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
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.