Since Seoul and Washington announced the deployment of the Terminal High Altitude Area Defense (THAAD) anti-missile system on the Korean peninsula in July 2016, Beijing has responded with a range of measures to express its disapproval. Chief among these is an apparent strategy of economic coercion designed to pressure Seoul into reconsidering.

This strategy has disrupted a broad range of South Korea’s goods and services exports, from pop culture and tourism to batteries and supermarkets. Of the 43 Chinese retaliatory actions identified so far, 38 relate to cultural or economic exports compared to only five on diplomatic, political and military matters.

South Korea joins a growing list of countries suffering economic losses after making political or security decisions in the face of objections from Beijing. Exports of rare earth elements to Japan were restricted and Japanese goods boycotted following escalations of the Senkaku/Diaoyu Islands dispute in 2010 and 2012 respectively.

Restrictions were placed on salmon imports from Norway after Chinese dissident Liu Xiaobo (劉曉波) was awarded the Nobel Peace Prize in 2010. And restrictions on tourism to and banana exports from the Philippines were implemented during a standoff over the disputed Scarborough Shoal in 2012. An empirical study suggests that countries receiving the Dalai Lama suffer reduced exports to China in the aftermath.

The Chinese response to the deployment of THAAD shares similar characteristics with these earlier cases. In particular, the pattern of industries affected provides insights into both the strengths and limitations of Chinese economic statecraft.

Over 70 percent of South Korea’s exports to China last year were intermediate and capital goods, including semiconductors (20 percent) and display panels (11 percent). But these appear to have escaped boycotts or regulatory interference.

Chinese economic retaliation is unlikely to target imported intermediate inputs because of the risk that their disruption will undermine wider complex production networks. The cost of exposing workers and factories relying on imported inputs to manufacture final goods for export is too high. This logic was seen in 2012 when the Philippines’ largest export categories — semiconductors, other electronics and natural resource — were not targeted. Instead, losses were concentrated in industries selling highly substitutable final goods: bananas and tourism. It is therefore perhaps unsurprising that South Korean merchandise exports to China rose in March 2017, the fifth straight month of growth.

What then is being targeted in South Korea?

One target has been highly visible consumer brands. Lotte department stores have been the site of nationalistic protests in recent weeks. Similarly, South Korean cosmetics company Amorepacific Corp is estimated to have lost a third of its value since the THAAD crisis began. State-run tabloid editorials have called for boycotts to be extended to other prominent South Korea firms such as Samsung and Hyundai.

To the extent that branded goods are substitutable for alternatives, Chinese consumers are able to incur minimal losses in steering clear of South Korean products while causing newsworthy and significant damage to the companies that manufacture them. This mirrors the experience of high profile Japanese consumer brands — including Toyota, Uniqlo, and Panasonic — that lost sales and were forced to close stores, factories, and offices when they were targeted by boycotts in 2012.

Other targets are substitutable consumer goods such as cultural exports and tourism. While denying visas to K-pop stars and blocking streaming services of South Korean music and TV dramas may upset diehard fans, the overall cost to Chinese citizens is relatively low when compared to the damage economic retaliation could cause in the manufacturing sector.

On the other hand, South Korea’s K-pop industry faces significant losses — in 2014 it generated US$5.3 billion from the Chinese market. Just as some charter flights were suspended to the Philippines and tens of thousands of flights reservations and tour bookings to Japan were canceled, South Korea is receiving the same forms of punishment. This will put real pressure on Seoul, given that heavy-spending Chinese tourists made up 48 per cent of total visitors in 2016.

The fallout from THAAD reveals the extent to which economic retaliation is selective — economic interdependence, after all, cuts both ways. Beijing has not targeted the most-traded South Korean industries because destabilizing the supply of key intermediate materials damages its own interests as much as Seoul’s.

The THAAD case took a new turn last week when Seoul referred the matter to the World Trade Organisation. As in previous instances, Beijing denies any connection between the political dispute and economic retaliation. Indeed, the nationalist sentiments activated by these controversies make it difficult to distinguish an official reprisal from a simple popular backlash.

Even if this is true, the perception that doing business with China carries political risk undermines China’s aspirations to leadership in the international system.

With the Trump administration expressing skepticism and hostility towards trade and international institutions, President Xi Jinping (習近平) has seen the need to speak out and defend the system within which China has risen so rapidly.

While it is in Beijing’s interests for Seoul to reverse its THAAD decision, it is also in Beijing’s interests for the rules and institutions of the international trading system, broadly, to hold together. The pursuit of the first objective using economic means undermines the achievement of the second.

The THAAD case is a reminder that deeper economic ties with China still seem to come with political risks attached. China’s economic weight is a significant, if constrained, mechanism through which it can seek to influence states’ political and security policies. But this case also demonstrates the complexity, and the trade-offs, of using economic levers in an interdependent world, particularly for a rising power with an increasing stake in the international system.

The News Lens has been authorized to republish this article from East Asia Forum. East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.

TNL Editor: Edward White