North Korea’s fifth nuclear test on Sept. 9 and the intensified test-firing of a range of missile types throughout 2016 underscored existing weaknesses in using dialogue and sanctions as a response. The timing of Pyongyang’s latest provocations coincided with the G20 Summit in Hangzhou and ASEAN-related meetings in Vientiane. President Park Geun-hye used the venues for sideline talks with President Xi Jinping and President Obama. The nuclear test directly challenged a nonproliferation statement adopted by East Asia Summit (EAS) members on Oct. 8, which urged North Korea to abandon its weapons programs.  Following extended negotiations with the US, China finally joined the international community in adopting UN Security Council Resolution 2321 on Nov. 30. In addition to strains in the China-DPRK relationship, regional coordination on North Korea remains challenged by disputes between China and the ROK over THAAD and illegal Chinese fishing.

Responding to North Korea’s fifth nuclear test

North Korea’s fifth nuclear test was immediately condemned by the UN Security Council and prompted telephone talks between PRC and ROK nuclear envoys Wu Dawei and Kim Hong-kyun on Sept. 10 and Foreign Ministers Wang Yi and Yun Byung-se on Sept. 14.  Premier Li Keqiang had joined South Korean and other regional partners in calling for denuclearization at the 11^th EAS on Sept. 8.  In the days ahead of the test, Park Geun-hye also mobilized support for trilateral cooperation with the US and Japan through separate talks with President Obama and Prime Minister Abe Shinzo on Sept. 6-7 in Laos.  Wu Dawei and Kim Hong-kyun met in Beijing on Sept. 22 and again in Dec. 9 after the adoption of UN Security Council Resolution (UNSCR) 2321, pledging to fully implement the tougher resolution.

Although Premier Li in his Sept. 19 meeting with President Obama at the UN General Assembly affirmed China’s resolve to strengthen the implementation of UN resolutions, President Park in her press conference with Obama earlier that month suggested a need for greater Chinese cooperation on enforcing sanctions.  Foreign Minister Yun Byung-se ahead of nuclear security meeting in Vienna in December called for China’s “constructive role” in implementing UN resolutions “without leaving a loophole,” an apparent reference to exceptions made for livelihood-related trade under previous UNSCR 2270, through which Pyongyang has been suspected of funding its weapons programs.  UNSCR 2321 partially closed such loopholes, but both US and South Korean observers remain doubtful that tougher sanctions will significantly change Pyongyang’s strategic calculations.  A Korea Development Institute (KDI) report in October argued that Pyongyang is unlikely to change policy course despite the estimated economic impact of sanctions, while other South Korean experts have raised concerns over North Korea’s ongoing unofficial trade channels with China.

Even with the closing of existing gaps in the sanctions regime, diplomatic coordination on North Korea is constrained by the current status of Beijing’s bilateral relations with Pyongyang and Seoul. Days after the nuclear test, DPRK ceremonial head of state Kim Yong Nam and Foreign Minister Ri Yong Ho passed through Beijing on Sept. 12 and 13 on their way to Venezuela for the Non-Aligned Movement (NAM) summit in Venezuela, with no reported meetings with Chinese officials. The absence of contacts in Beijing reinforced perceptions of Pyongyang’s quest to diversify its diplomatic partnerships with nonaligned counterparts.  On the other hand, China’s mounting opposition to Seoul’s July decision to deploy the Terminal High Altitude Area Defense (THAAD) missile defense system has highlighted the limits of Chinese cooperation with South Korea in dealing with the North’s military threats.  In a statement following the UN Security Council’s vote on the latest resolution, PRC Ambassador to the UN Liu Jieyi called for an “immediate stop” to the THAAD deployment process, arguing that it “will in no way help realize denuclearizing the Korean Peninsula.”  Although Beijing called for fully implementing the new Resolution, Liu at a Security Council meeting on Dec. 9 also reaffirmed China’s opposition to discussing DPRK human rights.  As some Chinese experts suggested at an international conference held in Seoul in November, cooling China-ROK political ties and concerns over Washington’s emerging isolationist orientation are likely to harden Chinese views of North Korea’s importance to Beijing as a “strategic buffer zone.”

