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While the US-China trade war has dominated geoeconomic discussions in 2019, great power rivalry is far from the only domain in which economic instruments are being used in the pursuit of political or strategic objectives. Barely a week seems to go by now without reporting of Chinese economic coercion—the threat or imposition of economic costs designed to influence others’ behavior.¹ Consider two recent high-profile examples from mid-December 2019. The first case involved Mesut Özil, a player for the English football team Arsenal. After he criticized China for its treatment of Muslims, a Chinese state-run television network cancelled a scheduled broadcast of an Arsenal English Premier League match, and Özil himself was removed from the Chinese version of a popular video game.² During that same week, China’s ambassador to Germany, Wu Ken, threatened “consequences” if Chinese company Huawei was excluded from participating in the construction of Germany’s 5G telecommunications network, raising the possibility that German-made cars would be excluded from the Chinese market on safety grounds.³

The increasing frequency of these events makes the broader study of economic coercion increasingly important to both scholars and policymakers. There remains a need for greater clarity regarding the nature of power and vulnerability generated by economic interdependence, especially in the Chinese context. What types of economic relations create vulnerabilities for national governments? Which international companies doing business with and in China are most at risk of having politics affect their bottom line? While the list of companies and countries that have seen economic links disrupted by politics is growing, as a percentage of the total revenues generated by China’s economic engagement with the world, the impact remains fairly small. This begs the question: how does Beijing choose targets to threaten and assail with economic disruption, and through what mechanisms do its cost-imposing strategies operate? What are the (perhaps hidden) constraints on economic coercion, and how do they arise? Accordingly, which nations, which industries, and which individual actors, are the most vulnerable?

In this context, the widely reported campaign against South Korean economic interests following Seoul’s decision to participate in the United States-led Terminal High Altitude Area Defense (THAAD) missile defense program, announced in July 2016, offers a valuable case study. The THAAD dispute represents a broad-based coercive episode directed at an ostensibly vulnerable target: China is South Korea’s largest trading partner—the destination of approximately one quarter of its total merchandise and service exports at the time of the dispute—and therefore essential to national GDP, 40 percent of which comes from exports. By contrast, South Korea was the source of just 10 percent of Chinese merchandise imports and did not feature among the mainland’s top service suppliers.

Over the approximately 18-month dispute, multiple South Korean economic actors and industries experienced (or were reported to experience) varying degrees of disruption. Yet ROK exports to China and total bilateral trade increased by almost 15 percent in 2017,⁴ suggesting that any retaliation was highly selective. Two years have now elapsed since the political agreement of October 2017 that purported to end the dispute. It is thus worthwhile to revisit this episode, review the evidence of economic disruption, inquire how (and why) affected industries suffered losses, and draw contrasts with those industries that appeared to be unaffected.

We begin with an overview of the dispute’s origins and purported resolution. Next, we distinguish three categories of industries that were affected and describe their dynamics throughout the dispute. Finally, we draw some tentative conclusions from this analysis, framed as broader principles that help illuminate the conditions under which economic interdependence creates power and vulnerability in international relations. China’s size and growing wealth make it a potentially lucrative destination to do business. Understanding the nature of firm- and industry-level political risk, and nation-level vulnerability, is critical to inform decisions that the private sector and governments must make regarding how to engage with China.

Overview of the THAAD dispute

In July 2016 South Korea and the United States jointly announced the THAAD missile defense system would be deployed on the Korean Peninsula. Beijing strongly opposed this development for a variety of reasons, including that the system’s X band radar might penetrate the Chinese mainland and undermine its nuclear deterrent.⁵ The Chinese government was quick to protest the announcement and responded with a variety of political and diplomatic measures. The first isolated reports of informal economic retaliation came as early as August 2016.⁶ The frequency of reported disruption gradually increased through February 2017 when the THAAD deployment began, and then peaked throughout March and April. Beijing consistently denied responsibility for any disruption, instead suggesting that the issue was that THAAD had “triggered strong feelings in the general public in China.”⁷

Reports of retaliation continued into the second half of the year, and initial bilateral talks on the matter during the July G20 meetings in Hamburg appeared to produce no results. Following the completion of the THAAD system on 23 October, however, a sudden resolution was announced: on October 30 Seoul declared the so-called “three noes” (no additional THAAD batteries, no participation in any US regional missile defense system, and no trilateral alliance with the US and Japan), and the next day the two nations agreed to restore relations to the “normal development track.”⁸ Putting aside the questions of who “won” the dispute or whether the “three noes” were a meaningful concession,⁹ the agreement marked a turning point in China’s apparent campaign of economic coercion: after that date, many of the difficulties faced by some Korean firms and industries gradually began to ease.

