China has reacted strongly against the South Korean decision to deploy batteries of Terminal High Altitude Area Defence (THAAD) interceptors on its territory in the face of repeated North Korean missile launches. The official Chinese reaction was swift after the July 2016 announcement by Republic of Korea (ROK) of its decision to permit the US to install the system in Seongju region. In response, China suspended its high-level defence dialogue with South Korea and postponed the South Korean defence minister’s visit to China. The Chinese government also did not send a high-level official as chief guest to attend the South Korean embassy’s annual National Day reception in 2016.
More worrying for South Korean leadership has been the resulting anti-Korea sentiment in China and officially sponsored silent boycott of Korean products and companies by both the establishment and Chinese public. Seoul has not been able to take any legal or official action against China, as none of the Chinese measures have been official. In any case, ROK’s 25 per cent exports are to China and it is in no position to annoy China due to its economy’s dependence on foreign trade with China.
The ire of the Chinese has mainly fallen on the Lotte group, which had sold its golf course in Seongju to ROK government where THAAD batteries are being installed. Pulling no punches China’s official news agency Xinhua commented that: “Lotte stands to lose Chinese customers and the Chinese market.” Dozens of Lotte stores in China were sent official notices on alleged fire code and other regulatory violations and 87 out of 99 stores in China remain shut. Official delegates at the recent Korea Expo 2017 in New Delhi informed that Lotte group was considering pulling out of China.
Hyundai Motors, which had sales of 1.1 million cars in China last year, has been another target of Chinese wrath. The sales of its cars plummeted by 64 per cent in the second quarter of this year as compared to 2016. Its operations in China are through a joint venture with a Chinese company. But even then the state-controlled media called for Chinese consumers to boycott Hyundai cars. Another Korean carmaker Kia has also seen its sales plummet in China. Chinese market is very important for both these companies. Twenty per cent of Hyundai Motors’ sales outside Korea are in China.
This Chinese retaliation against ROK is not something new. In 2000 when South Korea had raised import duty on Chinese garlic to protect its farmers, the Chinese had retaliated by restricting South Korean exports of cell phones and polyethylene.
Chinese tourists have been a major revenue source for ROK hospitality industry and duty-free shops. Last year eight million Chinese tourists had visited ROK. The Chinese authorities are believed to have advised Chinese travel agencies to stop selling trips to South Korea and the arrivals of Chinese tourists in ROK have fallen by half with a huge adverse impact on ROK’s tourism industry. The number of Chinese tourists in the first seven months declined to 2.5 million as compared to 4.7 million in the same period in 2016.
China has also placed restrictions on South Korean cosmetics and even denied visas to some South Korean artists for performances in China. It was reported that China has taken steps to limit the growing popularity of South Korean pop music and television serials. It is believed that online video sites have been stopped from buying rights to new South Korean shows.
Chinese have used the instrument of trade against ROK cleverly. They have refrained from touching the electronics sector, as Chinese electronics exports are critically dependent on imports from South Korea. For instance, South Korean companies supply more than a quarter of microchips that Chinese manufacturers use.
China has used trade restriction tactics against Japan also. China controls 97 per cent of the production of important rare earth elements. These elements are critical for the Japanese electronics industry. When tensions between Japan and China grew sharply in 2010 over Japan’s detention of a Chinese trawler, which was fishing illegally in Japanese exclusive economic zone (EEZ), the Chinese government had blocked exports of these elements to Japan, adversely affecting production of hybrid cars, wind turbines and guided missiles. The Chinese custom officials had actively halted the scheduled shipments of rare earths to Japan.
The dispute was over the detention of the captain of the Chinese trawler as he had deliberately rammed his vessel with two Japanese Coast Guard boats. The then Chinese Premier, Wen Jiabao, personally called for the release of the Chinese captain and threatened unspecified further actions if Japan did not comply. Japanese ambassador to China was summoned six times by the Chinese foreign office and on one occasion after midnight. Bowing to the pressure, Japan released the captain 17 days after the incident. In China, the whole sequence of events was perceived as a diplomatic victory. In Japan, Prime Minister Naoto Kan of Democratic Party was criticised for the government’s weak-kneed handling of the issue.
In 2012 also there were widespread anti-Japanese demonstrations in major cities of China. The trigger for these protests was escalation of Senkaku Island dispute, which is in control of Japan, but is claimed by China. Scores of showrooms of Japanese companies were shut down across China. Only when the protests turned violent in several cities, the local authorities acted to arrest the demonstrators.
India’s corporate leaders who are enticed by attractive Chinese credit would be well advised to factor in this tendency of Chinese retaliation through covert measures while making investment decisions. It was fortuitous that during the recent tension between India and China over their illegal road-building in Bhutanese territory, China had little economic leverage over India. In fact, burgeoning Chinese exports to India are more vulnerable to any restrictive measures by India.
India is not innocent of imposing trade restrictions to apply pressure on neighbouring countries. Nepal was subjected to limitations on transit trade by the Rajiv Gandhi government in 1989 and the Narendra Modi government had winked at the trade blockade by Madhesis in 2015. As India-China relations continue to be difficult, it would be prudent for the concerned authorities in India to be ready with a list of deniable measures to hit Chinese exports, if and when required.
The writer has served as India’s ambassador to Uzbekistan and South Korea.
