The Economic Costs of Diplomatic Conflict: Evidence from the South Korea–China THAAD Dispute

Hyejin Kim and Jungmin Lee
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Hyejin Kim: Bank of Korea
Jungmin Lee: Seoul National University and Institute of Labor Economics (IZA)

Korean Economic Review, 2021, vol. 37, 225-262

Abstract: We examine the economic effect of the diplomatic conflict between South Korea and China that resulted from the joint decision by South Korea and the U.S. to deploy the Terminal High-Altitude Area Defense system in the Korean peninsula. Using the synthetic control method, we estimate the conflict’s effects on Chinese tourists to Korea and stock prices of China-related Korean firms. We find that a negative effect on the inflow of tourists appeared with a lag of 3 months after the announcement of the decision and persisted for approximately 18 months. By contrast, the effects on the stock market appeared immediately but were insignificant and short-lived.

Keywords: Economic Sanction; Geopolitical Events; Tourism; Stock Market; South Korea; China; Synthetic Control Method (search for similar items in EconPapers)
JEL-codes: F51 P16 Z30 (search for similar items in EconPapers)
Date: 2021
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