker regional state—say, Cambodia—where the strategic stakes are comparatively low.

It’s another to try to bully into submission a wealthy US ally that’s staring down the barrel of mass destruction across its northern border.

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John Mauldin Archive

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