Commentary / World

South Korea and the curse of geopolitics

by Yoichi Funabashi

“In the national interest, say ‘no’ to Lotte!” So ran a front-page editorial in the state-run China Youth Daily urging Chinese citizens to boycott the South Korean conglomerate Lotte. That was in spring of this year.

The editorial ran in response to the use of a Lotte-owned golf course as the base site in South Korea for the deployment of the Terminal High Altitude Area Defense (THAAD) system, a U.S. anti-ballistic missile defense system capable of continuously monitoring North Korea by radar. Suspicious that it could also be used to monitor China’s defense readiness, Beijing pressured Seoul to abandon its plans to deploy the system. Nevertheless, the administration of then-President Park Geun-hye went ahead with its deployment.

Since then, China has felt aggrieved. Lotte, which provided land for the THAAD base, became the target of Chinese outrage. A majority of Lotte supermarkets in China were ordered to suspend their operations, ostensibly due to fire and building code violations. Chinese demonstrators descended upon Lotte supermarkets and jeered at anyone who attempted to enter the stores. Ultimately, 87 of the 112 Lotte supermarkets in China were forced to shut down. Lotte subsequently decided to sell off all of its stores in China, and commissioned Goldman Sachs to take care of the aftermath.

Supermarkets were not the only target. Construction of Lotte’s indoor theme park in the city of Chengdu had to be discontinued, and the operation of Lotte Shanghai Foods, a factory built jointly by Lotte and Hershey, was forced into suspension.

China’s bullying of Lotte has even spread to its outlets outside of China. The Lotte Duty Free Tokyo Store in Ginza used to be jam-packed with Chinese tourists, but traffic from Chinese customers dropped off precipitously this summer.

Other South Korean companies are also feeling the effects of Beijing’s displeasure. Sales of Hyundai Motor’s passenger vehicles in China between January and July this year fell 41 percent from the corresponding period of 2016. Over the same period, the number of Chinese tourists to South Korea fell by roughly half from the previous year — to just 2.5 million. The area most severely affected by this decline was Jeju Island, where Chinese tourists typically make up as much as 90 percent of all foreign tourists.

The South Korean economy depends conspicuously on China. In the quarter century since the two countries established diplomatic ties in 1992, China’s share of South Korea’s total trade has grown from 4 percent to nearly 25 percent.

In contrast, South Korea’s share of China’s external trade has been static at around 7 percent since the turn of the century. Today, South Korea’s export dependency on China is twice the level of its dependency on the United States. Among the Group of 20 member states, South Korea is second only to Australia (32 percent) when it comes to reliance upon the Chinese market for its exports.

Economic interdependence does not necessarily mean that the countries depend on each other to an equal degree. Indeed, the relationship between China and South Korea is characterized by an immense asymmetry in the levels of dependence — South Korea relies far more on China than China depends on South Korea. For China, there are perhaps no other easier targets for economic coercion than South Korea.

True, China imports intermediate goods from South Korea to use in its manufacture of consumer goods for export. Between January and August — the period during which China imposed de facto economic sanctions on South Korea in response to its deployment of THAAD — the value of South Korean exports to China increased by over 10 percent from the same period of 2016.

However, China is also rapidly enhancing international competitiveness of its semiconductor industry. The old, mutually complementary trade framework between China and South Korea is coming to an end as China emerges as a rival to South Korea.

Given the changing relationship, South Korean businesses dealing with China will prove unable to compete or make profits unless they have a significant value-added component. If they don’t and their profit margins shrink, they still find it difficult to pull out of the Chinese market altogether.

I recently met with a top executive at a mid-sized South Korean financial conglomerate. After divulging that he was thinking of cutting back on business in China in the future, he went on to say: “Lotte can get out of China. We don’t have that option — it’s enough to make me envious.”

Now, the overseas investment strategy of South Korea’s globally-operating businesses appears to be “China plus one.” In other words, they are seeking to diversify their market and segment in order to reduce their dependence on China.

I can’t help recalling the words of the left-wing polemicist and Yonsei University professor (now honorary special professor) Moon Chung-in, who sat next to me on a panel at a conference on the “Geopolitics of East Asia” in Canberra three years ago: “To be honest, I get the creeps when I hear the term ‘geopolitics.’ Of course, I can’t deny the reality of geopolitics, and in Asia — and particularly in Northeast Asia — we cannot ignore the geopolitical element. But we have to be very careful not to allow geopolitical discourse to degenerate into a study enchanted with survival of the fittest, as it was in the prewar period.”

Historically, the Korean Peninsula has been no stranger to this “curse of geopolitics,” which now appears to be ominously descending on the region once again.

Yoichi Funabashi is chairman of the Asia Pacific Initiative and was editor-in-chief of Asahi Shimbun. This is a translation of his column in the monthly Bungei Shunju.