The Peninsula

Two Decades on, Korea’s Relationship with China Remains a Conflicted One

By Troy Stangarone

The end of the Cold War is primarily remembered for the fall of the Berlin Wall, the end of the Soviet Union, and the reunification of Germany. However, in Asia one of its most significant impacts was to pave the way for South Korea and China to establish formal relations two decades ago.

Over the last two decades, the ROK and China have seen their relationship move from one of significant promise to become increasingly complex as economic imperatives have drawn the two countries together while they continue to face a strategic disconnect on key interests for each party.

Growing Economic Interdependence

The opening of relations with China began a new era for economic growth that allowed Korea to piggyback on China’s own economic development. Over the last 20 years, perhaps few other countries have developed such an important and interdependent economic relationship with China as Korea.

However, the roots of the economic relationship predate the formal opening of ties in 1992, as economic ties between Korea and China were already developing robust rate by that time. While total trade between China and Korea was only $6.3 billion[i] in 1992, trade had been expanding at a rapid rate. Exports to China grew by 34 percent in 1990, 71 percent in 1991, and 164 percent in 1992, by which point China had become Korea’s 6^th largest market for exports (Hong Kong was 3^rd). While not as robust, imports from China grew by 33, 52, and 8 percent respectively over the same period making China Korea’s 5^th largest market for imports by the time relations were formalized.

In the years since 1992, China has become increasingly important for the Korean economy. China passed the United States in 2003 to become Korea’s largest trading partner and today ranks as Korea’s most important export and import market by a wide margin. Total trade between the two countries has ballooned to $220.6 billion last year, more than the combined total of Korea’s trade with the United States and the EU.

During the same period, Korea’s dependence on China has grown. According to the IMF, for every percentage that investment growth declines in China, Korean economic growth is slowed by 0.6 percent annually. In much the same way, the Hyundai Research Institute has calculated that for every percentage point drop in Chinese economic growth, Korea’s economic growth slows of by 0.4 percent annually.

How did this change take place and in such a short period of time? The economic reforms and opening started under Deng Xiaoping in 1978 helped to transform China into a manufacturing powerhouse that has become the world’s assembly plant. Korea’s geographic proximity and two millennia of history with China made them logical partners, along with the complimentary nature of their economies at the time. These trends were only magnified by China’s entry into the WTO in 2001, which enhanced China’s access into markets around the world and its appeal as a manufacturing hub.

As these developments were taking place, Korean firms have been some of the most successful in taking advantage of the opportunities presented by China as an export platform to the developed world. In 1992, Korean investment into China amounted to only $100 million, but by the mid-1990s annual investment by Korea had reach $1 billion a year topping out at $6.2 billion in 2004. Today, more than 20,000 Korean businesses have invested in China.

As Korean investment in China deepened, trade between the two countries expanded and was driven by Korean exports of intermediate goods for assembly and re-export to parts of the developed world such as the United States and the EU. For this reason, despite the fact that trade with China now exceeds total trade with the U.S. and EU combined, Korea’s trade dependence on China is only on a similar level to that of the United States, EU, and Japan.

The economic relationship has benefited China beyond its direct investment and trade relationship with Korea. Seoul was the first of China’s major trading partners to recognize it as a market economy, something the United States and the EU have not, and has also been an important source of technology and managerial knowledge transfer for China’s developing economy.

But the relationship has always been a two ways street with Korea benefiting from Chinese investment as well. In 1992, China’s foreign direct investment in Korea tripled and has since risen to a cumulative value of over $37 billion, making China the second largest investor in Korea after the United States. With China moving its economy towards more domestic consumption, Korea should also find itself well placed to take advantage of growing consumer spending in the nation which is already the world’s largest market for products such as automobiles, groceries and other consumer products.

At the same time, economic cooperation between China and Korea has extended beyond the realm of bilateral trade and investment ties. The two nations have worked together to increase regional economic integration, specifically in the area of finance. After the Asian financial crisis in 1997, much of the region moved towards a self-help philosophy and away from dependence on the IMF in the case of a financial crisis. Out of this grew the Chaing Mai Initiative, a regional web of currency swap agreements designed to provide greater protection in the region against financial shocks. In 2010, after the global financial crisis, Korea and China played a key role in expanding the Chaing Mai Initiative and moving towards a more multilateral structure.

