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China's ire over missile system has Seoul on alert for trade hit

Friday, August 5, 2016 - 09:55
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China's anger at South Korea for deciding to deploy a US missile shield has officials in Seoul increasingly concerned about the risk of economic retaliation.

[SEOUL] China's anger at South Korea for deciding to deploy a US missile shield has officials in Seoul increasingly concerned about the risk of economic retaliation.

While they don't expect China to hit back directly by slapping tariffs on South Korean goods - which would create problems for Beijing with the World Trade Organisation - some see a risk that their larger neighbour may tighten customs inspections, enforce stricter certification requirements and increase bureaucratic obstacles.

The Korea International Trade Association, an influential business lobby group, has identified 26 measures already in place by China that hurt its members.

Any expansion of these would be particularly damaging now, with exports falling for the last 19 months straight amid broad-based slowdown in global economic growth.

Sales to China declined about 9 per cent in July. It accounts for about a quarter of South Korea's exports and is its biggest trading partner. The two countries signed a free trade agreement in 2015.

"China has used non-tariff barriers against other countries before when there were security or history issues, and there is reason to worry that the same may happen to Korea," said Jeong Hyung Gon, a research fellow for Korea Institute for International Economic Policy in Sejong.

"China could strengthen safety inspections of products like cosmetics, and a build-up of anti-Korea sentiment could affect tourists' visits." The foreign ministry in Beijing didn't comment on the potential trade implications of the missile shield. It said in a faxed statement that it strongly urges South Korea and the US to reverse their decision.

Examples of barriers cited by the trade association include costly examinations for licenses to sell some cosmetics that can take up to a year to complete. Quarantine and hygiene issues held up South Korean efforts to sell traditional Samgyetang chicken soup to China for 10 years, according to the agriculture ministry.

Shares of some South Korean companies that rely on Chinese demand have fluctuated amid strained diplomatic relations between the two nations over the Terminal High-Altitude Area Defense system, known as Thaad. It is set to be deployed by the end of next year.

China's restrictions on rare earth exports underscore a willingness use trade to further strategic goals. Production limits on rare earths in recent years and curbs on how much can be shipped overseas were imposed ostensibly to preserve supply and conserve the environment, but raised disputes with the world's major users. In 2010, China limited exports of the materials to Japan amid a territorial dispute.

China had also put a freeze on top-level contact with Norway after a committee appointed by the Norwegian parliament awarded the 2010 Nobel Peace Prize to imprisoned Chinese dissident Liu Xiaobo. The rift caused Norwegian salmon exports to the country to plunge amid restrictions.

South Korea will appoint an official in charge of solving non-tariff barriers at every ministry, and put priority on the issue when discussing free trade agreements, according to a statement from the trade ministry last month, which didn't link the move to the missile-defense issue.

This is also part of broad efforts to increase overseas sales of consumer goods, which tend to be more susceptible to non-tariff barriers.  Trade Minister Joo Hyung Hwan has said that while he doesn't expect Thaad to impact China-South Korea relations, the government will continue monitoring the matter, according to a report from Yonhap News.

Finance Minister Yoo Il Ho said last month that large-scale economic retaliation from China is unlikely, given its membership of the WTO, but that the possibility of non-tariff barriers can't be excluded.

Lawmakers from the main opposition party have raised concern over Thaad, saying that South Korea could experience a trade dispute like that seen in 2000. On that occasion China banned all imports of South Korean mobile phones and polyethylene after the government in Seoul raised tariffs on Chinese garlic. The amount of mobile phones and polyethylene that South Korea sold to China was about 50 times larger than garlic imports, according to Yonhap News.

South Korean media including Donga Ilbo and Joongang Ilbo reported Friday that a fan meeting for drama "Uncontrollably Fond" to be held in Beijing was asked to be postponed by Chinese counterparts for no clear reason, and that a Korean actress participating in Chinese drama had to halt the filming.

"China doesn't agree with South Korea's argument that Thaad is solely targeted at North Korea, and China could use administrative measures to make an uncomfortable situation for South Korean exports, such as delay at the customs," said Shim Sang Ryul, professor of international trade at Kwangwoon University in Seoul.

"We may have to brace for a trade off between short-term decline in economic benefits for the sake of longer-term national security."

BLOOMBERG