Categorizing affected industries

The range of South Korean actors and industries reported as victims of Chinese economic coercion during the THAAD dispute is very broad. Given the depth of connectivity between the two nations, it is unsurprising that many sectors of the ROK economy experienced distortions. However, contrary to the impulses of many reporters covering the dispute, the mere fact that business did not continue ‘as usual’ throughout the period for a given Korean firm does not prima facie indicate that it was a deliberate target of economic coercion. That certain shipments of electronic bidets were held up by Chinese customs in the midst of the dispute, for example, does not necessarily mean that customs officers intercepted the exports under direct orders from Beijing.¹⁰ We divide the range of impacts and consequences into three broad categories.  

Category one: apparently deliberate and coordinated retaliation by Chinese authorities

Lotte

The headline victim of economic retaliation was ROK conglomerate Lotte Group, which at the time relied on the Chinese market for approximately 25 percent of its overseas sales. Lotte was targeted because it was directly implicated in the political dispute, having signed a land swap deal to provide South Korea’s defense ministry with land needed to install THAAD missile batteries in late February 2017.

The most prominent disruption Lotte faced was regulatory interference: decisions by government officials that had negative impacts on commercial operations. The most prominent victim was Lotte’s hypermarket chain, Lotte Mart. By the first week of March 2017, 23 Lotte Mart stores had been forcibly closed. Although there was some variation in reasons cited, the dominant grounds were related to fire safety violations.¹¹ This pattern of interference continued so that by August, 74 of the 112 Chinese Lotte Mart stores had been shutdown for similar reasons, and Lotte independently made the decision to close an additional 13 stores due to market challenges. Many never opened again. Year-over-year Lotte Mart sales decreased by 76.9 percent in 2017, and in October 2018 the conglomerate announced the complete withdrawal of Lotte Mart from the Chinese market.¹²

Beyond Lotte Mart, other Lotte businesses experienced regulatory challenges including prolonged tax investigations, fines, delayed licensing approval, and at least one case of property seizure.¹³ Alleged fire code violations led to the closure of a number of Lotte facilities, such as confectionary factories,¹⁴ and also formed the basis for the suspension of a $2.6 billion development project in Shenyang.¹⁵ Lotte products and services were also the target of popular boycotts and vandalism.¹⁶ Total losses for 2017 were estimated at $1.78 billion, and some Lotte business ventures on the mainland have continued to experience difficulties ever since.¹⁷

Tourism

Prior to THAAD, Chinese tourists made up 47 percent of total tourist arrivals and 70-80 percent of ROK duty free shop sales in 2016. Tourism became the industry most affected by the political tensions. First, China’s National Tourism Administration (CNTA) discouraged trips to South Korea through the issuance of travel warnings.¹⁸ Second, Beijing imposed an “informal” ban on the sale of ROK package tours. CNTA representatives are reported to have issued verbal instructions to cancel all group tours after March 15, 2017, and that failure to do so would result in fines or license revocation.¹⁹ Instructions were delivered to travel agencies across the country and implemented almost immediately. The speed with which this ban came into the effect is consistent with a high degree of coordination.

The impact of the “tourism ban” is now well known.²⁰ Tourist arrivals dropped by 48.3 percent in 2017, over 4.5 million, having severe consequences for a variety of sectors that rely on Chinese visitors for business.²¹ Duty-free operators were particularly hard hit. The largest operator, Lotte, saw profits decline by more than 99 percent in 2017, compounding the other difficulties it was experiencing. Beyond duty-free shops, Korean hospitals and other clinics were adversely affected by the sudden disappearance of Chinese medical tourists,²² as were retail and hospitality outlets, tourism agencies, hotel chains, and casinos.²³ In total, the Hyundai Research Institute estimated that the reduction in Chinese tourists resulted in approximately $15.6 billion in lost revenue across the economy.