A Future of Economic Competition?

While Korea has largely benefited from China’s growth, it could find itself increasingly an economic competitor of China’s in the near future. China’s technological gap with Korea has narrowed to 3.7 years from 4.7 years in 2002 according to the Korea Institute for Industrial Economics and Trade. Additionally, China is placing greater emphasis on key sectors of the Korean economy, such as automobiles, shipbuilding, and high-tech sectors such as semiconductors. The technological gap with China has fallen to 4.2, 3.1, and 2.4 years respectively in these sectors. In some cases, Chinese firms feel as though they have already caught up with Korea.

Some of the effects of this change are already being felt. While Korea until recently dominated the shipbuilding industry, it now largely shares the market with its Chinese competitors. Additionally, Beijing is seeking to increase its market share in shipbuilding to 70 percent by 2015. In automobiles, Chinese exports of small cars to developed markets are around 20 percent cheaper than those of established auto makers. However, China is likely to face the same challenges as Korea did in developed markets where merely having the lowest price will not drive sales.

This means that as China grows more competitive with Korea, Korea will face the same challenges other nations have and will need to continuously move up the value chain to remain competitive in the global marketplace with an increasingly upwardly mobile China. It also means that the economic arrangements under which Korea and China cooperate and compete will become increasingly more important for Korea’s own economic success. Some of these rules will be set under the Korea-China FTA currently being negotiating, but the broader structure of trade in the Asia-Pacific region will likely be determined by whether the ASEAN Plus, Trans-Pacific Partnership, or some combination of both visions ends up shaping the regional trade structures in the years ahead.

Hallyu and History

At the same time as economic ties between Korea and China have been growing, so have cultural and people-to-people ties. It was Chinese journalists who coined the term “Hallyu,” or Korean wave, for the increasing popularity of Korean culture and entertainment in China. What began with the popularity of Korean dramas such as “What is Love?” has grown over the years to include K-Pop and other aspects of Korean culture and become an embedded aspect of popular culture in Northeast and Southeast Asia.

As a result, Chinese tourism in Korea has boomed over the last two decades and in July of this year visitors from China topped the list of tourists in Korea for the first time. In 2011, more than 2.2 million Chinese tourists came to Korea, up from 443,000 in 2000 when Korea opened the doors group tourism from China. Over the same period, Korean tourists in China have grown from 1.43 million in 2000 to 4.18 million last year.

In addition to tourism, more and more Chinese and Korean students are choosing to study abroad in their respective countries. Chinese students studying in Korea have risen from 1200 in 1992 to 58,000 according to the latest data from 2010. At the same time, the number of Korean students studying in China has grown from 4000 in 1992 to 63,000 in 2010, which is 21 percent of the foreign students currently studying in China and only about 10,000 less than studied in the United States that same year according to the International Institute for Education.

However, despite the growing cultural and educational ties, Korea and China have experienced a series of disputes in recent years over historical issues. After years of growing ties, Koreans were caught off guard when Chinese scholars laid claim to the Korean Kingdom of Goguryeo, from which modern day Korea derives its name, and it’s successor Kingdom Banhae as part of Chinese history. Further adding to the controversy, Beijing announced this past June that the Great Wall of China included parts of fortifications in the two Korean kingdoms and Jilin province in China erected a statue to a king of Banhae on bended knee as he received a letter from a Tang Dynasty envoy. A similar scene has also appeared in a Chinese documentary.

The culmination of these and other historical disputes between China and Korea has been concerns among Koreans that Sinocentrism is still prevalent in China today. At the same time, Koreans have not embraced Chinese culture in the same way that the Chinese have embraced Hallyu.

Strategic Disconnect

Since 2008, Korea and China have considered each other strategic partners and increased defense cooperation in 2011. However, while economic growth has been driving the two countries together and the two governments have been taking steps to increase cooperation, it remains an uneasy partnership in strategic areas.

