Economic Effect and Resolution Idea of the THAAD Political Conflict on South Korea’s Exports to China

Abstract

South Korea deployed the Terminal High Altitude Area Defense (THAAD) antimissile system in response to North Korea’s nuclear test, leading to the Chinese government’s opposition to THAAD, citing national security concerns. Chinese consumers held a large-scale “boycott for Korean products” campaign in 2014. In the same year, the China–South Korea free trade agreement (FTA) was signed. This study compares the double-difference (DID) and triple-difference (DDD) models using the impact of the THAAD political conflict on South Korean exports. In the DID model, THAAD reduced South Korean exports, while in the DDD model, the FTA effectively alleviated the impact of THAAD. The net difference of the FTA’s impact on the commodities boycotted in response to the THAAD conflict exists because some boycotted commodities were promoted by the FTA while others were not. The effect of the THAAD event shock was significant only in the first two years, with minimal subsequent changes in growth. THAAD and FTA’s dynamic effects provide evidence of how political conflict can eventually influence popular opinion and how the trade policy plays a significant role in the national conflict resolution. Finally, the study provides additional evidence on the effect of non-tariff barriers triggered by THAAD on the service industry.