Kim Jong-un welcomed the new year stating that “the nuclear launch button is on his desk,” and that North Korean nuclear missiles can reach the US. A “last ditch” diplomatic effort to resolve the crisis jointly organized by the US and Canada is to take place in Vancouver on January 16.
Allies using force to resolve the North Korea problem will be the defining event of the 21st century, with a range of possibilities from a limited “surgical” strike to nuclear war between Western allies and China and/or Russia. Anticipating and positioning for economic consequences of war on the global economy will be the most consequential investment decision of the year. Depending on what China under President Xi Jinping does, the war could devastate the Chinese economy.
Scenarios for all-out nuclear war between the US and China or Russia can be ruled out of bounds as being improbable, and, even if such a conflict did happen, anything but survivalist plans would be moot. At the other extreme, a decision by the US and its allies to accept North Korea as a nuclear-armed power would undermine and ultimately destroy the liberal international order, akin to how a declining Roman Empire or Ching Dynasty resorted to bribing “barbarians” at the gate until they were no longer able. Between these extremes are more plausible scenarios.
The likelihood of US military action against North Korea has been dismissed by many experts who earnestly believe that the US does not have a military option that does not involve mass casualties in South Korea, Japan, US territories, the United States itself or allied nations.
Suppose, though, that the US has good military options that meet the requirements of international law for necessity and proportionality, would not result in mass allied and North Korean casualties, and would result in the permanent elimination of the North Korean nuclear threat with manageable risk? Then military action is both practical and feasible.
Retired Lieutenant-General Dave Deptula and Trump administration officials have hinted that such options exist and are being refined and readied to be used this year should diplomatic efforts fail.
Restrained response
How would China and Russia respond to allied military action? History suggests they would be restrained, but they would adopt a responsive posture, for example by placing their nuclear arsenals on high alert. China would be constrained by the recognition that US nuclear ballistic-missile submarines are standing by off the coast, ready to respond to any Chinese attempt at nuclear attack.
But what about lower-level “limited” responses such as dispatching “people’s volunteers” or aiding North Korea with materiel, weapons, intelligence and knowhow to prevent a US victory? Whether President Xi agrees or not may not matter to the People’s Liberation Army warlords and Chinese “local” governments making these decisions.
The United States would respond to Chinese intervention or that of Chinese elements (or other parties) swiftly and certainly. Unlike the first Korean War, when the US had few economic and political levers against Communist China, the People’s Republic of China in the 21st century is vulnerable to Western sanctions short of war.
A coordinated sanctions campaign that includes freezing Chinese assets abroad, halting trade, cutting communication links and rounding up operatives of the Communist Party of China (CPC) is a foregone conclusion if the PRC intervened like in 1950. Therefore, what economic impacts should we be prepared for?
A trade embargo by US allies against China would almost immediately choke off about half of all Chinese exports and impair much more. Allies might also ban vessels flagged, owned or chartered by China, including those carrying Chinese goods, from access to ports and facilities worldwide. Allied protection for Chinese shipping could be suspended and contraband seized. Connections to unrestricted allied communications links including the Internet would be disabled.
Curtailing Chinese trade would lead immediately to mass layoffs across the export-dependent provinces of China, particularly in the southern coastal regions. Chinese economic growth, expected to moderate to 6.5% for 2018, would plunge. Recession is to be expected.
Freezing Chinese assets abroad and locking China out of the international finance system would bring trade and financial flows denominated in dollars, euros, yen and pounds to a halt. Chinese imports would have to be paid for with a mutually acceptable medium such as gold. Few vendors would accept yuan, for it is not a credible or stable storehouse of value in wartime.
Social, political unrest
Beijing would retaliate by seizing foreign assets in China, interning foreigners, and re-establishing essential trade via alternative routes that were not subject to embargo. By far the biggest problem for the CPC would be social and political unrest among hundreds of millions of workers thrown out of a job and returned to their “home” villages.
Regional rivalries and disparities in impact would put intense pressure on Beijing, resulting in local authorities challenging or disregarding the Xi regime. Peasants’ rebellions and local uprisings are the norm in Chinese history under such circumstances. The “strongest leader since Mao” might become the weakest since Chiang Kai-shek within months as warlords sense his impotence.
Chinese real property values, especially in the first- and second-tier towns that are overbuilt with many properties purchased as unoccupied “investments,” would risk collapse, as investors become unable to keep up the shell game premised on cheap financing and rising prices.
In order to head off a property crash, the People’s Bank of China would have to resort to flooding the economy with yuan and the CPC ordering many make-work projects to keep the army of unemployed busy, at least for a time. Inflation would consequently skyrocket, leading to devaluation and additional pressure to raise both real and monetary interest rates. People borrowing from underground banks and online micro lenders would be hit hard.
