Conservative activists shout during a rally welcoming Chinese President Xi Jinping's visit to Seoul, South Korea, in July. The writing on the cards reads: 'Welcome. Visit to South Korea.' Associated Press
Tom Wright
Updated Nov. 25, 2014 7:45 p.m. ET

SEOUL—South Korea is one of the closest U.S. allies in Asia but its growing economic dependency on China is forcing policy makers here into a diplomatic balancing act that is getting trickier as the two giants seek to expand their influence.

The latest issue that has Seoul on the fence is a U.S. proposal to deploy an advanced missile-defense system in South Korea.

The U.S. is portraying the Terminal High-Altitude Area Defense battery as a deterrent against North Korea, a nuclear-armed rogue state. South Korea, though, hasn’t publicly supported the deployment, aware that Beijing, Pyongyang’s patron, opposes it.

A senior government official in Seoul acknowledged the missile issue was a point of tension. “China is our single most important economic partner. But we can’t weaken U.S. security ties,” the official said. South Korea has been a steadfast U.S. partner since the early days of the Cold War. Officials here remain wary of some Chinese policies, especially its support of North Korea and moves in disputed areas of the East China Sea.

Yet they acknowledge that the blossoming commercial relationship with China is encumbering their ability to chart a policy course that accommodates friends old and new.

“Sometimes it’s very difficult for the Korean government to choose a policy,” said Jeong Eun-bo, South Korea’s deputy finance minister, in an interview.

South Korea is now among the largest investors in China, on the brink of eclipsing Japan, a much larger economy. South Korean businesses poured $3.2 billion into China-based factories through end-September, up a third on the previous year, according to Chinese data.

As South Korean manufacturers relocate to reduce costs and entrench themselves in China’s huge market, trade has shot up. Last year, China accounted for a quarter of South Korea’s $560 billion in total exports. The U.S. share stood at 11%, down from around 40% in the 1980s.

Cultural ties also have grown. Today, there are almost as many South Korean students enrolled at colleges in China as in the U.S. Last year, Chinese tourists were the largest group of visitors to South Korea.

President Park Geun-hye, since coming to power in early 2013, has worked to strengthen her relationship with Chinese President Xi Jinping. Relations had soured under her predecessor, in part because Beijing believed South Korea was prioritizing its security alliance with the U.S.

Seoul and Beijing do have some common ground. Both countries share a distrust of Japan, another important U.S. ally in the region. A South Korean farmer holds an ear of rice during a rally opposing a free trade agreement with China in Seoul, South Korea, Nov. 20. Lee Jin-man/Associated Press

The outline of a bilateral free-trade pact, signed Nov. 10 in Beijing during a summit of world leaders, is a cornerstone of the new friendship. The agreement, to be concluded next year, was a coup for China as it seeks to show it has allies in the region.

President Barack Obama, who also attended the summit, urged progress on a broader Asia-Pacific trade deal. South Korea expressed interest but isn't formally part of the talks the U.S. is pushing, in part because they exclude China.

South Korea hasn’t completely shied away from irritating China. A year ago, it extended its air-defense zone in the East China Sea to include an area disputed with China in reaction to a similar move by Beijing.

Seoul recently said it would donate a coastal defense vessel to the Philippines, another U.S. ally that is embroiled in territorial disputes with China in the South China Sea.

In March, South Korea agreed to sell the Philippines a dozen FA-50 fighter jets for $420 million and is bidding to sell it two frigates.

South Korea refrained last month from signing up to a $50 billion Asian Infrastructure Investment Bank that Mr. Xi is promoting as a potential rival to the U.S.-dominated World Bank, and which U.S. officials publicly have opposed. Some observers say China’s leaders hope to use trade as a way of obtaining leverage over South Korea on other issues, much as they have used commerce and aid to forge closer ties across Asia, Africa and South America. South Korea’s status as a developed country—it is a member of the Organization of Economic Cooperation and Development—makes it a prized ally.

“It is a way of pulling South Korea much closer to the China orbit,” said Lee Chung Min, a professor of international relations at Seoul’s Yonsei University. “They realize we can’t do without them.”

‘ China is our single most important economic partner. But we can’t weaken U.S. security ties. ’

—A senior South Korean government official

China’s foreign ministry declined to address whether Beijing expects more sway over Seoul given their economic ties. The ministry, though, said it remained opposed to deploying antimissile systems in South Korea.

“We think the antimissile deployment by certain countries isn't conducive to regional strategic stability and mutual trust,” ministry spokesman Hong Lei said. He described the situation on the Korean peninsula as “complex and sensitive” and said countries “must not do things that harm the peninsula’s peace and stability and China’s security interests.”

An official at the U.S. Embassy in South Korea’s capital, asked about the antimissile deployment, said Washington and Seoul remain “firmly committed” to their defense alliance aimed at protecting South Korea.

“We do not believe deepening economic and security ties in the Asia-Pacific region is a zero-sum game,” the official said.

A South Korea-U.S. free-trade agreement came into effect in early 2012, with the aim of boosting exports by billions of dollars in the coming years.

South Korean companies still see opportunity in the U.S. Hankook Tire Co., for instance, broke ground last month on a $800 million factory in Tennessee.

But Washington also is concerned that South Korea is continuing to protect its domestic industries. U.S. Commerce Secretary Penny Pritzker complained during a visit in October about the implementation of the free-trade agreement. She cited continued non-tariff barriers to trade in the auto, financial and other sectors.

Chinese authorities don’t seem as interested in the economic opportunities in South Korea, a country of some 50 million people. Nor has Beijing’s large trade deficit with South Korea become a public issue.

“The Korean slant toward China is viewed by some as reducing the influence of America here,” said Jeffrey D. Jones, an American lawyer at Kim & Chang, a Seoul-based corporate law firm.

Mr. Jeong, the deputy finance minister, said China is an important market but Washington remains a key partner. In the years ahead, South Korea should aim to play a “pivoting role” between China and the U.S., he said.

—Alastair Gale, Kwanwoo Jun and Kersten Zhang contributed to this article. South Korea looks to prosper in China while sticking close to U.S.
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