January 12, 2017 / 9:50 AM / a year ago

China bullies South Korea at its own risk

HONG KONG (Reuters Breakingviews) - China can only do so much to make life harder for South Korea. Beijing appears to be taking economic revenge against Seoul over a missile defence deal with the United States. Sectors riding the “Korean wave” in China, such as cosmetics, tourism and entertainment, are hurting. But $100 billion-plus manufacturing ties between the two nations are much harder to break. Excessive harshness would backfire on China.

Tensions have been escalating between Beijing and Seoul since a July decision to install the U.S. Terminal High Altitude Area Defense, or THAAD, system in South Korea. China, uncomfortable with the missile shield’s powerful radar, is protesting.

An unlucky cluster of South Korean companies seems to be bearing the brunt of Beijing’s wrath. China’s quarantine authority has rejected imports of a large number of South Korean cosmetics products, local media reported. The People’s Republic may also be trying to cut back on tourist flows to the Land of Morning Calm. Regulators have reportedly blocked television shows and brands from South Korea, along with K-pop stars.

Blocking access to Chinese consumers is a big blow to these firms, which have capitalized on the popularity of South Korean entertainment and personal care products in the People’s Republic. Major cosmetics maker Amorepacific, for one, has lost a third of its market capitalization since the THAAD decision.

But the bulk of South Korean exports to China is probably safe from retaliation. South Korea is the biggest exporter of parts and unfinished goods to China. Such items accounted for more than 77 percent of the $137 billion South Korean product exports to China in 2015, dwarfing 0.8 percent for cosmetics, according to the Seoul-based Institute for International Trade. High-quality, technologically advanced components made in South Korea are crucial for many Chinese brands’ competitiveness.

The squabble still highlights a need for rebalancing. South Korean companies depend on China for a quarter of their exports, but sales could slow as growth in the world’s second-largest economy weakens. Southeast Asia could pick up the slack. Chinese firms, for their part, want to climb the value chain and reduce reliance on imported components. But for now, a breakup would be as painful to China as it would be to South Korea.

On Twitter twitter.com/JYang_in_HK

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