Barclays Wealth Blog
North Korea - Crossed wires

“As one becomes aware of the decline of violence, the world begins to look different. The past seems less innocent; the present less sinister.” – Stephen Pinker, Better Angels of Our Nature

Some history…

Relations between The Democratic People’s Republic of Korea (DPRK) and the US have been unevenly deteriorating since the July 27th 1953 armistice formally, but still to this day not legally, ended the Korean War. Since then, events and words, both accidental and deliberate, have served to repeatedly reinforce the DPRK regime’s belief that their continuing survival depends on the development of a nuclear deterrent.

Over the intervening years, there have been fleeting moments when a lasting solution has seemed within touching distance. Most famous of these was under the Clinton administration, when years of careful bilateral negotiations eventually culminated in the 1994 Agreed Framework, where North Korea agreed to freeze operation and construction of its nuclear reactors in exchange for two proliferation-resistant nuclear power reactors and oil supplies from the US, among other concessions.

Follow through was complicated by the behaviour of both sides. North Korea no doubt played its part, deemed to be cheating on the agreement by covertly continuing its nuclear weapons program. Meanwhile a lame duck Clinton administration was swiftly followed by the Bush presidency, populated with neo-conservative thinkers, espousing a different world view. Shortly afterwards, the tragic events of September 11 2001 helped to solidify this dogma, culminating in, among many other things, President Bush listing North Korea as part of an ‘Axis of Evil’ in his State of the Union address of 2002. Ultimately this all led to the agreement’s collapse, paving the way for North Korea’s first ever successful nuclear test three years later.

Wind forward to 2011, skipping many different at attempts at talks, hobbled by ever rising mutual suspicion. Events during the Arab Spring, in particular the overthrow of Muammar Gadhafi – a leader who voluntarily gave up his own nuclear program to widespread acclaim – seems to have further convinced Pyongyang that a nuclear deterrent remains the sole guarantor of the regime’s survival. Why would you give up your ultimate deterrent in exchange for a non-aggression pact reliant on the continuing sufferance of an often mercurial US electorate?

There have since been yet more diplomatic attempts, military and economic reprisals have been threatened, with the latter implemented. None of this has served to materially alter the trajectory of the events that have led us to this point – two nuclear armed states facing off against each other where the ‘key decision makers are a 71 year old businessman with a volcanic temper and no relevant experience, and a 33 year old dictator, surrounded by frightened sycophants’ in the words of one journalist this week.

What next?

The historical context hints at just how complex (and seemingly intractable) this situation is. Military options would provoke devastating reprisals, even non-nuclear – some 15,000 conventional artillery launchers lie within 50 miles of Seoul and its 10m inhabitants. Meanwhile, the accumulated mistrust and conflicting incentives on both sides present a surely mountainous obstacle to a negotiated settlement. At the same time, the US and China seem to hold irreconcilably different visions of how to bring about peninsula stability. This difference apparently helps to explain why China continues to try and water down proposed sanctions.

Investment conclusion

A war in the North Korean peninsula would no doubt have widespread and profound implications – humanitarian, economic and otherwise. Although it accounts for only 2% of world GDP, South Korea is a major producer of products ranging from LCDs to semiconductors to ships. There may also be sizeable economic consequences for Japan, the world’s third largest economy and major exporter to South Korea, as well.

However, that we cannot see an easy solution to the present queasy truce, should not lead us automatically to assume that war is inevitable. Of course there is the possibility of a misstep from either side – neither the President’s twitter feed nor the DPRK’s persistently bellicose barks will help lower our pulses much. Nonetheless, our base outlook remains that self-interest (and preservation) continues to prevail on all sides, driving a reassuringly large wedge between words and action. We also probably need to keep in mind that we are not living in especially dangerous times, even if our 24 hour news feeds may make it seem so. In fact, as Stephen Pinker so convincingly argued in ‘The Better Angels of Our Nature’ (2011), the reverse is strikingly true, whether we compare our blessed era to the first half of the 20th century or against a much larger multi-millennial relief. That doesn’t have to remain the case of course – long term trends can be reversed, either temporarily or even permanently. However, the idea that an extra discount for capital markets assets is already appropriate to reward investors for a persistently more tumultuous geopolitical backdrop than earlier decades lacks appropriate context in our opinion.

For the moment, we change nothing. Incoming economic data continue to provide us with an ever higher threshold to bet against the global economy. The continuing strength of semiconductor demand, evident within South Korea and Taiwan’s trade statistics, are among the data points suggesting brighter economic times ahead for both Asian emerging markets and the global technology sector.

References

The Trump administration’s North Korea policy: Headed for success or failure? (Evans J.R. Revere Brookings, July 2017) – https://www.brookings.edu/blog/order-from-chaos/2017/07/10/the-trump-administrations-north-korea-policy-headed-for-success-or-failure/

Miscalculation could lead to a Korean war – Gideon Rachman, Financial Times – https://www.ft.com/content/ffdd9c08-9167-11e7-bdfa-eda243196c2c

The Better Angels of Our Nature: A History of Violence and Humanity (Stephen Pinker, 2011)

The Korean Nuclear Issue: Past, Present and Future – A Chinese Perspective (Fu Ying, John L. Thornton China centre at Brookings) – https://www.brookings.edu/research/the-korean-nuclear-issue-past-present-and-future/

Why deterring and containing North Korea is our least bad option (Jeffrey A. Bader, Brookings, August 2017) – https://www.brookings.edu/blog/order-from-chaos/2017/08/08/why-deterring-and-containing-north-korea-is-our-least-bad-option/

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