[THE INVESTOR] South Korea’s decision to deploy the U.S. missile defense system here will likely have repercussions on the country’s trade with China, casting a shadow on its exports prospects, experts said on July 11.

Many analysts were cautious to predict how this highly-political issue will play out on the trade front, but investor reactions on Seoul bourses were pretty obvious: key China-sensitive stocks fell, led by Hana Tour and cosmetics maker LG Household & Healthcare. 

Korea’s Finance Minister, however, sees China’s trade retaliation against South Korea as unlikely. 

“We expect China to uphold the principle of separation of economics and politics,” Finance Minister Yoo Il-ho said during a parliamentary session.

“Still, we’re drawing up possible scenarios (of China’s response to the missile defense system issue) and devising countermeasures based on them,” he added.

Seoul officials announced Friday the introduction of the U.S. Terminal High-Altitude Area Defense platform in South Korea against North Korea’s growing missile and nuclear weapons threat. The move sparked a strong rebuke from China, which viewed the system as neutralizing its own weapons.

Some private experts warned that China could seek to penalize Korean companies, judging from its past track record. They say “subtle” measures from China would be enough to deal a blow to Korean companies.

In 2010, when Norway awarded the Nobel Peace Prize to the Chinese dissident Liu Xiaobo, the Asian superpower reacted with a ban on imports of Norwegian salmon.

“Due to the Korea-China Free Trade Agreement, effective since 2015, the likelihood of China imposing trade sanctions on Korea is low,” said Lee Kyung-min of Daishin Securities in Seoul. “But ‘invisible’ restrictions could be imposed on Korean companies doing business in the country.”

Joo Won of Hyundai Research Institute said if China opts for trade retaliation, Korea will not be able to eke out a turnaround in exports.

Exports, which account for half of Korea’s economic growth, have been shrinking since January 2015, on sluggish global demand, lower oil prices and a slowdown in China.

Although the U.S. is Korea’s longest and most important ally, in terms of trade, it is second for Korea. China is Korea’s No.1 export market, accounting for 26 percent of the country’s total outbound shipments last year. The U.S.’ share was 13 percent.

“Although it is hard to predict how China will react, one thing is clear. The issue is a key risk factor for Korea’s tourism industry,” said Yang Il-woo, analyst from Samsung Securities.

“A 1 percentage-point decline in the number of Chinese tourists in Korea would cut earnings of Hotel Silla by 2.6 percentage points and casino-operator Paradise by 2.3 percentage points,“ he said.

By Lee Sun-young (milaya@heraldcorp.com)