Entertainment

The second industry apparently targeted by coordinated retaliation is South Korea’s entertainment sector. What began as a series of seemingly isolated incidents of Hallyu pop stars having Chinese concerts cancelled or actors being removed from Chinese television programs in late 2016, eventually came to resemble a broader ban on popular Korean cultural exports. The so-called “Korean Performing Arts Activities Ban” appears to have been issued verbally by the State Administration of Radio, Film and Television. As with tourism, booking agents and content distributors were informed that failure to comply would result in fines or license cancellations.²⁴

Although the precise instructions are unknown, the ban seems to have been expressed broadly: new Korean TV shows and films stopped receiving approval for release, streaming of Korean music, television, and movies became impossible, music stars ranging from pop group EXO to soprano Jo Sumi had concerts cancelled, and idols and actors reported contracts withdrawn and visa applications denied. Korean video game developers also suddenly stopped receiving licenses for new titles in March 2017, losing access to the world’s largest gaming market.²⁵

Over time, the degree of coordination in restricting Korean entertainment exports appears to have lapsed. In 2018, anecdotal evidence emerged suggesting that implementation was varying from province to province. Booking agents, for example, reported that ROK acts could be booked with ease in Guangzhou, while it was impossible in Shanghai.²⁶ Although some ROK musicians have experienced relief, other actors—such as video game developers who remain yet to see a title approved,²⁷ or television producers who still struggle to get Korean titles onto Chinese streaming services²⁸—have not.

Category two: government involvement likely but not nationally coordinated

Electric vehicle batteries

In a bid to enter the world’s largest and fastest growing market for electric vehicles (EVs), in 2015 two Korean firms—Samsung SGI and LG Chem—independently constructed EV battery manufacturing plants on the mainland. The Chinese government began subsidizing the purchase of all EVs in 2012, but in 2016 subsidies were restricted to certain vehicles on an approved list managed by China’s Ministry of Industry and Information Technology. Since the THAAD dispute began, no vehicles containing Korean batteries have ever made the list.²⁹ Without subsidies the price of a Chinese EV can increase by 40-50 percent, therefore many mainland EV manufacturers cancelled battery supply contracts with LG and Samsung, who saw operations at their factories grind to a halt and their market shares halved.³⁰

However, unlike the actors and industries discussed in category one, in this case the link between THAAD tensions and the disruption (denial of subsidies) is less clear. Despite consistent reporting that this was a clear case of retaliation, there remains some uncertainty. For example, vehicles with Korean batteries had never received subsidies prior to the THAAD announcement, and several models had been denied subsidies earlier in 2016. However, the original reason provided for the exclusion of LG and Samsung was that approval would only be granted to companies which had maintained manufacturing facilities in China for 12 months. This hurdle was passed in October 2016 (after the THAAD announcement), yet they continued to be excluded. It is therefore possible that the THAAD dispute had some influence on the treatment of ROK battery manufacturers; the available evidence, however, is not conclusive.

Other miscellaneous

Throughout the period of tensions numerous Korean exports were also reported to have faced irregular holdups or other obstacles when passing through Chinese customs. Typical examples included greater scrutiny of paperwork, with export documents returned with requests to correct minor details such as the romanization of “Pusan” to “Busan” or item description from “blouse” to “t-shirt.”³¹ Affected exports were reported to include agricultural and food products,³² textiles, cosmetics, textbooks,³³ and the aforementioned electronic bidets.

