With South Korea’s economy heavily dependent on China, its companies are vulnerable to Beijing’s political whims. It needs to recognize that unrecognized dangers – “gray rhinos” – are a feature of trading and investing in China.
As consequences of the US housing bubble bursting in 2008 and spreading slowly and unevenly across the globe, Japan’s exports to China dropped from 19.7% of all Japanese exports in 2011, valued at more than US$160 billion, down to 17.7% in 2016, valued at just under $114 billion.
Even though the decrease in dollar value was just 2 percentage points, the loss amounted to $46 billion, not an insignificant sum. And while the plunge in value reflected the lingering effects of a worldwide economic slowdown, at least one other factor had an impact.
Trading with the frenemy
As the squabble between Beijing and Tokyo over the Diaoyus (to China) or Senkakus (to Japan) – a group of uninhabited rocky islets in the East China Sea – heated up in 2012, China exacted economic revenge on Japanese businesses. Imports from Japan declined precipitously from previous years.
Chinese consumers not only stopped buying Japanese goods, a number of Japanese cars were destroyed during government-tolerated public protests against Japan. However, it was stores selling Japanese products that bore the brunt of the waves of demonstrations across China.
As Tokyo still sends more than a fifth of its exports to China, it would seem that Japan has not yet fully learned its lesson. True enough, China is seen as a growing market and is thus very attractive, but a number of economists feel that growth there will eventually slow down – and perhaps even reverse – because of Beijing’s overextension in debt as well as a need to focus upon infrastructure. That would reduce its appetite for imports. At least one economic planner in Beijing agrees, though for a different reason.
Tokyo did join the original members of the Trans-Pacific Strategic Economic Partnership (Brunei, Chile, New Zealand and Singapore) in 2011 to counter the decline of its exports by broadening access to markets in the Pacific. That organization has grown into the Trans-Pacific Partnership (TPP) with membership by Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and originally the United States.
Seoul’s precarious position
South Korean trade with China began only in 1985, but recent figures show that Beijing accounts for fully 25% of Seoul’s exports. Data for 2016 show that exports to China were worth $124 billion, representing not quite a tenth of South Korea’s gross domestic product, a very high percentage that ought to be of concern to Seoul’s economists and trade planners.
Introductory courses in business teach never to rely on a single source for a large portion of anything critical, whether material for input or buyers of output. Doing so puts the dependent entity at the mercy of the other. The solution to the vulnerability of relying on a single source is to incorporate it into the dependent entity. But obviously, while South Korea cannot buy China, China could use its disproportionate economic power to disrupt or buy financially distressed companies in South Korea.
Additionally, financial planners caution against putting all one’s eggs into one or just a few baskets. Diversification is the only good hedge against the vagaries of market forces, and this is especially true of international trade over which one nation is able to exercise little control.
This is a lesson that Seoul needs to learn in a hurry, since it has already had one acute signal about its vulnerability.
Beijing clamped down last year on South Korea’s Lotte Group for that conglomerate’s part in the installation of the US Terminal High Altitude Area Defense anti-ballistic-missile system in South Korea. China fears that THAAD could be used against it, and Lotte had traded away the land on which the initial THAAD batteries were installed. Lotte outlets in China remain shuttered over alleged fire-safety issues because of Beijing’s lasting displeasure over the THAAD land deal. Other Korean sectors – notably autos and tourism – were also significantly affected.
Looking further, reaching farther
For its part, Seoul has failed to seize opportunities to mitigate such dangers. It is not quite accurate to label South Korea’s decision not to join the TPP in 2015 as a tactical mistake. It was a strategic blunder of epic proportions, for the TPP will be an economic passport to far-reaching trade opportunities.
Even though Seoul already has free-trade agreements (FTAs) with nearly all the countries in the TPP, there are clear advantages when nations band together to establish trade. There would be common definitions, standardized procedures, and other aspects of international exchange that would be set beforehand.
However, Seoul needs to reach beyond the Pacific. It has not penetrated South America to any significant degree, nor has its trade with Africa, Europe or the Middle East reached its potential.
South Korea must discover how it can leverage China’s Belt and Road Initiative linking Asia to these latter marketplaces to its own advantage. India is also seeking to lure investment.
Those additional outlets are the very diversification Seoul so desperately needs. South Korea clearly has its work cut out for it, and it must be wise enough not to scorn opportunities to avoid the gray rhinos.