China and South Korea’s political fallout over THAAD and fishing

Political frictions over THAAD have undermined coordination on North Korea since Seoul’s decision last July to deploy the system.  South Korean officials on Nov. 6 indicated that the THAAD decision has led to the suspension of all high-level defense talks with Beijing, including a planned meeting between Defense Ministers Chang Wanquan and Han Min-koo, and military strategy talks at the vice defense minister-level that have been held regularly since 2011.  Chinese objections intensified in November after the ROK Defense Ministry concluded an agreement to acquire the site for THAAD deployment from Lotte Group in the southeastern county of Seongju, where construction will begin in early 2017.  After US Forces Korea Commander Gen. Vincent Brooks’ affirmed the plans for THAAD’s deployment, the Chinese Foreign Ministry on Nov. 4 warned that it would counter the “strategic and security interests of countries in the region, including China.”  The PRC Foreign Ministry voiced its concerns in September after the Xi-Park summit in Hangzhou failed to resolve differences over THAAD, threatening “necessary measures to defend national security interests and regional strategic balance.”  Such views were echoed by Wang Qun, director general of the PRC Foreign Ministry’s Arms Control Department, at an October meeting of the UN General Assembly.  Chinese government officials did not attend the Seoul Defense Dialogue in September, reflecting Beijing’s ongoing opposition to THAAD’s planed deployment.

In addition to their immediate priorities, the THAAD dispute has forced Beijing and Seoul to confront longer-term disagreements on North Korea, the US-ROK alliance, and broader regional security.  In an interview with Yonhap News on Nov. 22 and Nov. 17, Yang Xiyu of the China Institute of International Studies, and former head of the Foreign Ministry’s Korean Peninsula issues office, raised the need to “rethink” the bilateral partnership given the likely change in the course of bilateral ties after THAAD deployment.  He warned that China is preparing diplomatic and military countermeasures, accusing South Korea of “bringing in a tug-of-war between major powers into its own territory.”  Jin Jingyi of Peking University at a September forum in Seoul similarly projected “extreme pain” in China-ROK ties following the advancement of THAAD deployment plans, and a likely improvement in China’s relations with Pyongyang.  Beijing’s frustrations over the missile defense system, however, have resulted in intensified US and South Korean demands for greater cooperation on North Korea.  In his statement following the ASEAN-related meetings in September, President Obama urged Beijing to “work with us more effectively to change Pyongyang’s behavior.”  As a Congressional report argued in October, Seoul’s rejection of Chinese objections suggests strengthened strategic trust with the United States.  However, growing calls within South Korea for nuclear armament also reflect domestic uncertainties over Washington’s future security commitments on the Peninsula.

China renewed its criticisms of a “cold war mentality” on the Peninsula in response to Seoul’s signing of an intelligence-sharing agreement with Tokyo on Nov. 23, two years after concluding a trilateral deal with the US in late 2014.  In exchanges between Chinese and South Korean foreign ministries on the regional security implications, China’s Foreign Ministry claimed that the deal “will further aggravate hostility and confrontation on the Korean Peninsula and add new insecurity and instability in Northeast Asia.”  Beijing raised similar concerns in October after Seoul, Washington, and Tokyo’s decision to regularize missile-detection exercises that were first conducted in summer 2016.  After the reopening of ROK-Japan talks on the intelligence-sharing pact, South Korean officials in October indicated that Seoul has also proposed talks on a similar deal with Beijing for the second time since 2012 to strengthen cooperation on countering DPRK military threats.

The THAAD dispute has been accompanied by an intensified exchange of hostilities over Chinese fishing in South Korea’s exclusive economic zone (EEZ). The sinking of a ROK Coast Guard boat by an illegally operating Chinese fishing boat on Oct. 7 during a crackdown in the Yellow Sea triggered a series of formal complaints from Seoul.  To protest what Coast Guard officials described as “attempted murder,” South Korea’s Foreign Ministry called in China’s consul general in Seoul on Oct. 7 and 13 and PRC Ambassador Qiu Guohong on Oct 11.  While South Korean lawmakers demanded tougher action and an apology from Beijing, the ROK Coast Guard on Oct. 11 pledged to resort to force against Chinese interference with law enforcement.  Such warnings were put into action on Nov. 1 and Nov. 12, when ROK Coast Guard officials fired a machine gun to warn and seize two Chinese fishing boats and dispel 30 others.  Dismissing Beijing’s protest against the “violent” crackdown, the ROK Foreign Ministry called for more “effective” measures against illegal vessels and their “organized and violent” resistance.

