North Korea’s missile tests in July may have resulted in a war of words with the U.S., but the fundamental dynamics between the two countries remain the same, says Angelo Katsoras, geopolitical analyst at National Bank, in an economics briefing.
Though perhaps not ideal, maintaining the status quo is better than the alternative: military action.
“From an economic perspective, an outbreak of major hostilities on the Korean peninsula would shake the global economy,” says Katsoras. “Though South Korea accounts for only 2% of world GDP, it produces 40% of the world’s liquid crystal displays and 17% of its semiconductors. In fact, about 12% of Apple’s suppliers are based there.” (The figures are from Asia Times.)
South Korea is also home to the world’s three biggest shipbuilders and major automobile manufacturers. China and Japan, the world’s second- and third-largest economies, could also be drawn into the conflict.
Still, North Korea’s growing nuclear capabilities are concerning. The country has the ability to launch missiles on South Korea and Japan, and is very close to being able to reach the U.S. west coast.
“Though he has been in power for only six years, Kim Jong-un has already tested more missiles than did his father and grandfather combined,” says Katsoras. “Estimates of the country’s nuclear stockpile range from 15 to 60 bombs,” he adds, citing the Council on Foreign Relations. Another risk is that North Korea could sell its nuclear technology to other countries.
Read: Look for these fastest-growing emerging markets
Katsoras also notes that past negotiations between the U.S. and North Korea to stop the latter’s nuclear weapons program have proved fruitless.
“Like his father, [Kim Jong-un] sees nuclear weapons as the only way to guarantee his regime’s survival,” says Katsoras. “He feels that both Iraq’s Saddam Hussein and Libya’s Moammar Gadhafi would still be alive and in power if they had possessed nuclear weapons.”
But in response, U.S. military action would be counterproductive, says Katsoras. Given the economic fallout, “it is unlikely the U.S. would have the support of its Asian allies to launch a pre-emptive strike against North Korea,” he says. “After all, they would almost certainly bear the brunt of any subsequent retaliation.”
Instead, he sees the role of China as key, since it accounts for up to 90% of North Korea’s trade.
“China has long resisted adopting a tougher line against its neighbour due to fears North Korea’s collapse would lead to an influx of refugees and to a unified pro-American Korea on its borders,” he says. “Also, there have been reports that up until recently, China had long been secretly pleased with the ability of North Korea to provoke and distract the U.S.”
But China’s position could be changing because of regional fears of destabilization, along with U.S. threats to sanction Chinese companies doing business illegally in North Korea.
“While China is a major world economic power, it faces many challenges: an aging population, growing debt levels, rising wages, pollution, water shortages, trying to move up the economic value chain and the gargantuan task of implementing its One Belt One Road initiative,” says Katsoras. “The last thing it needs is for the North Korean situation to spiral out of control.”
Read: The best investment category now
China’s willingness to get tough with North Korea changes the dynamics of the standoff, and makes future negotiations more consequential than past attempts. For example, China could make its continued support for sanctions conditional upon reaching a deal with the U.S. over the geopolitical orientations of a future united Korea, says Katsoras.
For more details, including the challenges the U.S. faces if it launches a military attack, read the full briefing.