South Korea: The Global Order’s ‘Canary in the Coal Mine’

In the world of finance, South Korean exports are often referred to as the “canary in the coal mine” for the global economy. Because the country is so connected to global markets – about 40 percent of its GDP are tied to exports – many investors view a sustained fall in South Korea’s exports as a sign of an impending downturn global growth. Likewise, South Korea’s global interdependence arguably makes it a good bellwether for the health of the global rules-based order. In this light, events on the Korean Peninsula over the past two months should be cause for widespread concern.

It is no coincidence that alarm for the state of the international liberal order has peaked since Donald Trump entered the White House in early 2017. Since taking office, Trump has undertaken a campaign to dismantle many of the longstanding global rules and norms that have been shaped and supported by the United States since the end of World War II. His “America First” foreign policy has led to a retrenchment of American leadership on issues ranging from trade to climate change to security. Washington’s lessened role has helped to empower emerging rivals and competitors – particularly Beijing and Moscow – which are looking to generally uphold the existing order in some ways, but fundamentally overhaul it in others.

As a relatively small, trade-dependent U.S. ally at China’s doorstep, South Korea has been on the front lines of a shifting global order in the past two years. Seoul was directly caught between Washington and Beijing over its deployment of the THAAD missile defense system, threatened with either termination or renegotiation of the KORUS free trade agreement, and faced demands for significantly increased financial contributions to military burden-sharing with the United States. It has also dealt with indirect consequences from a series of other issues driven mostly by the White House – especially on trade. Despite what has occurred in recent years, the flurry of developments South Korea faced in recent months portend that even greater challenges lie ahead for the rules-based order.

The story capturing the most headlines in South Korea this summer was Japan’s decision to remove South Korea from its “white list.” The move effectively restricts the ability of Japanese companies to export components vital to South Korean semiconductor producers, which drove over 90 percent of South Korean export growth last year. Although Tokyo claims this action was unrelated, by all accounts the decision was driven by a recent South Korean Supreme Court ruling that several Japanese companies owed restitution to Koreans who were used as forced labor during World War II. While ostensibly a bilateral issue, Tokyo’s actions represent the first sign of another country taking a page out of Trump’s book on trade. By weaponizing trade ties over an unrelated issue, Tokyo’s actions seem to follow Trump’s acts of devaluing global trade standards in pursuit of outside objectives.

Rising tensions with Japan have overshadowed what an escalating U.S.-China trade war could mean for South Korea, but it potentially will have a greater impact. Trump’s August 1 tweet announcing the United States would be imposing 10 percent tariffs on the remaining $300 billion worth of imported Chinese goods took the trade war to a next level that many were hoping to avoid. The impetus of the trade war was not just Washington’s growing concern with the size of the bilateral trade deficit with Beijing, but a shifting view of China as a competitor and revisionist power. That the United States is exacerbating trade tensions with China suggests the emerging great power competition is not going away anytime soon. South Korea may be uniquely exposed to the trade war as China and the U.S. are its first and second largest export destinations, respectively, but it also generally represents the effect of the new great power competition on relatively small countries.

Seemingly emboldened by a shifting global landscape, the Russian incursion into South Korean airspace in late July was perhaps the most assertive act by Moscow in the region since the Cold War. Although Russian military aircraft have crossed South Korea’s Air Defense Identification Zone in recent years, the July incident in which South Korean jet fighters fired nearly 400 warning shots was the first time since the Korean War that Moscow violated airspace claimed by Seoul. Compounding the incident, however, was that Russian aircraft were in the area as part of the first joint air patrol drills in the region between Moscow and Beijing with long-range aircraft. This follows a growing trend of closer cooperation between the countries, a partnership clearly intended to push back against the United States and its allies.

Under previous administrations, Washington would have been expected to respond by bolstering support for the military alliance with Seoul, but it is now instead straining the relationship. While U.S. National Security Adviser John Bolton was in Seoul during the Russian incursion into South Korean airspace, he was seemingly more concerned with increasing Seoul’s bill for hosting U.S. military forces. The last round of military burden-sharing talks between the two allies, which only concluded earlier this year, left a sour taste in many South Korean mouths. Not only did Washington demand a new agreement be negotiated again this year rather than in five years as was the previous standard, but it is now asking Seoul to annually pay four times more than what was just agreed to in February. South Korea is certainly not an outlier in facing this approach from the Trump administration, as Japan and NATO members can surely attest. However, South Korea has arguably been the testing grounds for the administration’s cost-focused policies toward allies. The scope of the latest request for money likely means other partners should expect to face heightened financial demands in the coming months.

Much as there are limits to using South Korean exports as a proxy for global demand, there are constraints on gauging how much of what is happening to South Korea is or will be reflected in the larger global order. South Korea’s reliance on the international liberal order and position between Beijing and Washington make it uniquely sensitive to shifts in the current international architecture. As such, the intensity of recent developments may not be as transferable to other countries in the near future. Even so, events in July and August for South Korea are a compelling sign that global economic and security norms are turning more sharply away from the previous status quo.