Such confrontations clouded a three-day visit by PRC Assistant Foreign Minister Kong Xuanyou to South Korea on Oct. 19-21 to meet ROK Deputy Foreign Minister Kim Hyong-zhin and Vice Foreign Minister Lim Sung-nam, and to participate in working-level talks on EEZs in Busan.  While Beijing appeared to step up its efforts in November to enforce compliance with maritime law and ROK inspections, South Korea’s Coast Guard claimed that the proportion of illegally operating Chinese fishing vessels in the EEZ in the Yellow Sea that are actually seized amounts to merely 0.04 percent.  Following the recent clashes, the 16^th round of bilateral fisheries talks in Beijing on Dec. 29 produced an agreement to reduce fishing quotas in each other’s EEZs for 2017 and to take additional measures to crack down on illegal fishing.

China’s trade and investment dealings with a sanctioned North Korea

South Korean analysts estimate that if UNSCR 2321 is fully implemented, North Korea’s total export revenues will be cut by almost one third as a result of restrictions on North Korea’s coal exports and bans on mineral exports.  According to ROK government sources, the new resolution could reduce the North’s foreign currency income by more than $800 million per year, or more than a quarter of its estimated $3 billion in total exports.

Growth in China-DPRK trade, however, has raised doubts over Chinese implementation of sanctions since the adoption of UNSCR 2270 in March against North Korea’s January nuclear and missile tests.  China’s exports to and imports from North Korea increased by 42 percent and 19 percent respectively in August, reversing a general downward trend in trade since April.  The volume of North Korea’s coal exported to China reached its highest level since 1998.  The Korea International Trade Association (KITA) reported a doubling of DPRK coal and other mineral exports to China in November, just ahead of the implementation of UNSCR 2321.  In an apparent move to impose the tougher resolution, China’s Ministry of Commerce and General Administration of Customs announced a temporary suspension of DPRK coal imports from Dec. 11 to 31.  Despite China’s trade ban on coal, iron, and iron ore under the previous resolution, coal trade with the North has been criticized as a circumvention of UN sanctions under exceptions applied to livelihood-related trade.  In addition to China-DPRK coal trade, KITA has raised further concerns over an almost four-fold growth in China’s export of jet fuel to the North in September, even though the March resolution (UNSCR 2270) prohibits UN member states from supplying jet fuel to the North except for humanitarian need or civilian passenger aircraft.

The upward trend in China-DPRK trade is countered by shrinking investment ties.  New DPRK investment in China amounted to $70,000 in 2015 according to KITA, the lowest officially-recorded level since 1997.  Chinese investment in the North, meanwhile, reached $41.21 million, falling for a third consecutive year since the 2013 nuclear test.  The latest data reflects a 99 percent decline in DPRK investment in China since peaking at $11.22 million in 2010, and a 61 percent decline in Chinese investment in the North since peaking at $109.46 million in 2012.  Construction activity on the China-DPRK border, however, suggests continued Chinese investment in cross-border projects.  PRC Vice Foreign Minister Liu Zhenmin and DPRK counterpart Park Myong-guk led the third meeting of the Border Joint Commission in Pyongyang on Oct. 25-26, focused on border exchanges and control.  The reported expansion of Chinese bank operations in Rason special economic zone is another potential violation of the UNSCR 2270, which prohibits UN member financial institutions from operating existing or new branches in the North.

Although negotiations on a new resolution against Pyongyang focused on closing loopholes in existing sanctions, a KDI report in October raised doubts over the effectiveness of international sanctions without further cooperation from China.  South Korea’s media and research institutes since September have shed light on illicit trade activities on the China-DPRK border in addition to the rise of Chinese firms engaged in illicit trade and business with the North.  Following a joint report by the Asan Institute for Policy Studies and US-based Center for Advanced Defense Studies, the US Treasury Department blacklisted Dangdong Hongxiang Industrial Development Co. on Sept. 26, its first case of sanctions against a Chinese firm for supporting Pyongyang’s weapons programs.  While the ROK Foreign Ministry welcomed the move as a deterrent against other Chinese firms that have served the North’s evasion of sanctions, Washington’s actions also appeared to catalyze active responses from South Korean and Japanese counterparts.  Demonstrating its unified commitment to sanctioning Pyongyang, South Korea’s Foreign Ministry in November indicated that it is considering unilateral measures against a suspect Chinese firm, a month after similar steps taken by Tokyo.

