Bad THAAD, THAAD’S Bad: Reflections about China’s Economic Sanctions and their Implications for Multinational Corporations
For about the past three months, Beijing has been escalating economic pressure on South Korea because of the latter’s decision to deploy the Terminal High Altitude Area Defense (THAAD) anti-missile system to counter North Korea’s missile threat. Chinese economic coercion has encompassed barriers to Korean cultural products like K-Pop bands, television shows, and online games entering China, bans against Chinese tourists going to Korea, the shutdown of Korean stores in China, the cessation of investment deals, and reduced buying of Korean products.
The ultimate economic impact of these sanctions on Korean companies and Korea is uncertain. It is clear now, though, that foreign multinational corporations need to be attentive to what is transpiring. After all, as illustrated by the case of Hershey, an American confectionary firm, foreign firms directly cooperate with sanctioned Korean firms in or doing business with China. Furthermore, non-Korean firms are active investors in Korean cultural/entertainment and cosmetic firms that have a high eventual probability of targeting the China market. Past Chinese economic statecraft episodes like sanctions against Norway and the Philippines and China’s increasing propensity to wield its economic power coupled with China’s Korea sanctions suggest a need for corporate planning. At a minimum, firms need identify partners against which China might target economic sanctions. Second, if potentially meaningful risks exists, companies need to establish mechanisms to obtain inputs that might be disrupted or to ensure their products find a market outlet. For those who have not yet put money into or build serious relations with prospective targets, they should a prior consider risk reduction measures like finding additional investment partners, limiting the amount they invest, or purchasing political risk insurance. Third, businesses need to contemplate the longer-term implications of China’s targets adopting new supply and distribution chains to reduce their future exposure to economic pressure.