A tale of Two Out­comes. Fre­quent tem­per­a­ture swings are af­fect­ing the U. S.-North Korean re­la­tions.

U.S.-North Korean re­la­tions have gone from cold to hot to cold again. How does the cur­rent tem­per­a­ture af­fect busi­ness and the geopo­lit­i­cal land­scape in the re­gion?

Norway-Asia Business Review - - Contents - SOFIE LISBY

The­world held its breath in July 2017 as North Korea in a dis­play of brazen de­fi­ance fired its first-ever in­ter­con­ti­nen­tal bal­lis­tic mis­sile on U.S. In­de­pen­dence Day. Out­cry and con­dem­na­tion from the in­ter­na­tional com­mu­nity, in­clud­ing North Korea’s strong­est ally China, didn’t stop North Korean leader Kim Jongun from fir­ing an­other in­ter­con­ti­nen­tal bal­lis­tic mis­sile just three weeks later, prompt­ing South Korea’s Pres­i­dent Moon Jae-in to con­vene an emer­gency se­cu­rity meet­ing in the mid­dle of the night, and Ja­panese Prime Min­is­ter Shinzo Abe to note that “The threat to Ja­pan’s se­cu­rity [had] be­come grave and real”.

The mes­sage from The White House was a lit­tle blunter. Speak­ing from his golf course in New Jersey, US Pres­i­dent Don­ald Trump told re­porters that any more threats from North Korea would be met with the now-fa­mous “fire and fury like the world has never seen”.

De­spite the rhetoric, North Korea went on to con­duct no less than seven mis­sile tests be­fore the year was over, in­clud­ing the Hwa­song-15, an in­ter­con­ti­nen­tal bal­lis­tic mis­sile be­lieved to be ca­pa­ble of hit­ting the en­tire con­ti­nen­tal U.S., two in­ter­me­di­aterange bal­lis­tic mis­siles over Ja­pan, and a nu­clear test in the form of an ad­vanced hy­dro­gen bomb.

In early 2018, how­ever, there was a shift in North Korean for­eign pol­icy. A South Korean diplo­mat re­turn­ing from an of­fi­cial visit to Py­ongyang said Kim Jongun was will­ing to dis­cuss North Korea’s nu­clear pro­gramme with the U.S. and just three months later the two lead­ers fi­nally met at a sum­mit in Sin­ga­pore. Mixed re­ac­tions The sum­mit was great news for busi­ness. In the lead-up to the event, stocks across ma­jor Asian mar­kets ral­lied, and on the day of the ac­tual sum­mit, key mar­kets closed higher. Ja­pan’s Nikkei 225 rose 0.33 per­cent to close at 22,878.35, slightly lower than the sea­son high of 23,011.57 it reached that same morn­ing. Food, re­tail and land trans­ports in­dexes were among the high­est per­form­ing, ris­ing more than one per­cent. The Shang­hai com­pos­ite gained 0.91 per­cent to fin­ish at 3,080.55, while the smaller Shen­zhen com­pos­ite gained more than 1 per­cent. How­ever, other mar­kets were less buoy­ant. South Korea’s Kospi slipped 0.05 per­cent to close at 2,468.83, and Sin­ga­pore’s Straits Times In­dex slip­ping 0.13 per­cent.

Given the im­me­di­ate re­sult of the sum­mit – a signed joint agree­ment pledg­ing nu­clear dis­ar­ma­ment by North Korea in ex­change for U.S. se­cu­rity guar­an­tees – a more pro­nounced mar­ket re­ac­tion might have been ex­pected. How­ever, crit­ics were not late to sound the alarm. “Vague and with lit­tle sub­stance” was the over­ar­ch­ing theme of the crit­i­cism, with many tak­ing the stance that Pres­i­dent Trump had made too many con­ces­sions to the North Korean regime, in­clud­ing the de­ci­sion to halt joint U.S.-South Korean mil­i­tary ex­er­cises, which have been a ma­jor con­tention point for the North for years.

“Un­for­tu­nately, we do not know if Kim Jong-un has made a strate­gic de­ci­sion to de­nu­cle­arise and it is un­clear if fur­ther ne­go­ti­a­tions will lead to the end goal of de­nu­cle­ari­sa­tion,” An­thony Rug­giero, a se­nior fel­low at the con­ser­va­tive Foun­da­tion for De­fense of Democ­ra­cies think tank, told Reuters. “This looks like a re­state­ment of where we left ne­go­ti­a­tions more than 10 years ago and not a ma­jor step for­ward.” Slow, if any, progress Since the sum­mit, North Korea has in­deed halted its nu­clear and mis­sile tests and claims to have dis­man­tled a nu­clear test­ing site. The regime even re­turned re­mains that are be­lieved to be of U.S. sol­diers killed in the Korean War.

How­ever, a UN re­port com­mis­sioned by the UN Se­cu­rity Coun­cil con­cluded that North Korea is con­tin­u­ing to work on its nu­clear pro­gramme, mir­ror­ing claims by U.S. of­fi­cials that spy satel­lites had spot­ted con­tin­ued ac­tiv­ity at a site that has pro­duced bal­lis­tic mis­siles. The UN re­port also said that there has been a mas­sive in­crease in ship-to-ship oil prod­uct trans­fers and that North Korea has been try­ing to sell weapons abroad, both vi­o­la­tions of UN sanc­tions.

