Daily Management Review

The Korean problem is threatening the world trade


08/21/2017


Economies of the United States, Japan, and Korea may pay dearly for the tense situation on the Korean peninsula.



Kok Leng Yeo
Kok Leng Yeo
The volume of bilateral trade between the United States and the countries of the Asian region reached $ 1.3 trillion in the first half of this year - 52.5% of the country's total foreign trade. However, this is only part of the US economic relations with the Asian economies. Investments in fixed-income assets that contribute to the growth of these trade flows are also worth taking into account, as they directly affect the level of employment and income, and also form one-third of the aggregate demand in the US.

All this is now subject to growing risks and uncertainties as a result of acute security issues and seemingly unresolved strategic conflicts.

The current outbreak of long-term military threats on the Korean Peninsula is the most serious risk for global economic growth and international trade. The relationship between North Korea and the United States directly affects the economies of South Korea, China and Japan, which, in turn, make up about a quarter of world production.

The problem is that deteriorating geopolitical conditions in Northeast Asia will almost immediately lead to a decrease in the volume of regional trade. In this case, the American market can become an irresistible alternative for Korean, Japanese and Chinese companies.

An unfavorable truce will determine the political and security situation on the Korean Peninsula in the foreseeable future, excluding, of course, the nuclear Armageddon, caused by accidents, miscalculations or military conflict. The reason is simple: the US, China and Russia are unlikely to agree to the terms of a permanent peace settlement between the two Korean states.

Meanwhile, North Korea will strengthen its position as a nuclear power with technically viable means of delivery for its warheads. At the same time, any further efforts to suppress the economy of the North with exhausting sanctions by the US will be extremely negatively perceived by China.

This is a serious problem for the economy of South Korea. Its long years of strong economic and technological development have become possible due to the fast-growing trade and investments of the US and China. Seoul is at the crossroads of trade ties and political conflicts between the US and China. Washington is exerting pressure on South Korea's exports to make sure that it adheres to its policy, while Beijing continues to do the same to force Seoul to pull out of Uncle Sam's tight embrace.

While the attention of analysts and investors is focused on problems in the real estate and construction sector in South Korea, the country is facing a significant reduction in the number of tourists from China, as well as a fall in exports in the II quarter of this year. China accounts for 27% of South Korean exports, which is twice the volume of exports from Korea to the United States.

Beijing enjoys its position and exerts pressure on Seoul, demanding termination of the deployment of the US missile system THAAD, which Beijing regards as a threat to its own security. South Korea is also losing ground in trade deals with Japan. In the first half of this year, Japan's trade surplus with South Korea rose by 31.3% compared to the previous year.

Moreover, trade relations between Japan and South Korea are deteriorating on the negative political background between these countries. It is worth recalling that as early as January of this year, official Tokyo temporarily withdrew its ambassador from South Korea because of the monument to the so-called "comfort women" (the Koreans who were forced by the Japanese authorities to engage in prostitution during World War II).

Japan's relations with China also have a difficult history. Last Tuesday China pompously marked the 72nd anniversary of Japan's surrender, to which Tokyo once again responded with harsh statements. Looking at all this from the side, it seems surprising that China and Japan can have any trade and investment relations. Nevertheless, the volume of bilateral trade in the first half of this year showed growth, and China recorded a significant surplus of 1.9 trillion yen.

However, on the background of all this, on last Friday China repeated its warnings against Japan, demanding not to interfere in the problems of the South China Sea. In turn, Tokyo reminded Beijing that its security agreements with Washington also cover the Senkaku Islands (Diaoyu), which Japan controls, but which China claims.

Rigid rhetoric, triggered by the escalation of the situation around North Korea, provoked a "domino effect," which affects trade relations between South Korea, China, Japan and the United States. Experts believe that further deterioration carries risks that can exert extremely negative pressure on the world economy.

source: reuters.com, bloomberg.com






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