China-ROK commercial relations a year into the FTA

South Korean exports to China fell by 11 percent in January-November to $112.4 billion, reflecting monthly consecutive declines since July 2015, accompanied by a slowing growth rate of 0.7 percent during the third quarter.  In addition to the global slowdown, South Korea’s weakened export performance can be partly attributed to China’s declining dependence on intermediary imports, and relocation of South Korean companies out of China to cut down labor costs.  The Bank of Korea (BOK) in December warned against a further decline in exports in the event of potential US-China trade tensions, where a 10 percent decline in Chinese exports to the US would generate a 0.36 percent decline in total South Korean exports, with the greatest costs to sectors like electronics, semiconductors, and petrochemicals.  According to the Federation of Korean Industries, South Korea’s direct investment in China reached $2.85 billion last year, almost halving since 2007 and reflecting a long-term decline over the past decade due to increased labor costs and weakened incentives for foreign investors. South Korea’s ratio of outward foreign direct investment (FDI) into China fell from 39.3 percent in 2005 to 10.5 percent in 2015. The decrease corresponds to a general slowdown in FDI in China as well as recent growth in South Korean investment in other emerging markets like ASEAN.  A Korea Institute of Industrial Economics and Trade report in September raised concern over growing export competition in ASEAN over the past decade as Chinese exporters have caught up with South Korean rivals particularly in technology goods.  Chinese producers have already narrowed the gap in the TV market, taking 31.9 percent of the global market in July-September, an on-year growth from 28.9 percent.  China’s share approaches the South Korean share of 32.2 percent, a decline from 35.4 percent.

The Korea Institute for International Economic Policy, however, points to positive impacts of the China-ROK free trade agreement (FTA) since it went into effect in December 2015, including a diversification of trade items, 7.8 percent growth in agricultural, fisheries, and forestry exports, and almost doubling of e-commerce sales to 1.2 trillion won ($1 billion) in January-September, especially in cosmetics and clothing.  Chinese direct investment in South Korea increased by 8.5 percent to $1.66 billion by September 2016, most notably in entertainment and culture sectors.  Marking the first anniversary of the FTA and a step toward lowering technical barriers to trade, China and South Korea in December agreed to expand the mutual certification of electronics and electronic products.  Talks will begin next year on opening up the service and investment sectors under the FTA, which seeks to remove tariffs on about 90 percent of goods over the next 20 years.  PRC and ROK Trade Ministers Gao Hucheng and Joo Hyung-hwan also held the latest round of trade talks with Japanese counterpart Hiroshige Seko in Tokyo on Oct. 29, but progress toward a trilateral free trade deal appears limited given the current hold on summit talks.

Meanwhile, government-led marketing campaigns, the easing of visa procedures, and a weakening Korean won drew a record number of Chinese tourists to South Korea this year until China began to informally discourage Chinese tourism to South Korea in November in response to the THAAD deployment decision.  South Korea’s Ministry of Culture, Sports and Tourism project Chinese tourist arrivals in 2016 to reach 8.04 million, representing almost half of total foreign tourist arrivals and a 34.4 percent growth from last year.  ROK authorities are currently targeting independent travel rather than traditional group packages, with plans next year to issue five-year multiple entry visas to Chinese travelers who buy a package worth more than 3 million won ($2,491).  Credit card expenditures by Chinese traveling to South Korea grew more than five-fold in 2012-2016, amounting to 4.32 trillion won ($3.95 billion) in the first half of 2016.  On the other hand, the growth in crime rates in Chinese tourist hubs like Jeju Island has led to a public outcry over existing visa waiver programs, most recently after a Chinese suspect traveling under the visa-free program, introduced on Jeju in 2002, stabbed to death a 61 year-old South Korean woman who was praying inside a church.  The BOK has called for diversifying sources of foreign tourists, citing 6 million Chinese tourist arrivals in South Korea last year, which accounted for 45 percent of all foreign visitors.  A vice minister-level bilateral consultative body will be formed in March next year to streamline China-ROK tourism exchanges.

Economic implications of China-ROK political tensions

China and South Korea’s political fallout has spilled over to the economic arena, in what is viewed as Beijing’s retaliation against THAAD. The surge in China’s rejections of South Korean food and cosmetics imports from 5 to 26 percent of all Chinese customs rejections from July to August drove initial speculation over Beijing’s raising of nontariff barriers to ROK exports.  Perceptions of Chinese retaliation have been strongest in the entertainment industry, where tougher regulations on Korean cultural content have been associated with growing anti-Korean sentiment in the PRC government.  BOK data indicates a 22 percent monthly decline in South Korean exports of cultural products in September-October to $51.5 million, the lowest monthly figure since September last year.  In South Korean poll results released in September, 64 percent of surveyed entertainment companies claimed that the THAAD controversy has hurt business with China.