News reports and analyses of these disruptions have tended to assume Chinese customs officers were carrying out retaliation per orders from above. Indeed, this would be consistent with China’s typical economic coercion playbook: stepped-up customs inspections feature prominently in other “classic” cases such as Norwegian salmon and Filipino bananas.³⁴ However, compared to the disruption seen in tourism and entertainment, the evidence of deliberate and coordinated government involvement is weaker. For example, no actors or industries appeared to experience disruption consistently, and many companies acknowledged they made errors (such as the inclusion of unapproved ingredients or discrepancies in labeling) that were also penalized pre-THAAD.³⁵

Category three: THAAD-related boycotts and other activities that lack direct government involvement

Motor vehicles

Boycotts are a key mechanism through which foreign firms are affected by political disputes in China. With state-run media fomenting an environment of hostility, visible brands often face the most difficulty. Beginning in March 2017, Hyundai and Kia faced extensive popular boycotts by mainland consumers. These were cited as the main cause of an 8.7 percent decline in their combined global sales over the first 6 months of the year compared to the same period in 2016.³⁶ Local Chinese competitors encouraged the boycotts, offering discounts and other perks to customers who could demonstrate they had sold or canceled orders for South Korean vehicles.³⁷ Incidents of vandalism were also reported, such as the smashing up of a Hyundai outside a Lotte Mart in Hunan.³⁸ For Hyundai, the slowdown in sales was compounded by difficulties with local parts suppliers and joint venture partners, leading to the temporary suspension of production at some factories.³⁹

Overall, Hyundai and Kia’s China sales fell more than 30 percent year-on-year in 2017.⁴⁰ Both firms also saw their market shares on the mainland shrink significantly,⁴¹ while those of local competitors such as Geely and Baojun, expanded. Prior to THAAD, Korean automakers had already been struggling to compete with these rivals who were producing models of similar quality at lower prices. Disruption arising from the THAAD dispute appears to have accelerated that trend. Unlike other Korean industries that have seen improvements since the dispute was resolved, the situation of automakers remains difficult. Chinese sales have remained, low and both Kia and Hyundai have recently moved to close factories on the mainland.⁴²

Cosmetics

The cosmetics industry also experienced some difficulties throughout the THAAD dispute. Encouraged by nationalist media,⁴³ some mainlanders boycotted easily identifiable K-beauty brands like Innisfree and Laneíge. As discussed further below, some companies also complained of difficulty clearing customs and passing sanitary inspections.⁴⁴ Overall, however, cosmetic exports to China continued throughout the year, seeing a 23.4 percent year-over-year increase in 2017.⁴⁵ While some firms saw a decline in aggregate sales, such as Korea’s largest cosmetics manufacturer Amorepacific, this was attributed to the absence of tourists visiting retail outlets and duty free stores rather than boycotts and administrative interference.⁴⁶

Lessons on economic power and vulnerability

The analytic value of the THAAD case stems from the variety of industries affected. It is reasonable to infer from this breadth of impact that Beijing wanted to impose significant economic costs on Seoul, either in an attempt to procure a reversal of the THAAD decision or perhaps as a deterrent against future security policy decisions contrary to Chinese interests. Yet not every industry was affected, and those that were experienced punishment in different ways. Based upon on the descriptive analysis above, we draw the following (tentative) conclusions regarding what insights this case yields on the sources of power and vulnerability arising from economic interdependence.

Lesson one: The macroeconomic condition of interdependence does not create uniform microeconomic vulnerability within a state’s economy

As discussed at the outset, South Korea was and is widely perceived to be vulnerable vis-à-vis China because a high percentage of its exports are bound for the mainland. Yet despite the breadth of industries affected, the impact was not uniform across all sectors of South Korea’s economy. Some industries experienced heavy impacts, such as tourism and many of Lotte’s mainland operations. Others, however, were untouched, most prominently the largest category of South Korean exports to China—integrated circuits, or semiconductors—exports of which more than doubled in value from 2016 to 2017.⁴⁷ Semiconductors fall into the broader category of intermediate inputs, trade in which constituted about 70% of South Korea’s exports and which appeared generally untouched by the dispute. Indeed, growth was sufficient to fuel an increase in the country’s overall exports to China in 2017.⁴⁸

This discrepancy shows that macroeconomic data—here the fact that China was South Korea’s largest export destination—do not necessarily provide significant assistance in understanding the link between economic interdependence and vulnerability, and therefore the sources of coercive power. Disrupting trade in intermediate inputs would have caused the most economic and political pain for the South Korean government, and thus been most likely to influence Seoul’s foreign and security policy. But the industry was left wholly alone. Such high-level measures of interdependence therefore do not translate neatly into a nation’s overall economic exposure to political risk. Said differently, the fact that China is the largest trading partner of many countries around the world, by itself, is insufficient evidence to draw conclusions about Beijing’s capacity to coerce.

