• South Korean conglomerate Lotte has been badly hit by China's sanctions due to the THAAD issue.

South Korean conglomerate Lotte has been badly hit by China's sanctions due to the THAAD issue. (Photo : Getty Images News)

If the dispute over the Terminal High Altitude Area Defense (THAAD) system between China and South Korea escalates into a full-fledged trade war, both countries will suffer, warns Lee Jong-wha, a professor of economics at Korea University.

Lee, who also serves as director of the Asiatic Research Institute at Korea University, noted that protracted tensions like the 2012 territorial disputes between China and Japan over the Senkaku Islands can severely damage economic and diplomatic relations.

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China is ramping up economic sanctions, in the hope of compelling the next president to reconsider. Already, South Korea's tourism, consumer goods, and entertainment industries have been hit hard.

Among the hardest hit among South Korean companies is the Lotte Group, who is now losing appetite in the Chinese market due to the sanctions.

Already, South Korea is considering bringing the Chinese sanctions to the World Trade Organization (WTO) for adjudication, and the authorities are reviewing whether China has violated relevant clauses of the two countries' bilateral free-trade agreement.

China is utilizing its position as South Korea's largest trading partner by pressuring the latter to withdraw from deploying the Terminal High Altitude Area Defense (THAAD) system before the South's snap presidential election on May 9.

China accounts for nearly one-quarter of South Korea's external trade and is its main source of foreign tourism. There were eight million Chinese tourists who went to South Korea last year, accounting for half of its total number of foreign visitors.

On the other hand. South Korea is China's fourth-largest trading partner and the top source of foreign tourists to China.

Lee emphasized that China and South Korea should protect the diplomatic relationship that they have maintained since 1992.
Chinese authorities seem to recognize the risk of a trade war with South Korea.

Lee said that China should increase economic pressure on North Korea, such as by cutting off oil supplies.