Category Archives: China

North Korean closure of Kaesong Industrial Complex is no signal for increased likelihood of military conflict with South Korea

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The Wall Street Journal reported today that a North Korean closure of the Kaesong Industrial Complex would be a signal of increased probability of hostilities with South Korea. North Korea hosts the industrial complex a few miles within its boundary, where approximately 50,000 North Koreans work for 123 South Korean companies. On an average workday, about 120 South Korean managers cross the border into the complex. South Korean companies operating in the complex pay $80 million in cash wages directly to the North Korean government, and conduct approximately $2 billion worth of North Korean trade. This is a significant amount considering North Korea’s largest trading partner, China, yields only $6 billion worth of trade. The complex is a source of inexpensive labor for South Korea, rare US dollars for North Korea, and a foundation for pan-Korean economic and political cooperation (Reuters, WSJ).

North Korean threats and provocations are primarily bluster and bluff meant to elicit talks and appeasement payouts from the west. North Korean closure of the Kaesong Industrial Complex would be no different.

More informative signals would be: 1) South Korean closure of the border crossing, or 2) North Korean capture of South Korean complex workers by abruptly closing the border. The first of the two scenarios would indicate that South Korea believes hostility is imminent. The hostility could include the second scenario, or more seriously but less likely, a North Korean attack on South Korea. The capture of South Korean complex workers would be the most serious Korean crisis since 2010, when North Korea sunk a South Korean naval vessel and shelled a South Korean island. It would likely lead to US and Chinese-mediated negotiations, a payout to North Korea, and a definitive end to North Korea’s access to trade through the Kaesong Industrial Complex. Not North Korean, but South Korean closure of the border, is the signal to watch.

 

Effect of European political disunity on the Euro and global economy

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Today, France joined the UK in publicly threatening to rupture a common approach to European Union (EU) foreign policy by sending arms to Syrian rebels (Bloomberg). This, on the heels of the January 11 unilateral French intervention in Northern Mali. Since the May 2012 election of French President François Hollande, France has increased its political independence with respect to the EU. This distresses Germany, which wants closer political union. Without seeing gains in political unity, Germany could decrease its financial support to the European project (Council on Foreign Relations). This augurs poorly for European monetary union, the value of the Euro, and global economic stability.

Lack of German financial support to Europe would increase the probability that Portugal, Italy, Ireland, Greece, or Spain would be forced out of the Euro. Were this to happen without prior agreement from the rest of the eurozone, the cost to the dropout would be catastrophic in terms of trust and with it, access to money markets. The cost to the remaining eurozone countries would be an increase in eurozone per capita money supply and resulting inflation of the Euro. Confidence in the Euro would fall, and the chance of further dropouts would be reflected in the foreign exchange market. Decreasing confidence and loss of value increases incentives for other EU countries to be the next to leave the Euro, with spiraling downward effects on its value. The massive investment in the Euro — and the amount that could be lost given failure — explains why Germany is willing to prop up the currency through stabilization of economically ailing eurozone members. Ailing eurozone countries milk their wealthier neighbors with the threat of Euro collapse.

Euro collapse is not just a European problem. It would have a disastrous effect on the global economy, including major European trading partners such as the United States and China. Thus, all trading partners with Europe have — at least for economic reasons — a stake in the success of a European common foreign policy. This should be considered when jockeying for short-term diplomatic goals such as arming the opposition in Syria.

Increasing European political integration and unity should give the investor increased confidence in the Euro; decreased integration and unity will have downward effects.  In part because of understandable historical differences based on the subjective experience of World War II, Germany is profoundly leery of military intervention. France and Britain frequently see intervention as an obligation to stop massacre, genocide, and civil war, especially when such intervention involves ancillary benefits such as removing a rogue or terrorist threat. Increased institutional power to overcome foreign policy differences in Europe would assist common foreign policymaking, and thereby improve market confidence in the Euro. Public pronouncements of Britain and France asserting foreign policy independence from the EU are geared towards influencing Germany and other recalcitrant EU states to take the UK-France-Italy approach on Syria. They show that for the moment at least, short-term foreign policy goals are trumping aspirations of a common EU foreign policy, stability of the Euro, and mitigation of risk to the international economy.

Watch for any hedge by the German government against the Euro, which will precede rapid loss of confidence in the Euro and a decrease in German monetary support to the currency union.

 

Unfounded Worries of a Sino-Japanese War

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Saber-rattling by China over the Senkaku Islands, most recently in the form of locking weapons on a Japanese ship and helicopter, have led some analysts to warn of war between the two East Asian countries. These analysts go further to question whether the US treaty commitment to Japan’s territorial integrity would hold in this case (Wall Street Journal).

Such warnings are overblown. Militarized jostling of this sort is normal for low-intensity territorial disputes. All parties — including China — recognize that war would be counterproductive. China regularly activates media coverage with its mildly belligerent actions in order to bolster and maintain its long-term claim to the islands should the case go to an international court in future. Japan is a key US ally and trading partner. There is no question that were war to occur between China and Japan, the United States would defend its ally.