Lesson two: Economic power and vulnerability are founded upon asymmetric interdependence

Understanding the basis of coercive economic power begins with an appreciation of the logic of economic transactions. Economic actors—firms and individuals—buy and sell in markets because it is in their rational interest to do so. Basic economic theory assumes that a given transaction occurs because it is the most beneficial option available to the buyer and seller, in the sense of maximizing benefits and minimizing costs. If for some reason a transaction is disrupted or becomes unavailable, the participants incur different types of costs (“exit costs”) because it is costly to search for an alternative and, once found, the alternative may be lower in quality or reliability, or transacted at a less attractive price. Where an alternative cannot be found, they must forgo the benefits of the transaction entirely.

Asymmetry in exit costs between two sides to a transaction lies at the heart of economic power and vulnerability.⁴⁹ Where one side faces relatively low exit costs, while finding alternatives (or going without entirely) would be highly costly for the other, the strongest potential for coercive power arises. In transactions (or industries) where both sides face high exist costs, symmetry reduces the likelihood that they will be leveraged for coercive purposes.

The THAAD case is consistent with this logic. The clearest and most high-profile examples of affected South Korean industries were cases in which an asymmetry in exit costs was apparent. In the case of tourism, directing mainland travel agents to sell group packages to countries other than South Korea was very low cost. Yes, some would-be tourists might miss out on their first preference holiday destination, but the ease of substitutability with alternative travel destinations meant little was lost on the Chinese side.⁵⁰ For the South Korean tourism industry, however, replacing 4.5 million Chinese tourists could not be done quickly, easily, or cheaply, as it would require the cultivation of alternative markets via marketing and outreach campaigns, and perhaps the construction of tourism infrastructure to cater for new types of tourists. This logic of asymmetry applies more broadly to the fomenting of boycotts by state-run media—where consumers and firms are able to decide which products to boycott, they will choose the most easily substitutable products (such as K-beauty products or Orion Choco-Pies),⁵¹ not those products that cannot easily be replaced (intermediate inputs).⁵²

By a similar logic, closing down 70 or 80 Lotte Marts on the mainland would cause a small inconvenience to Chinese shoppers who regularly patronized a given store and the employees working there, but hardly imposes a significant burden on the Chinese economy overall. In contrast, Lotte lost more than $1.7 billion following its exit from the supermarket industry and other costs.⁵³ Equally, cancelling pop concerts or denying computer game licenses might upset dedicated Chinese fans, but their material losses are minimal compared to ROK suppliers losing access to the Chinese market.

Conversely, no transactions were going to be targeted that would impose significant costs on the Chinese economy. Disrupting South Korean exports of semiconductors would do real damage, given the massive role final assembly operations continue to play in China’s export-led growth model.⁵⁴ Millions of Chinese workers are employed in factories that assemble intermediate inputs into finished goods. Consistent with the logic of asymmetric interdependence, the exit costs on the Chinese side were high, because transactions involved inputs in established supply chains that cater to specific design and manufacturing processes. This symmetry insulated trade in intermediate inputs from being leveraged for coercion. Even where the incentive to punish was at its highest in the case of Lotte, the company’s chemical division—an intermediate input—saw modest growth during the relevant period, again likely because the costs of disrupting these transactions was too high.⁵⁵

The theory of asymmetric interdependence does not offer precise predictions regarding what specific industries will be targeted in a coercive episode. Rather, it provides a guide for the types of industries most at risk—typically branded consumer-facing goods that are easily substitutable—and those least likely to be affected—intermediate inputs moving through established production chains.

