Will the North Korea Crisis Lead to Major Repercussions in the Global Economy?

North Korea has been seen as something of a ‘loose cannon’ in terms of global politics for a very long time. However, tensions between the highly secretive Asian state and the US are now reaching crisis point. Add to this the frictions between North Korea and their neighbours to the South, plus key Asian economies including Japan, and it becomes clear just how far reaching the consequences of moves made by, or against, the country could be right now.

What Is North Korea Doing?

Most people are familiar with the dynasty that have run North Korea for the past 105 years. The current leader, Kim Jong-Un, is the son of deceased former leader Kim Jong-Il, and grandson of the regime’s founder Kim Il-Sung. While both Kim Jong-Il and Kim Jong-Un have really been treated as figures of fun in the West, due to their penchant for strange hair and dress and bizarre, almost cult like way of establishing themselves as ‘golden gods’ to the information-starved people in their country, certain things that have happened in recent months are forcing the President to start treating North Korea seriously. Namely, their provocative nuclear weapons and missile testing, and some lavish displays of what Kim Jong-un believes is their military might.

There are several incidents that have been seen as escalating the tensions between North Korea and the rest of the world, including missile tests that entered the Japanese economic zone, and an obvious display of weapons and military capacity during a parade in Pyongyang to celebrate the anniversary of the state.

Nuclear weapons testing has been carried out ever since Kim Jong-Un took over leadership in 2011, and as the country continues to provoke other nations, especially the United States, who they perceive as an ideological enemy, it is unclear whether demonstrating North Korea has nuclear arms is intended to try and lure Trump to the negotiating table, or constitute a genuine threat.

The Current Position of the US

While America would probably rather not have to be drawn into conflict with the tiny Asian nation, it seems that Trump is keen to shut down any attempts at intimidation from North Korea. Trump has ordered a US aircraft carrier, the USS Karl Vinson, to take up residence in the Korean peninsula, and has encouraged sanctions against the country. Unfortunately, while the best way to resolve any threat from North Korea without military means would probably be by taking away their access to trade with China, this is not currently something China is prepared to do to the necessary extent, and so the potential for conflict remains.

Economic Impacts in Asia

When it comes to the consequences for the economy, it is important to understand the current economic climate in Asia as a whole, as Asia will see (and is seeing) the first economic effects of the North Korea crisis, and this will have a knock-on effect on the rest of the world.

At the moment, investors trading in the UK and other countries concerned with the Asian markets consider the Japanese yen to be a safe haven, as its value has been well protected. Investment in the yen has certainly risen, causing the price of the yen to climb. However, this is actually the reverse of the intentions of the policies used by current Japanese Prime Minister Shinzo Abe to bolster Japan’s economy. He has sought to keep the price of the yen low, encouraging growth driven through exports. This is something that has worked well thus far, with the approach becoming known as ‘Abenomics’. It is also the reason why the yen is seen as a safe place to keep one’s money in times of uncertainty, however, and with events around North Korea causing investors in Asia to look for safe havens, it could present a challenge to Japan’s approach.

Investors in Asia are very sensitive to socio-political events at the moment, with the situation in Syria also a strong motivator to consider safe haven investments. In China, the federal bank has been trying to dissuade investment in Bitcoin, which has also, surprisingly, become something as a go-to safe haven for Chinese investors.

Tensions are also, understandably, escalating between North Korea and South Korea, meaning the South Korean economy is also feeling a lot of risk at the moment.

Impact on US Trade Relations With China

As previously mentioned, China has a significant trade relationship with North Korea, and accounts for 90% of their international trade. China has shown no approval for North Korea, and has given warnings to them about continuing to agitate the rest of the world. They have made some moves to reduce trade, including a ban on importing coal from the secretive state, which has been in place since February. Nevertheless, trade between China and North Korea has not only continued, but actually grown – by as much as 37 percent in 2017’s first quarter.

China is in a difficult position because of this. Chinese leaders in Beijing have expressed that they would entertain UN sanctions on oil exports to North Korea, however have also said that China would not be available to impose sanctions that went against the interests of the Chinese economy, and would not, therefore, be open to facilitating economic collapse in North Korea.

This position has meant that Trump has threatened that banks and businesses in China who continue to trade with North Korea may be affected by any US sanctions against North Korean trade. It remains to be seen where this goes, but it is unlikely China will – if they have to choose – pick a good trade relationship with North Korea over one with the US.

Volatility

In essence, we won’t really see what the economic fallout of a conflict between North Korea and other nations will be until the kind of ‘cold war’ situation we are in now is resolved, whether that be by peaceful or military means. The number of countries involved, each with their own economic concerns, means that any impact will be significant, but as we don’t yet know what measures will be taken and which nations will be active in opposing North Korea, all we currently have is a time of volatility.

Volatility can be a good thing in some senses, as it does present opportunities for investors, however it also sees more risk averse people look to safe havens and a more bearish sentiment on the markets. Asian currencies are being impacted by the tension in North Korea already, and further afield, the US dollar and other Western currencies like the euro and the British pound are already experiencing volatility for other reasons (for example Brexit), and it has been hard of late for analysts to keep up with the movements caused by the events in the economic calendar of any one of these regions alone.

Should there be an escalation into an actual war situation in North Korea, these currencies and the relevant stock markets would also be affected. There is also the effect of any impact on China and Japan on those countries in the west who have significant trade with them to consider.

While North Korea may be small, its actions are causing ripples that are affecting the economic state of the world in 2017.