Background

At the end of the Korean War in 1953, the Korean peninsula was left with several United Nations Security Council resolutions (UNSCR’s 82, 83, 84), an armistice agreement, a DMZ at the 38th parallel but no official end to the war1. Since then the family of Kim Il Sung has sowed chaos within their own country and abroad. Internally, through the ideologies of Juche or national self-reliance and Songun, the doctrine that allocates resources to the military and elites above all others2, the North has isolated itself from the global economic community and eroded its own infrastructure through decades of economic mismanagement and corrupt allocation of resources3. In fact, through the 1990s the North endured severe famine and starvation. Furthermore, even their ability to properly care for their military is questionable given the state of its defectors4.

Abroad, chaos comes from their means of economic income. North Korea uses nuclear proliferation, saber-rattling (extortion), drug trafficking, hacking, and weapons sales to earn an income and keep the military and political elites fed and pacified. After the famine of the 1990s and loss of support from the former Soviet Union, the North improved their farming methods and allowed a limited expansion of private economic activity, and informal local markets to grow.5 While this has helped meet more of the country’s food demands, chronic shortages are still common.

On the southern side of the 38th parallel, South Korea (the South) stands in stark contrast to its northern neighbor. The South is a technologically advanced, open, democratic republic, fully integrated into the global economy. In fact, the South is the 11th largest economy in the world.6 Quite an achievement given this country only started opening up in the 1960s.6 Despite its success, the South has some underlying problems that could be exacerbated by a war with the North. As of 2018, the South’s economic growth hovers around 2-3%. They are heavily dependent upon exports, have an aging population, high unemployment among young people, low-worker productivity and corruption.6

The Military Option

A conflict on the Korean peninsula would be a devastating and catastrophic event for all sides. Seoul is only 35 miles from the 38th parallel and contains almost 25 million people in its surrounding area and 30,000 US troops.7 The Military Times estimates casualties equal to the entire Syrian conflict over only a matter of days.7

Former national security advisor John Bolton laid out 3 potential scenarios that could start a conflict.8

1. The US conducts a pre-emptive strike on military targets. Under this option the US would most likely implement a “limited war” using a combination of special forces and precision weapons:

 Japan’s Asahi Shimbun newspaper reported in 2015 that the plan resembled guerrilla warfare, with special forces assassinations and targeted attacks on key facilities. The goal was to consolidate several older war plans, minimize casualties in a war, and even prepare for the possibility that the North Korean regime might collapse. Most important, OPLAN 5015 envisaged the possibility of a preemptive strike against North Korea.9

This would be the worst scenario for the U.S. because the Chinese would be obligated to come to the defense of the North Koreans under the 1961 Mutual Aid and Cooperation Friendship Treaty.

2. North Korea attacks targets outside of the peninsula and the missiles are subsequently shot down (hopefully before impact).

3. North Korea attacks targets in South Korea. Under this and the previous scenario, China would be able to remain neutral during the conflict as indicated in the state-run Global Times via Reuters.10

Assuming the third scenario, the events could unfold as follows:7 an attack on South Korea would yield an immediate response from the US 8th Army and 2nd Infantry division, which contains both US and South Korean troops. In addition, airstrikes on North Korean military targets would be carried out in advance of troop movements. The challenge here is to neutralize heavily fortified and hidden artillery batteries before they can devastate Seoul. 7

North Korea is predicted to move into the southern peninsula as fast as possible to prevent US reinforcements. This could be aided by tunnels under the DMZ7 but hampered by ongoing food shortages within the country.11 Additionally, the North would target Southern airbases to hamper US-led airstrikes.

The US’s main goals will be to limit civilian casualties, rout the North’s army, and neutralize the North’s navy. However, this will likely not be resolved quickly. The North has a standing army of 1,000,000 troops and 5.8 million paramilitary troops.12 Retired Army Lt. Gen. Mark Hertling estimates just removing the North’s artillery batteries could take weeks and result in possibly more than 100,000 civilian casualties.13

Implications

As the war unfolds, one can expect an increase in insurance costs for shipping in and out of the region. Also, expect currencies to flock to “safe havens” like Switzerland, Japan, and the US. This in turn causes those currencies to appreciate in value, thereby making it harder to meet any debt obligations denominated in those currencies. As of January of this year, global debt rose to $244 trillion, three times larger than the entire global economy.23

Anticipated damage to South Korea’s manufacturing industry would ripple throughout the world. South Korea contributes 4% to global exports and is a major supplier of LCDs, semiconductors, automobiles, and ships.14 According to Capital Economics, it takes two years to rebuild a semi-conductor factory.14 Underscoring the effects that a drop in the South’s economy would be felt early and sustained. China may be the first to feel the effects since many of the chips manufactured in South Korea are shipped to China for manufacturing many of the electronics then sold in the U.S.15.