Sensing disaster reminiscent of 1937-49, or 1989 (all within living memory), Chinese citizens with means would en masse attempt to squirrel wealth away abroad by any means possible irrespective of any attempt by Beijing to control capital outflows, putting further pressure on the yuan and inflation.
The yuan, abruptly untethered from the US dollar, would collapse in value worldwide – ending any dreams of it being a global reserve currency. Chinese people would rush to “hard” – ideally movable – assets to protect their wealth. The second-largest economy in the world could abruptly disaggregate as core “backstop” institutions like the banking system wither and investors lose confidence in the CPC.
Plunging asset values
Implausible scenario? Given the advocacy by Xi and the CPC leadership of nationalism and imperial aspirations, the Beijing regime will be under intense pressure to prove its mettle as a superpower to the Chinese people – pushing it into taking action to save North Korea, however symbolic and unwise it may be strategically for the survival of the CPC.
In any event, uncertainties generated by how Beijing and Chinese elements would respond to an allied military attack in Korea would cause asset values to plunge. That is before consideration of the inherent vulnerabilities of the highly leveraged, wobbly and fragile Chinese economy and government.
For those who have no choice but to invest in China, buying non-safe-haven Chinese assets (that is, not physical gold or platinum) during the downturn make sense. Others (non-Chinese nationals) who have the option of investing in safe havens abroad would do much better betting on fundamentally strong allied economies whose assets will be temporarily depressed by uncertainty.
As Nathan Rothschild once observed, “Buy on the sound of cannons, sell on the sound of trumpets.”
Disclaimer: This article is provided for entertainment or informational or educational purposes only and is not a solicitation to buy or trade securities of any kind. The information is believed to be accurate but its timeliness, accuracy and completeness cannot be guaranteed. At the time of publication, there are no known conflicts of interests: The author does not hold a position in any securities mentioned at the time of publication, though this may change at any time after publication.
The U.S. is a "has been". The reality today is China. China has weapons today where the U.S. is still trying to develop. China is coming out with new weapons faster than Uncle Sam was able to do. Talking about the U.S. allies, they all joined China’s AIIB, and China’s BRI. Even Japan will join China to finance China’s BRI.
North Korea is not a problem. The U.S. is a problem. North Korea needed the nukes and ICBMs for self-defense. Uncle Sam is making something huge out of nothing. Cool it, and let it die.
I think this writer has the same IQ level as Donald Trump. This one looks more like US Fox TV. When will Asia have its own news paper?
Completely idle speculation. Serious people know that the US cannot attack North Korea for multiple reasons. It will be forced to negotiate against its will.
Interestingly, this article has not only the usual disclaimer from AT but and additional one.. maybe from the author himself. Orson Welles would be proud.
Not that simple. The article assumes that China is so frightened of US nuclear capability and lay down and fold up. I don’t think so. China has 260 nukes. Why would it build this arsenal if it is afraid to use them to face US agression in its own backyard (North Korea)? The US can’t push a nuclear China into a corner and expect just to walk over it. China will respond with a nuke war against the US. It has 1.6 billion people and can afford to lose a billion and still survive. Will the US survive after a nucler exchange with China?
An economic blockade of China would hurt the USA more than China, as China is the producer and the USA the consumer, sending mere paper, or electrons, to China in exchange for real wealth.
China does not need Russia to inflict severe pain onto tje USA on its own.
This disgraceful article has been written with a typical 19th century imperialistic mindframe. But the author forgets that China has the conventional means to defeat the US in Korea, and that by partially switching from exports to internal consumption China’s economy could withstand any sanctions by the West. The US can no longer impose its will on other countries, even as small as North Korea, and much less on a country like China. Any bellicist adventure by the US would end in disaster for the Americans. But Trump is too stupid to understand that.
A strong nuclear North Korea with capability to strike any city in USA (including Washington DC) is a guarantee of peace in the Korean Peninsula. Korea is one country like Vietnam is one country. Currently, USA is invading Korea with its 30,000 soldiers stationed in the South part of Korea. This invasion started in 1950. Now that North Korea has become a nuclear power, there is no way USA will pursue further its invasion. I therefore predict that in 2018 USA will remove all its soldiers and military equipment out Korea. This will mark the end of the invasion of Korea by the USA. However, the Koreans must insist that USA pays the Koreans adequate compensation for all the harm and damages caused by the invasion of Korea by the Americans.
I love reading "FICTION" with my java in the AM. I will bet anyone that Mr lam is using this article to get a job as a Hollywood screen writer————-I am impressed with Mr Lam’s creative skills to be noticed by some Hollywood Producer————–RIGHT!!
What took AT so long to get a token neocon asian? Surely the screening procedure is slipping.