As re­cent as Au­gust, Pres­i­dent Trump, whose gov­ern­ment is in the mid of an in­tense trade war with China, blamed the Chi­nese gov­ern­ment, which yields sig­nif­i­cant in­flu­ence over the North Korean gov­ern­ment for stalling progress. An of­fi­cial visit by Sec­re­tary of State Mike Pom­peo was can­celled due to lack of progress in dis­man­tling the nu­clear pro­gramme.

Now what? The slow­ing down or lack of progress begs the ques­tion: Now what? With not only North Korea’s nu­clear ca­pa­bil­i­ties on the line but also the re­la­tion­ship be­tween China and the U.S. and the geopo­lit­i­cal bal­ance in the re­gion, some feel that a Pan­dora’s box has been opened and that Asia’s se­cu­rity land­scape will change, dis­ar­ma­ment or no dis­ar­ma­ment. Py­ongyang has pre­vi­ously said that it will only dis­man­tle if the U.S. re­moves its 28,500 troops sta­tioned in South Korea, a sce­nario that will sig­nif­i­cantly change the geopo­lit­i­cal bal­ance in the re­gion as Asian al­lies rely on U.S.’s de­fence com­mit­ments in the face of an in­creas­ingly as­sertive China.

Pres­i­dent Trump him­self at a press con­fer­ence after the sum­mit in­di­cated a de­sire to bring the troops home, a move that me­dia branded “a huge win for Py­ongyang and Bei­jing” and prompted con­cerned re­marks from South Korea and Ja­pan. “At this point, we need to know Pres­i­dent Trump’s ex­act mean­ing or in­ten­tions,” said the Blue House, South Korea’s equiv­a­lent of the White House. Mean­while, Ja­panese De­fence Min­is­ter It­sunori On­odera said the U.S.South Korea drills were “vi­tal” to East Asia, adding that his coun­try wished to “seek an un­der­stand­ing of this be­tween Ja­pan, the U.S. and South Korea.”

Fur­ther­more, the tim­ing of dis­ar­ma­ment could pose a threat to sta­bil­ity in the re­gion. Staged dis­ar­ma­ment com­bined with the re­moval of U.S. troops in South Korea could prompt the clo­sure of mil­i­tary bases in Ja­pan as well, leav­ing both coun­tries vul­ner­a­ble to North Korean short-range mis­siles. “Any agree­ment that re­moves the North Korean nu­clear threat from the United States, but leaves Ja­pan and South Korea vul­ner­a­ble to a North Korean at­tack would be cause for con­cern,” Troy Stan­garone, se­nior di­rec­tor at Korea Eco­nomic In­sti­tute, a Wash­ing­ton-based think tank told CNBC.

Ac­cord­ing to an anal­y­sis by CNBC, if no progress is made to­wards dis­ar­ma­ment, it may in­di­cate to U.S. and North Korean of­fi­cials that diplo­macy as a strat­egy has failed, leav­ing only mil­i­tary so­lu­tions on the ta­ble. “Fail­ure to reach any deal would al­most cer­tainly re­turn the mil­i­tary op­tion to the fore as the U.S. ad­min­is­tra­tion’s pre­ferred means of re­mov­ing the North Korean threat,” said a note from the In­ter­na­tional In­sti­tute for Strate­gic Stud­ies.

From a busi­ness per­spec­tive, Korean and Ja­panese mar­kets are most sen­si­tive to the North Korean risk and would also ben­e­fit the most from a de­nu­cle­ari­sa­tion of the Korean Penin­sula. Ac­cord­ing to an anal­y­sis by Oanda, a lead­ing provider of cur­rency data, the Korean won is very sen­si­tive to con­flict on the penin­sula, and dis­ar­ma­ment is likely to boost the won sig­nif­i­cantly. The data provider also noted that although the Ja­panese yen has tra­di­tion­ally per­formed well dur­ing geopo­lit­i­cal strife, per­ma­nent dis­ar­ma­ment will likely re­sult in an in­crease in value. An end to max­i­mum pres­sure

Even if dis­ar­ma­ment does not hap­pen, some be­lieve that a re­turn to Pres­i­dent Trump’s cam­paign of “max­i­mum pres­sure” is im­pos­si­ble. Ac­cord­ing to Reuters, North Korean of­fi­cials have toured China to dis­cuss eco­nomic de­vel­op­ment, spec­u­la­tors are snap­ping up prop­er­ties along the Chi­nese-North Korean bor­der, and South Korea is study­ing ways in which to boost en­gage­ment with its north­ern neigh­bour.

“Trump’s cam­paign is over,” Kim Hyun Wook, a pro­fes­sor at the Korea Na­tional Diplo­matic Academy told Reuters. “The diplo­matic open­ings with North Korea have al­ready been tak­ing a toll on the max­i­mum pres­sure cam­paign.”

A sim­i­lar sen­ti­ment was ex­pressed by Joseph Yun, the United States’ for­mer top ne­go­tia­tor with North Korea. “Prac­ti­cally it is not pos­si­ble to con­tinue max­i­mum pres­sure when you’re talk­ing with your ad­ver­sary. I don’t think you can have se­ri­ous en­gage­ment as well as max­i­mum pres­sure.”

PHOTO: WIKIPEDIA/DAN SCAVINO JR

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