Lesson three: The availability of regulatory tools shapes the use of intentional, government-coordinated economic coercion

A key feature of Chinese economic coercion in recent years has been its informal nature.⁵⁶ This contrasts with the “original” form of economic coercion, the official sanction, in which a government publicly announces embargoes or other kinds of trade or financial restrictions, and uses legal instruments—legislation and regulations—to create a framework for communication and enforcement. This serves the dual purposes of informing its own companies of what types of transactions are prohibited, and subsequently preventing and punishing “sanctions-busting” behavior. In contrast, the Chinese government has not utilized formal sanctions when seeking to prosecute its political disagreements. Beijing rarely admits to the existence of any intentional, top-down, coercive campaign. This was seen in the tendency of Chinese officials to dismiss allegations of THAAD retaliation by reference to changing consumer sentiment on the mainland.

Part of the reason for an informal approach is the maintenance of plausible deniability. Economic coercion is, after all, a restriction on trade (or other economic activity) that may bring the instigator into violation of WTO or other trade agreement obligations. Denying any intentional, top-down, and coordinated discrimination against a target country’s economic interests, in a forensic sense, complicates establishing legal liability. Yet informality can also serve as a constraint that limits the extent to which economic disruption can be carried out.

For informal economic coercion to be performed by government officials directly, it requires the utilization of some existing laws or regulations that can be plausibly used to shut down commercial activity. This might be straightforward, such as where licensing regimes confer a government discretion to refuse to grant approvals, as happened with South Korean computer games, or where paperwork requirements have not been satisfied, as happened at ports with customs approvals. Therefore, the more an industry relies upon the (opaque) discretion of regulators, the more at risk it may be to politically-motivated disruption. Yet even where the tools exist, coordinating such activity at a national level without making it official policy is difficult. Nevertheless, Beijing has shown a willingness to stretch the bounds of credulity when political incentives are sufficiently powerful, such as when the majority of Lotte supermarkets were abruptly closed for alleged safety violations. While there was a veneer of plausible deniability, few would have accepted the decision on its face. 

At other times disruption will require controlling the market behavior of firms or individuals, as was the case with the tourism ban. While it was remarkable that the government’s group travel ban reduced Chinese tourist arrivals to South Korea by almost 50%, it is equally notable that over 4 million Chinese tourists still made the journey in 2017. The structure of the outbound tourism market in China meant that a handful of state-owned travel agencies dominated the group travel market, where (relatively) unsophisticated consumers needed a full range of services to book flights, hotels, transport, and activities, as well as to acquire the necessary visas. It was logistically feasible to get representatives from these agencies in the room and issue the instructions to ban group travel to South Korea. But controlling the behavior of the other 4 million plus consumers, categorized as “free independent travelers,” who had the capacity to make their own travel arrangements, would have required a far more disruptive policy response. Interventions like banning commercial flights or re-instituting exit visas would have both magnified the costs on the Chinese side and created unpredictable consequences in global markets.⁵⁷

The broader point is that economic coercion requires deliberate intervention into a market that has a particular structure, defined both by the laws and regulations that govern commercial activity, the characteristics of the goods or services being bought and sold, and the firms and consumers doing the transacting. Market structure will influence the form and extent of coercive measures and may limit or channel cost imposition in specific ways. Identifying political risk requires understanding the regulatory landscape within which commerce is carried out and focusing attention on industries where regulatory discretion may enable responses harmful to a company’s interests. 

Lesson four: Identifying evidence of patently top-down coordination is a challenge, but even in its absence, political disputes can affect market dynamics in ways that harm target country firms

Not all disruptions represent a deliberate top-down campaign of economic coercion. Based on our research, we concluded there were only three categories from the THAAD episode where the evidence for a centrally directed effort was strong: tourism, Lotte, and at times entertainment. This is not to say that other disruptions were wholly unrelated to the dispute, but are better framed through the idea that political tensions have ripple effects—both political and economic—that may change behavior and impose costs on commercial interests, even if they fell well short of deliberate coercion by the government.

