North Korea – The real threat to East Asian commerce

North Korea’s decision to test-fire missiles that could potentially reach the U.S. mainland has far-reaching consequences. For businesses operating in East Asia, the greatest risks emanate not from a nuclear war, which is highly unlikely, but from the conflicting responses of China, the U.S., South Korea and Japan to the North’s antics. China has proven itself willing to penalise foreign companies in order to deter any U.S.-led military expansion in the area, but this tactic risks economic retaliation from a U.S. administration that is volubly dissatisfied with China’s trade policies.

 

North Korea

North Korea’s government has a single overriding objective: its own survival. This explains why the North is developing nuclear weapons, which it sees as the ultimate guarantor against invasion, but also why it will avoid conflict with the U.S. at all costs, even once such a nuclear deterrent is in place. Such a conflict would almost inevitably end in the North Korean regime’s downfall.

This strategy also means avoiding war with South Korea and Japan, which could easily escalate into a U.S.-led regional conflict. The North knows it can no longer rely on China to fight for it, as China did in the Korean War of the 1950s; China would only intervene on the North’s side in the event of an unprovoked U.S. military attack, and perhaps not even then. Nor does China have the military experience or systems to be confident of a victory in any conflict against the United States.

U.S. forces have high levels of veterancy due to their experience in Iraq and Afghanistan, U.S. military funding far exceeds China’s, and their weapons systems are battle-tested. China’s People’s Liberation Army has none of these advantages, and moreover it recruits from a population where most soldiers are only children, courtesy of China’s now-discontinued One Child Policy. Significant casualties on the Chinese side would have uncertain social consequences on the mainland, with parents bereft at the loss of their only child a potential source of civil unrest.

The prospects of the North instigating a war against the U.S, Japan or South Korea are therefore low. 

It was therefore unsurprising that having threatened to fire long-range missiles into the seas around Guam, a heavily militarised U.S. overseas territory, the North then moderated its position following what it proclaimed as the wise and level-headed intervention of its leader Kim Jong-un. This choreographed piece of political theatre was likely planned even before the threat against Guam, which China declared would relieve it of any obligation to defend North Korean sovereignty if acted upon. It allowed the North to first escalate and then de-escalate the situation, accurately assuming that the international news media would follow its lead and thereby allowing the news agenda to move onto other issues, reducing pressure on the Trump administration to respond to the initial tests.

The prospects of the North instigating a war against the U.S, Japan or South Korea are therefore low. The main risk stems from the North miscalculating the character of the administration of U.S. President Donald J. Trump, which even seasoned American political commentators find unpredictable. It should be noted that many of Trump’s closest advisers are senior U.S. military figures intimately acquainted with the strategic situation in north-east Asia, and that they are likely to counsel against any rash military action against the North that could escalate into a regional conflict.

China & South Korea

China does not desire a re-unified Korea, particularly one created by U.S. military intervention. This would embarrass China’s claims to being Asia’s regional hegemon and would bring U.S. forces to China’s 1,420km long border with North Korea. China is content for the North to remain a buffer state and for a large U.S. military presence to remain in South Korea, because its presence reduces the arguments for Japan’s re-militarisation.

North Korea’s nuclear and missile tests are a threat to the status quo that China is seeking to preserve

In the short term, North Korea’s nuclear and missile tests are a threat to the status quo that China is seeking to preserve. Should the North develop a nuclear deterrent, this poses a dilemma for China. On the one hand, it could pose an existential threat given that Beijing is only about 900km from North Korea and any large-scale conflict resulting from the North’s activities would have a major adverse impact on China. On the other hand, the North’s nuclear weapons could actually cement the status quo to China’s strategic advantage, by taking any outright invasion of the North off the table and ensuring regime continuity.

China’s response therefore has been to play a double game. It is trying to persuade the U.S. that it is serious about stopping the North’s nuclear missile programme, for instance by supporting new sanctions at the United Nations. Such sanctions have so far proven entirely ineffective in deflecting the North from its nuclear ambitions, partly due to China’s reluctance to enforce sanctions which it had previously approved. Early signs indicate, however, that the latest sanctions are being applied, at least for now.

Economic reprisals [by China] currently present the most risk to companies operating in the region

At the same time, China is placing economic pressure on South Korea to refuse U.S. military deployments aimed at interdicting a Northern attack. Beijing is particularly concerned over the Thaad anti-missile defence system’s radar, as it believes that it could undermine its own missile systems’ effectiveness, most of which are positioned in the north-east of the country near North Korea.

It is these economic reprisals that currently present the most risk to companies operating in the region. The experience of South Korea’s Lotte Group is illustrative. Earlier this year China forced Lotte, South Korea’s fifth largest ‘chaebol’ family-owned conglomerate, to close 87 of its 99 retail outlets in China and to cease work on a theme park after the group ceded a golf course it owned in South Korea to the Seoul government so that the U.S. could deploy Thaad missile-defence systems on the land.

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