According to ROK officials, another consequence of Beijing’s perceived restrictions on Korean cultural content is an increase in Chinese plagiarism.  South Korean sources claim that at least seven variety programs scheduled to air in China in 2017 are illegal replications of Korean originals.  South Korean media portrayals of Chinese retaliation against THAAD have most recently extended to the tourism sector ahead of the Chinese New Year peak season.  Beijing on Dec. 30 rejected requests by Korean Air, Asiana Airlines, and Jeju Air to run chartered flights between China and Korea in January, while China Southern Airlines and China Eastern Air withdrew their requests for ROK government approval of similar plans, citing “internal” reasons.

ROK Foreign Ministry officials have publicly voiced their concerns over Beijing’s toughened restrictions on Korean cultural products.  Accusations over China’s economic retaliation against THAAD heightened in late November after China began a tax probe and health and safety inspections of Lotte Group units in China.  After ROK Ambassador for Public Diplomacy Cho Hyun-dong’s meeting with PRC Assistant Minister of Foreign Affairs Qian Hongshan in Yangzhou on Nov. 28 on the sidelines of the fourth China-ROK public diplomacy forum, an initiative launched under the Xi and Park governments in 2013 to promote people-to-people ties, the ROK Foreign Ministry raised concerns over “reported Chinese bans” on Hallyu (Korean Wave) events in China.  The Korea Tourism Organization explicitly blamed diplomatic tensions over THAAD for the slowing growth rate of the number of Chinese tourists traveling to South Korea, which dropped from a year-on-year increase of 70.2 percent in August to a year-on-year increase of 1.8 percent in November despite overall increases in tourist inflows from other regions.  At the closing ceremony of “Visit Korea Year 2016” in Beijing on Dec. 15, China National Tourism Administration Chairman Li Jinzao and ROK Minister of Culture, Sports and Tourism Cho Yoon-sun expressed joint concerns over the negative ramifications of the THAAD dispute for cultural exchanges and overall bilateral relations.  Foreign Minister Yun Byung-se during his year-end press conference on Dec. 29 raised the need for private businesses to reduce their reliance on China in preparation for a potential “ripple effect of a discord.”

At the same time, South Korean officials have taken cautious steps to mitigate public suspicion over Beijing’s effective restrictions on Korean cultural products and tourism exchanges.  Vice Foreign Minister Lim Sung-nam at a December forum in Seoul insisted that current challenges should not undermine the progress achieved in the overall strategic cooperative partnership.  South Korea’s Finance Minister Yoo Il-ho in a ministerial meeting in Seoul similarly warned that political frictions should not tarnish the economic partnership.  Chinese officials, on the other hand, have dismissed South Korean accusations of China’s retaliation in the economic and cultural sectors.  PRC Ambassador to Seoul Qiu Guohong at a business forum in October asserted that the THAAD dispute would not undermine economic cooperation, but also suggested that developments in the US-ROK relationship counter to Chinese interests would compel necessary action from Beijing.

Conclusion: future prospects clouded by domestic political turmoil

South Korea’s domestic political vacuum following the impeachment of Park Geun-hye on Dec. 9 overshadows prospects for renewing China-ROK relations in the year ahead.  Acting President and Prime Minister Hwang Kyo-ahn indicated at the end of the year that he plans to introduce no major reforms in Park’s controversial policies, including THAAD deployment.  In a Yonhap interview in December, Director of KDI’s Department of North Korean Economy Cho Byun-koo raised the need for Seoul to re-approach North Korea “under the bigger frame of U.S.-China relations” likely to emerge under President-elect Donald Trump, whose engagement of Taiwan President Tsai Ing-wen drove early speculations over Beijing’s use of its “North Korea card.”

Former DPRK diplomat Thae Yong-ho, in his first press conference since defecting to South Korea in July, stressed Kim Jong Un’s commitment to complete nuclear development by the end of 2017 “at all costs” regardless of any economic incentives, citing leadership transitions in Washington and Seoul as an opening for pursuing dialogue with new administrations toward nuclear power status.  While the current cycle of DPRK provocations and international sanctions has drawn attention to vital Chinese interests in ensuring stability on the peninsula, Beijing’s deteriorating bilateral relationships with the two Koreas and the United States impede immediate regional efforts to break this cycle.