The Limits Of China’s Economic Power

The countries of East Asia are worried about the coercive power of Beijing’s pocketbook. And perhaps they should be. China is flush with money, and as it continues to pour massive amounts of aid and investment into the region, it’s only a matter of time before Beijing tries to cash in.

China’s overseas investments are being pushed, at least in part, for strategic reasons. This is evident in the high number of projects included in China’s One Belt, One Road initiative that make little commercial sense and fail to perform their stated purpose: to bypass chokepoints that a hostile power could use to asphyxiate the Chinese. In areas such as the Philippines, the primary goal appears to be the cultivation of political influence in foreign capitals or, more cynically, the creation of dependence on Chinese investment or consumers, which Beijing could someday exploit.

But China’s capacity for economic coercion has as many limitations as it does strengths, as the case of South Korea shows. Tensions between the two countries revolve around the deployment of the US Terminal High-Altitude Area Defense anti-missile system in South Korea. Fearing that the THAAD system’s powerful radar could penetrate deep into Chinese territory and threaten its ability to respond to missile attack, Beijing opposed the deployment. And it was compelled to do something about it.

What resulted was a set of informal retaliatory measures that amounted to sanctions in everything but name. For example, Lotte Group, a major conglomerate that owned the land where THAAD was deployed, saw a number of its superstores in China closed, ostensibly over fire safety concerns. Hundreds of other South Korean firms working in China claim to have been subjected to a surge in inspections, visa denials, and increased customs hurdles. Sales of South Korean automobiles in China dropped roughly 44%. Beijing also banned package tours to South Korea, leading to a 50% drop in Chinese visitors through the first 10 months of 2017 (compared to the same period a year earlier). The hit to tourism alone is expected to cost the South Korean economy more than $5 billion. All told, the THAAD issue dented South Korean gross domestic product by 0.4 percentage points this year, according to Bank of Korea estimates.