The two sides face challenges over differences related to North Korea, the United States, territorial concerns, and values and perceptions when it comes to developing a deeper strategic partnership.  One of the core challenges is that Korean perceptions of China have changed. During the early period of economic cooperation many Koreans held a favorable view of China. In recent years, however, that perception has begun to change. In polling by the Asan Institute for Policy Studies, China’s favorability rate in Korea has fallen from 45 percent in 2010 to 40 percent this year and only 30 percent of Koreans want to see China show leadership on global affairs. In addition, 62 percent see China as the biggest threat in a post-unification period and a majority of Koreans, other than those in their 20s, see China’s economic rise as a threat, while all age groups by 71 percent or more see its military rise as a threat.

Beyond the historical disputes that have dampened relations, there has been a disconnect between the Korean public’s expectations in relation to the North and Chinese interests. Because of the growing economic ties between the ROK and China, there was an expectation that China would take a more balanced position between the two Koreas. However, when the Cheonan was sunk, it took Beijing a month to issue a statement of regret for the 46 sailors who lost their lives. Later that year, when North Korea shelled Yeonpyeong Island killing two soldiers, as well as two civilians, China again seemed to side with North Korea.

Despite growing economic ties, China has not grown closer to the ROK in terms of its policy towards North Korea. While Beijing works with Seoul to maintain stability and discourage provocations or additional nuclear tests by Pyongyang, that has become the limit of China’s cooperation. Even on humanitarian issues, such as refugees, it routinely sends them back to North Korea, considering them to be economic migrants rather than refugees.

Perhaps it should not be too surprising that the two countries diverge when it comes to North Korea. China finds itself surrounded by 14 nations, of which North Korea is its only nominal ally. At the same time, China prioritizes stability on the peninsula as it focuses on its own economic development. The improvement of ties between the two Korea’s is not a priority for China, especially if it were to nominally pull North Korea out of the Chinese orbit.

However, it is in China’s strategic interest to balance its relations between the North and the South. Beijing has long been weary of Seoul’s alliance with Washington and too strongly supporting North Korea against the South only reinforces the basis for that alliance. China’s support for North Korea cannot be so strong as to alienate the ROK, but at the same time it cannot be so minimal as to lead to the reunification of the peninsula and the placement of a state aligned with the United States on its boarder.

Beyond North Korea, the two sides face other challenges to a closer strategic relationship. Beijing and Seoul disagree about where their exclusive economic zones end in the Yellow Sea. Additionally, while it does not receive the press of Dokdo, China disputes Korean sovereignty over Korea’s southernmost island, Ieodo, which sits in the intersection of the two countries exclusive economic zones. While the dispute has not lead to the tensions of China’s other territorial disputes, such as those in the South China Sea, the aggressive manner in which Beijing has pursed those disputes has not created confidence in Seoul, especially since the two side also face a challenge in dealing with the estimated tens of thousands of Chinese fishermen who illegally fish in Korean waters each year.

When it comes to values, the two sides not only part views when it comes to North Korean refugees, but also basic issues of human rights. The recent accusations of human rights activist Kim Young-hwan of torture by the Chinese during his four month detention in China and the calls for action on the part of China demonstrate the cultural gap when it comes to protecting basic rights between the two societies.

An Increasingly Complex Relationship

South Korea and China recently exchanged diplomatic pleasantries to mark the 20^th anniversary of relations and in many ways the progress of the last two decades makes such a gesture meaningful. However, it is also clear that their relationship is one of delicate balance.

As with perhaps any significant relationship, there are opportunities and challenges ahead.  However, the nature of the historical issues and the security disconnect make the relationship a potentially complex one where increasingly Seoul’s most important economic partner and security ally are different.

While Korea has much potentially to gain from China, on Korea’s core security issue there will likely remain a disconnect between the two countries. How successfully the two countries can wall off the issue of North Korea to focus on other areas of interest remains to be seen, but China’s recent assertive pattern with other neighbors and tendency to enter into historical disputes with Korea likely minimizes the prospects for deepening cooperation beyond economics in the near future.

While the two sides continue to hold differences in terms of values, world views, and strategic interests, there will be a limit to the level of cooperation the two governments can achieve. However, these will be issues Seoul and Beijing will have to work through as Korea’s increasing economic interdependence with China and China’s continued rise as a global power will continue to put these issues front-and-center. Finding ways to manage these differences and reach new understandings will be in the interest of both countries.

Troy Stangarone is Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. He is currently on leave from KEI. The views expressed here are his own.

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