First, government officials at the sub-national level may decide to punish foreign economic interests because they interpret signals sent from the center—such as from state-run media or criticism by high-ranking officials—as a directive to scale back cooperation with foreign economic partners or even make life difficult for them. Examples of this can be seen in some of the more random, isolated cases of regulatory interference reported by ROK firms with operations on the mainland: whether small businesses being ordered to remove LED signboards in hangul for failing to comply with “proper administrative procedures” or larger companies experiencing fire inspections without notice, sometimes leading to temporary closures.⁵⁸

Second, the boycott mechanism may be fomented by state-run media, but ultimately reflects the (voluntary and capricious) choices of private companies and individuals. Boycotts motivated by nationalism or patriotism are not of themselves a violation of the rules regulating global commerce. Nationalist backlash is a key political risk companies face when going abroad, especially in China, which can operate even in the absence of a deliberate and top-down campaign.⁵⁹

Third, even if nationalist-driven boycotts were not a concern, political tensions can still set back the efforts of foreign companies to win or defend market share. While textbook economic models assume that markets are governed by well-defined property rights and the rule of law, Chinese capitalism places greater emphasis on networks or “guanxi” (connections/reciprocity), in which informal business networks and interpersonal relationships govern much business activity.⁶⁰ Political tensions unsettle informal networks, creating opportunities for domestic firms to exploit the tensions for gain. One interesting manifestation that may have arisen during the THAAD dispute was tensions being used as bargaining power in business-to-business negotiations, with reports suggesting that one of Hyundai’s Chinese joint venture partners may have sought to pressure Hyundai to agree to restructure its supply network away from Korean parts-suppliers to local Chinese manufacturers.⁶¹

Ultimately, even in cases where foreign firms or industries are not deliberate targets of economic retaliation, the combination of political tensions and the unique (and sometimes volatile) dynamics of the mainland Chinese market may expose foreign firms to disruptions.

Lesson five: More attention should be paid to how political disputes may interact with industrial policy objectives

Parallel to political disputes that arise from time to time, China’s model of development utilizes heavy state involvement in implementing industrial policy to support the rise of national champions, especially in key advanced technology sectors like those outlined in the Made in China 2025 initiative.⁶² The Chinese government has come under heavy international criticism for overly protectionist policy regimes that shelter emerging domestic firms from foreign competition.⁶³ The THAAD case offers up a potentially new way of conducting industrial policy and providing domestic protection—disguising it under the cover of political tensions.

While the case for this is more speculative than concrete, the example of electric vehicle batteries is consistent with this possibility. South Korean manufacturers were inexplicably denied lucrative subsidies contrary to (confident and widely held) expectations. Only domestic companies received the subsidies, allowing two in particular to achieve a position of dominance within a few years, despite a lack of leadership in the technology itself.⁶⁴ In several other affected industries one can also find hints of an industrial policy logic. For example, the Chinese government has long been trying to develop an indigenous computer game industry, and the denial of licenses to South Korean companies—major players in the industry—did create space for local competitors to develop.⁶⁵

Conclusion

Sifting through the evidence of China’s economic response to THAAD against South Korea provides a unique opportunity to glean new insights into the operation of Chinese economic coercion and the broader relationship between power and interdependence as we enter an era characterized by “weaponized interdependence” and “geoeconomics.”⁶⁶ Rather than evaluate who “won” the dispute or whether Seoul’s ultimate concession—the “three noes”—should be considered a “success” for Beijing, we focused on identifying the sources of variation in industries and actors affected by economic retaliation and the precise mechanisms through which disruption occurred. THAAD provides a fruitful case study for policymakers and scholars seeking to understand the factors that enable and constrain China to leverage its economic relationships to exercise power.

While the case conforms with much of the established wisdom, notably that power and vulnerability arise from asymmetric interdependence, it also suggests some more novel and complex dynamics that have the potential to generate new insights into industries and actors most likely to be targets of economic disruption. In particular, the evidence highlights the importance of the regulatory environment governing commercial activity, which can both provide options for plausibly deniable disruption, while also constraining the extent to which such disruption can go. Moreover, it suggests that market structure and industrial policy should not be ignored as relevant factors motivating and shaping the economic disruptions that arise during political tensions. Studying these dynamics is made difficult by the challenge of collecting sufficient empirical observations of retaliation in play, and formulating policy responses in response to real-time contingencies is even harder. Yet clarifying and deepening our understanding of baseline factors that have the potential to shape outcomes during coercive episodes can help and is therefore a task of great importance.