During the first Korean War, South Korea’s GDP dropped by 86%.14 Even a 50% drop in South Korean GDP would lead to a 1% drop in gross world product (GWP).14

That drop in production would be felt in the U.S. as South Korea is also the US’s 6th largest trading partner.16 Moreover, the U.S. accounts for 17% GWP,12 thus a drop in the Korean economy is a drop in the U.S. economy is a drop in the global economy.

There are additional long-term implications for the U.S. if the war goes beyond 6 months. It takes roughly two years to “grow” a combat battalion.7 Therefore, efforts for resupplying troop levels would need to start early. In the interim, the U.S., would need to move troops out of Europe and possibly the Mid-East, rely once again on its national guard troops, and/or start a draft. The one difference, however, in this war compared to the wars in Iraq and Afghanistan, is the South Korean military is a fully trained and combat-ready ally capable of doing more of the fighting.7 As such, the costs to the U.S. may be less but this is a “wait-and-see” potential benefit.

The first Korean war at its peak cost the U.S. 4.2% of GDP, in 2017 dollars that would be near $780 billion.14 The cost to the U.S. for the wars in the Middle East from 2001-2019 was nearly 6 trillion dollars or over $300 billion per year and is projected to increase $808 billion through 2023 even the wars end today due to continued veteran care.17 The interest alone cost the US $716 billion through 2019.17 US debt is already at 79% of GDP (2019) and that number is expected to grow to 95% in the next 10 years.18 The CBO reports that the level of debt has not been seen in the United States since WWII. The added interest and leverage pose several risks for the country;

In particular, the significant increase in federal borrowing would elevate the risk of a fiscal crisis and would limit lawmakers’ ability to adopt deficit-financed fiscal policies to respond to unforeseen events… .18

The report continues to highlight that debt levels would “reduce economic output,” and “reduce the income of U.S. households.”18

Contingencies

Regardless of whether the war develops, the following general contingencies are a hedge against economic stress. Similar to portfolio diversification, broadening suppliers, and taking advantage of core-competencies will mitigate risk and broaden revenue sources. Furthermore, it has the added benefit of making revenue more resilient after economic downturns.

  • Add supply chains outside of the Korean peninsula

  • Begin relationships with new suppliers outside of the region. For example, Japan or local suppliers

  • Source raw materials from new locations where possible. For example, Africa.

  • Open new or expand existing markets outside of East Asia.

  • Build on current core competencies to diversify product/service lines

Conclusion

The political environment has changed drastically since 1953. The Chinese who once viewed North Korea as an ally to be protected have come to see their southern neighbor as a burden.19 However, that does not mean they want a war at their doorstep. The Chinese are more intertwined with the world than they were 65 years ago. Their economy would feel the effects of war just as much as any other nation. Additionally, given their proximity refugees would be an issue the Chinese are strategically positioned and obligated to handle.

The US is also motivated to stay out of a war in the region given the potential for high casualties, the low political and public support for such an endeavor, and the economic burden it would incur.

Yet, it is the North Korean’s themselves that have the most to lose if it came to war. A war with the U.S. and its allies would most likely be unwinnable and result in Kim Jong-un’s removal from power. Kim Jong-un would have to believe his regime was about to fail for him to consider a war with the US.20

Given the past political climate and rhetoric between the US and North Korea, the potential for war exists.21 However, when viewed through the lens of finance the North Korean government’s behavior is “rather transparent and consistent: When the regime in Pyongyang perceives American weakness or preoccupation elsewhere in the world, it becomes menacing and demanding. Conversely, when the U.S. appears invincible and confident, North Korea becomes cautious and relatively conciliatory.”24 Fortunately, as recently as September of this year, Kim Jong-un was asking for the U.S. to “revive diplomacy.”22 For the foreseeable future, war is a low-probability event.

 

References

1. Why China and Russia are Keen for the Korean War to Officially End. https://thediplomat.com/2018/10/why-china-and-russia-are-keen-for-the-korean-war-to-officially-end/. Accessed October 17, 2019.

2. Lessons from Others for Future U.S. Army Operations in and Through the Information Environment: Case Studies | RAND. https://www.rand.org/pubs/research_reports/RR1925z2.html. Accessed October 16, 2019.

3. East Asia/Southeast Asia :: Korea, North — The World Factbook – Central Intelligence Agency. https://www.cia.gov/library/publications/the-world-factbook/geos/kn.html. Accessed October 16, 2019.

