The epic stare down between the US and North Korea continues unabated, with North Korean foreign minister accusing US president Donald Trump of declaring war on his country.
In a speech on September 25th outside the UN headquarters, Foreign Minister Ri Yong-ho stated that the president’s “declaration of war” will allow them to consider all options in retaliation. This comes a week after the UN Security Council imposed sanctions on North Korea. These sanctions include a cap on oil imports, a ban on exports of textile goods, the cessation of overseas labor contracts, suppression of goods smuggling, discontinuation of overseas joint activities and direct sanctions on North Korean government’s entities.
Although these seem like very strong measures, a previous draft called for a full ban on oil imports, as well as an asset freeze of the North Korean Workers Party, the Government of North Korea and even on the personal assets of leader Kim Jong Un.
Recent escalations in the tenor of proclamations and the North Korean propaganda war showing the destruction of a key US war apparatus, has continued to inflame already strong tensions. North Korea has responded strongly to the US president saying that the US would “suffer the greatest pain” over its role in the sanctions.
Whilst the sanctions are yet to show their impact, they are focused on key areas of North Korea’s trade activities and well as their weapon development capabilities. Sanctions on textile exports, the largest export sector in North Korea, will take a significant toll on economic activity. The 30% decrease in oil imports should have a direct effect on nuclear testing activities. Oil is a significant element needed for fueling the production and testing on nuclear weapons. By putting pressure on smuggling activities, other necessary materials for weapons manufacture is effectively being stifled or cut off.
Should tensions escalate, the markets are expecting a rough ride. Leading research firms Capital Economics and Oxford University analyzed the potential impact of a full-scale war, should this event play out.
Because of the expectation that war would center on the Korean peninsula, this area would have the most significant impact. However, a war would challenge supply chain activity, which would impact businesses worldwide. Markets will focus on those businesses that require the transfer of goods throughout the Korean and Asian regions, with expectations that they will drop on signs of imminent war.
Neighboring countries like South Korea and China could well have their economic activity impacted. Since South Korea exports a significant amount of intermediate products, this could also have the significant impact on international companies. South Korea produces 40% of the world’s LCD’s and 17% of the world’s semiconductors, placing it number 1 and 2 in the world respectively. Prolonged impacts on manufacturing or shipment due to war could have a significant impact on global markets in a variety of sectors.
In the affected region’s markets, shares will expect to fall sharply, as well as “abrupt exchange rate and bond market adjustments,” according to Oxford Economics Jamie Thompson. The good news is that markets tend to rebound quickly after the cessation of hostilities. However, the impact on economic activity tends to remain whilst countries affected pick up the pieces, rebuild infrastructure and reintegrate workers.
The general consensus is that there is no immediate expectation of a war. As a result, worldwide markets have not strongly reacted thus far. However, a change in this situation would put Asian markets in jeopardy, creating a significant drop in their key market indexes and currencies.Get the 5 most predictable currency pairs