The Korean Economic Review
The Economic Costs of Diplomatic Conflict: Evidence from the South Korea–China THAAD Dispute
Hyejin Kim (Bank of Korea) and Jungmin Lee (Seoul National University and Institute of Labor Economics (IZA))Year 2021Vol. 37No. 2
AbstractWe 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.