4. CNN PN and TL. North Korean soldier: Surgeon says defector “was like a broken jar.” CNN. https://www.cnn.com/2017/12/04/health/north-korea-defector-doctor-intl/index.html. Accessed October 17, 2019.

5. The Markets: Private Economy and Capitalism in North Korea? Beyond Parallel. https://beyondparallel.csis.org/markets-private-economy-capitalism-north-korea/. Published August 26, 2018. Accessed October 17, 2019.

6. East Asia/Southeast Asia :: Korea, South — The World Factbook – Central Intelligence Agency. https://www.cia.gov/library/publications/resources/the-world-factbook/geos/ks.html. Accessed October 17, 2019.

7. War with North Korea: An inside look at how US troops would respond worldwide. https://www.militarytimes.com/news/your-military/2017/05/21/war-with-north-korea-an-inside-look-at-how-us-troops-would-respond-worldwide/. Accessed October 16, 2019.

8. The Military Options for North Korea. https://www.gatestoneinstitute.org/10767/north-korea-military-options. Accessed October 16, 2019.

9. OPLAN 5015: The Secret Plan for Destroying North Korea (and Start World War III?) | The National Interest. https://nationalinterest.org/blog/the-buzz/oplan-5015-the-secret-plan-destroying-north-korea-start-19747. Accessed October 16, 2019.

10. Chinese paper says China should stay neutral if North Korea attacks first. Reuters. https://www.reuters.com/article/us-northkorea-missiles-china-media-idUSKBN1AR005. Published August 11, 2017. Accessed October 16, 2019.

11. Sang-Hun C. In North Korea, Worst Drought in Decades Adds to Food Crisis. The New York Times. https://www.nytimes.com/2019/05/15/world/asia/drought-north-korea-food-crisis.html. Published May 15, 2019. Accessed October 18, 2019.

12. Tikhonova P. US vs North Korea War: Consequences And Economic Impact Would Be Severe. ValueWalk. August 2017. https://www.valuewalk.com/2017/08/us-vs-north-korea-war-consequences/. Accessed October 16, 2019.

13. Why it could take months for the US to get ready for war with North Korea. cnn. https://cnnphilippines.com/world/2017/08/10/US-north-korea-war-signals.html. Accessed October 17, 2019.

14. assessing-the-impact-of-a-war-in-korea.pdf.

15. Investors, South Korean tech suppliers brush off North Korea threat. Reuters. https://www.reuters.com/article/us-norhthkorea-southkorea-supplychain-idUSKBN17U0EN. Published April 28, 2017. Accessed October 17, 2019.

16. North Korea Economy, Politics and GDP Growth Summary – The Economist Intelligence Unit. http://country.eiu.com/North%20Korea#. Accessed October 16, 2019.

17. Crawford_Costs of War Estimates Through FY2019.pdf. https://watson.brown.edu/costsofwar/files/cow/imce/papers/2018/Crawford_Costs%20of%20War%20Estimates%20Through%20FY2019.pdf. Accessed October 17, 2019.

18. An Update to the Budget and Economic Outlook: 2019 to 2029. :90.

19. Can North Korea Transform U.S.-China Relations? | HuffPost. https://www.huffpost.com/entry/can-north-korea-transform-us-china-relations_b_5901278ce4b06feec8ac9348. Accessed October 16, 2019.

20. Reiter D. Analysis | Should you worry about a U.S. war with North Korea? Not really. Washington Post. https://www.washingtonpost.com/news/monkey-cage/wp/2018/01/11/should-you-worry-about-a-u-s-war-with-north-korea-not-really/. Accessed October 18, 2019.

21. Borger J. Donald Trump threatens to “totally destroy” North Korea in UN speech. The Guardian. https://www.theguardian.com/us-news/2017/sep/19/donald-trump-threatens-totally-destroy-north-korea-un-speech. Published September 19, 2017. Accessed October 18, 2019.

22. http://www.washingtontimes.com TWT. North Korea to Trump: Make ‘bold decision’ to revive diplomacy. The Washington Times. https://www.washingtontimes.com/news/2019/sep/27/n-korea-to-trump-make-bold-decision-to-revive-dipl/. Accessed October 18, 2019.

23. Global Debt of $244 Trillion Nears Record Despite Faster Growth | Bloomberg https://www.bloomberg.com/news/articles/2019-01-15/global-debt-of-244-trillion-nears-record-despite-faster-growth. Accessed October 18, 2019

24. A Two-Track Approach Toward Pyongyang | WSJ https://www.wsj.com/articles/SB106133544872553100 Accessed October 18, 2019

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