China's Thaad Backlash May See South Korea Invest More in Asean

Southeast Asia is already winning more FDI from South Korea
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A truck carrying components needed to set up the Terminal High Altitude Area Defense (THAAD) missile defense system arrive at the Osan base, South Korea.

Photographer: NurPhoto via Getty Images

While economists pencil in smallish cuts to South Korean GDP this year and a big hit to the travel sector, the most enduring impact of China’s clampdown on outbound tourism could be an acceleration of efforts by Seoul to reduce dependence on its giant neighbor.

Analysis by Natixis Asia emphasizes that South Korea is likely to keep winding back risk exposure to China, particularly when it comes to foreign direct investment.

Southeast Asia, with expanding consumer markets and competitive wages, appears well positioned to benefit.

Read more: The Thaad missile system that's provoked China's ire.

To be sure, the total stock of South Korean FDI in China is huge, at about $52 billion according to data from the Export-Import Bank of Korea. This compares with $45 billion in Asean nations.

"They will increasingly seek to diversify risks by moving into markets that offer fast growth and cheap labour costs," Trinh Nguyen, senior economist for emerging Asia at Natixis in Hong Kong, said in a note to clients.

Nguyen also highlighted tourism’s relatively small place within the overall economy relative to sectors like manufacturing, and the continuing demand from China’s factories for components from South Korea.

"Korean tech firms still retain technological edge that supports decent demand for their products abroad," she said.

Read more: Seoul mulls invoking FTA rules or appealing to the WTO.

 

Economists at Nomura International said the decision to ban package tours to South Korea could shave 0.2 percentage point from GDP, assuming the number of Chinese tourists drops by 40 percent over the next 12 months. This would be in keeping with the decline in mainland travelers to Taiwan during another diplomatic spat, according to Nomura.

While South Korean exports of consumer goods could be vulnerable, intermediary products that fill China’s manufacturing supply chain are less exposed, according to a note from Nomura economists Young Sun Kwon and Minoru Nogimori.

Nomura forecasts South Korean GDP growth of 2 percent this year. The median of estimates compiled by Bloomberg is for expansion of 2.5 percent, slightly lower than 2016.

The curbs on tourism come on top of a host of non-tariff barriers South Korean companies face in China.

Read more: Cosmetics shipments blocked, music concerts canceled.

"There are many ways for China to torment Korea," said Song Yeong-kwan, a fellow at the Korea Development Institute in Seoul, who said the flareup has come at very bad time, given impeachment proceedings against Park Geun-hye, who's been suspended from power. "The situation inside Korea is pretty bad -- we don’t have a control tower."

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