The Korean economy, already struggling with sluggish domestic consumption, rising household debt and youth joblessness, is facing double shocks from its two biggest economic partners -- China and the US.
The most immediate threat comes from China, which has been stepping up its economic retaliation against South Korea’s decision to host an advanced US missile defense system.
The Chinese retaliation, which started when South Korea and the US decided last July to deploy a Terminal High-Altitude Area Defense battery in Sangju, North Gyeongsang Province, has now reached a level where South Korean residents and visitors, as well as businesses there, are advised to be cautious about their safety.
China accounts for nearly a quarter of Korea’s foreign trade and a deterioration in this bilateral economic relationship would have severe repercussions for the Korean economy.
The tourism sector is one of the industries being heavily affected by Chinese retaliation, which started with a ban on group tours to Korea and the cancellation of charter flights between the two countries.
Most recently, Chinese authorities last week instructed travel agents not to sell tour programs to South Korea. The South Korean travel industry should brace for a difficult time, because almost half of its foreign tourists come from China.
China is also targeting Lotte Group, Korea’s fifth-largest conglomerate, for providing a golf course to the THAAD battery. Various Lotte units in China have already been harassed by discriminatory tax audits and safety inspections. Some of its retail units have been kicked off of online shopping malls, and Chinese authorities suspended more than 20 Lotte Mart discount stores, citing violation of firefighting regulations.
Chinese media now threaten that other Korean companies like Samsung and Hyundai Motor could face the same fate as Lotte.
A bigger problem is there are signs of brewing anti-Korean public sentiment among the Chinese public. Two Chinese men were charged with damaging Hyundai cars. Chinese protesters picketed Korean retail shops and some of Lotte’s websites have been attacked by hackers. An increasing number of Chinese websites and social media carry photos of Korean products being smashed.
These remind us of the fierce, violent anti-Japanese protests that erupted across China in 2012 in the wake of Tokyo’s announcement that it had nationalized the Senkaku/Diaoyu Islands. It led to a boycott of Japanese products.
It is certain that China will ratchet up the pressure in the coming months, as South Korea and the US agreed to hasten the THAAD battery deployment. There are enough reasons for Korean officials and businesses to prepare for worse to come.
If the threat from China is an ongoing factor, another external risk -- a possible revision of the South Korea-US free trade agreement -- is in the making.
During his campaign, US President Donald Trump, whose “America First” policy is based on isolationism and protectionism, criticized free trade pacts like the Korea-US FTA for killing American jobs and leaving the US in deficit.
Reflecting Trump’s view, the US Trade Representative, in an official report released last week, strongly indicated that the Trump administration would revise the pact.
The report -- President Donald Trump’s 2017 Trade Policy Agenda -- said that compared with before the agreement went into effect in 2012, US exports to South Korea fell by $1.2 billion, while US imports from South Korea grew by more than $13 billion.
“Needless to say, this is not the outcome the American people expected from that agreement,” it said. “Plainly, the time has come for a major review of how we approach trade agreements.”
That exactly reflects the view of Trump who once called the KORUS FTA a “disaster” that only kills American jobs. It may be a matter of time before the US side demands a revision of the free trade agreement.
The recent developments vis-a-vis the US and China show that Korea should brace for uncertainties in the world’s two largest markets and its most important economic partners.
A big problem is that the external risks come at a bad time when the Korean economy is stuck in a low-growth trap and consumption slump, and the nation is going through unprecedented political instability.
More worrisome is that the political instability may continue for the time being, regardless of the impending court decision on impeachment of President Park Geun-hye. Which is why government bureaucrats and businesses should be more alert than ever.