Danny Lam,
You obviously suffer from cognitive dissonance or confirmation bias. That is, you live in your own mind and ‘banana’ bubble land!
The way you write suggests that you have a background in military or defence matters and see economic consequences like how a military man would. Well, that is like getting an apple grower and seller to explain how to grow and sell oranges.
And further it looks like you have never lived and worked in Mainland China or you were probably last there when Chiang Kai Shek was still in Nanking. Foremost, you seem to have no understanding or concept about the current solid intensity of nationalistic and patriotic pride of the Chinese of the new modern ascendant China.
And most obviously you are not even involved in China’s export trade and thereby not conversant with the groundswell of resilient and adaptable and dexterous and versatile manufacturers and exporters who bring new meaning to what being a ‘chameleon’ is and means in international trade and commerce!
If China should come attack by the U.S. militarily or peripherally through trade sanctions and embargoes, trust me, the clarion cry to defend China will be "Remember the Opium Wars! Remember the Rape of Nanking! Time for Revenge! Revenge our ancestors! Punish and destroy Western hegemony and supremacist complex once and forever!"
But I trust most Asia Times readers are really Asia socio-politically in tune with the actual and factual ground conditions here in Asia and not like you relying on Canadian or American cuckooland news media to base your article on.
You want to write verily about North Korea! Start with the premise predicated on how an Asian David would react to being bullied by a pompous grandstanding Yankee Goliath. Let me sum it up for you – ‘Big Bully, you want to fight, then let us die together! My life is worth nothing if I allow you to bully me anyway!’
Danny Lam’s views are clearly pro-US and anti-China. He seems to suggest that international trade and relations between China and the West, in particular the US is for the sole benefit and advantage of China. All these are made to appear as acts of benevolence of the West to China. He has forgotten the utter unfair treatment of China in the early 20th century, are evidence of the selfish mentality of the West. While no one, probably except the warmonger and bully, US, wants any wars and conflicts in Asia, I am certain any sanctions so detailed by the writer will harm and destroy the whole world and not just China alone.
A really lame analysis. Mr Lam doesn’t seem to understand the grave economic and financial realities the US is facing right now. America’s heavy dependence on cheap credits and cheap imports makes China the bigger gun in a battle of sanctions.
Take a look at EU’s sanctions against Russia, or US sanctions against Iran. Not only have they not worked, they are actually hurting the EU and the US more than their targets.
All US / EU hostility and sanctions have accomplished is strengthening the resolve and accelerating the pace of de-dollarization in among the largest economies and energy producers in Asia.
Danny Lam must have lived in North America for too long. The world has changed a lot. China, on its own, will suffer a lot. But don’t discount China and Russia getting together to inflict even greater pain to the USA.
Delusional ravings and bluster!
Can USA survive without importing goods from China? There will be critical shortages, a recession and riots in USA. China can divert its goods to friendly neighbours. Trade will be reduced but does China and its allies need more U$? What does US sell to China – nothing that China cannot produce for itself !
China can project power in a 2000km radius while US carrier battlegroups only have a operational radius of 800km. At their speed of 30 knots per hour, it will take 40 hours before the US fleets reach striking range. Naval blockages will be expensive and US goes not have enough ships nor submarines. China has more attack submarines than USA. Forget about the military bases in Japan, Guam and South Korea. The bases will be attacked and destroyed in the first few days. Sneak attacks are also not possible with satellites monitoring the region.
Japan and South Korea will not participate in any attack. USA has to do the lifting itself with token forces from Australia, Canada and UK and will most certainly lose it naval forces.
F35, Ford carrier, Zumwalt destroyers are lemons and bluster do not hide this fact.
If it comes to a nuclear war, everyone will be destroyed. China also has submarines with nukes lurking within striking range of USA.
Peace and recognitiotn of North Korea as a nuclear power is the only real option. .
That is what the US does not like at all = a peaceful solution.
Too Simplistic analysis , the scenario if ever happens, would go nuclear very fast. How will the yanks society become? Life is not always about others, it is also about what happen to your society?
All the negatives are apportioned to China in a new Korean war. Do not forget, in a life and death situation, the CPC to survive may resort to the nuclear option even though the US and its allies have numerically many more nuclear warheads. With just a few dozens US cities devastated and much much more of China laid to waste, the US will be finished as a significant power not to mention a superpower. I am sure the White House and the Pentagon are aware of this real possibility.
What the writer fails to say is the consequences or the whole world if such a conflict is to take place. In this globalised world where we are all interconnected the war will bring an end to whatever order that now exists. The US and allies Will not have an option without consequences to itself. South Korea will not have this war. The consequences for South Korea is just unimaginable. If you follow the recent developments in the Korean Peninsula the US is slowly withdrawing from the heights of its military deployment. Slowly the world will find a peaceful solution to the Korean issues.