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The big geopolitical risk markets are missing

Rick Newman
North Korean strongman Kim Jong Un

A giant global disruption is looming. It’s not the demise of the European Union, or Trumpian trade wars. It’s North Korea, the world’s most menacing nation.

You’ve heard this before. Many times. What’s different now is a gathering of forces that seem to be leading toward some sort of inevitable confrontation in 2017, whether military or political. North Korea possesses perhaps 10 nuclear weapons, and the capability to produce maybe 20 more. Intelligence experts believe the sixth North Korean test of a nuclear weapon may be imminent, with each test since 2003 demonstrating more destructive capability than prior ones. The most recent test, last September, involved a bomb with 35 times the power of the nuke that destroyed Hiroshima, Japan in 1945.

The nukes are half the problem. The other half involves the missiles able to target them at enemy states, and the miniaturization required to place a warhead atop a missile. North Korea already has missiles that can reach South Korea and Japan—key US allies—as well as American territories such as Guam and maybe the state of Hawaii. And North Korean dictator Kim Jong Un has pledged to develop an intercontinental ballistic missile, or ICBM, capable of reaching the continental United States sometime this year.

Since North Korea has repeatedly threatened nuclear action against the United States, some national-security experts feel the US can’t allow the reclusive nation to develop missiles capable of delivering nukes it already has to American territory.

The real wild card

There’s one other factor that could lead to a showdown this year: President Donald Trump, who has already shown greater willingness to use force than his predecessor, Barack Obama. “The unknown wild card is not Kim Jong Un but the Trump administration,” says Sue Mi Terry of the consulting firm Bower Group Asia, who was a former senior analyst on North Korea at the CIA. “The situation is definitely moving toward a critical threshold. But North Korea is not Syria. It’s not as simple as saying ‘I’m going to take out target X.’”

On April 11, Trump said in a tweet that “North Korea is looking for trouble. If China decides to help, that would be great. If not, we will solve the problem without them!” That came as the Pentagon was sending a group of warships, included the aircraft carrier USS Carl Vinson, toward North Korea, a show of force meant to signal Washington’s displeasure should the nuclear test take place.

Reining in North Korea’s nuclear ambitions, however, has vexed every US president since Bill Clinton, with each president inheriting a more complex and dangerous situation than his predecessor. “All the options basically suck when it comes to North Korea,” says Terry.

The risk for global financial markets

War on the Korean peninsula is not inevitable during the Trump administration. But if there’s some kind of negotiated outcome, it may require the credible threat of military force by the Pentagon, and the kind of brinkmanship sure to rattle global financial markets. The recent cruise-missile strike on Syria chilled markets briefly, as did the use of the giant “mother of all bombs” in Afghanistan. Military action involving North Korea would be far riskier.

For a nation nearly cut off from the civilized world, North Korea could cause a lot of trouble in financial capitals. Thousands of artillery pieces are arrayed along its border with South Korea, which could rain down shells on Seoul, the South’s capital, in a shooting war. Thousands would die before US and South Korean forces were able to subdue all those guns. North Korean missiles can reach Tokyo, and while they may not be all that accurate, they could certainly cause mayhem. If North Korea has a nuke able to fit on a missile aimed at either of those two countries, it would obviously multiply the threat, and any risk of US action that triggers a North Korean response.

The role of China

Chinese President Xi Jinping shakes hands with U.S. President Donald Trump. REUTERS/Carlos Barria/File Photo

China plays a key role because it is North Korea’s only ally and to some extent, its patron. China buys raw material from North Korea, providing cash used to fund North Korea’s weapons programs and sustain its elite (even as much of the population endures brutal poverty). China provides food North Korea desperately needs, and Chinese banks may aid North Korean smugglers and criminal enterprises. Were China to squeeze North Korea, it might be able to persuade Kim to lay off the nuclear program or at least stop being so bellicose.

China recently began sending back North Korean shipments of coal, its first significant embargo of exports from its troublesome neighbor. But that alone is unlikely to influence Kim, and China seems reluctant to go further. China likes North Korea more or less as it is, because as a communist nation, in theory, it’s a counterbalance to the democracy in South Korea. China also fears regime change in Pyongyang, or anything else that could send millions of refugees streaming across the border. And it certainly opposes a reunification of the peninsula—which could happen if North Korea collapses—under the guidance of the democratic government in Seoul.

The Chinese also have no reason to cave to American demands. “The Chinese have made a calculation,” says Mary Beth Long, a senior adviser to the Foundation for Defense of Democracies and a former top Pentagon official under President George W. Bush. “Has the United States ever demonstrated a willingness to do anything militarily against North Korea? The answer is no. Never. We’ve never taken out the electrical system or embargoed shipping. Sending an unequivocal message that would indicate our willingness and ability to take out their weapons or other targets needs to be part of getting the Chinese to act.”

And that, of course, is the sort of warmongering that would drive investors out of risk assets and send stocks plummeting.

“We’re running out of time”

Nobody knows how Kim would react if the United States threatened military action against him, or actually conducted preventive strikes meant to destroy nuclear facilities, missiles, launch systems or other weapons. The Kim regime prioritizes its own survival above all else, so Kim may not be as willing to attack Seoul or Tokyo as his loose rhetoric suggests. The United States and South Korea would undoubtedly prevail in an all-out war, but the scale of destruction could rival that from any conflict since World War II.

The Pentagon has spent decades developing anti-missile technology able to shoot down missiles in flight, and it recently deployed such systems in South Korea, over China’s objections. But anti-missile systems are largely unproven and could easily fail. There are also efforts underway to use cyber weapons against North Korea, similar to the malicious code that knocked the Iranian nuclear program offline for a time. But North Korea is reportedly a harder target, partly because it’s so hermetic.

After his recent meeting with Chinese president Xi Jinping, Trump said via tweet that “I explained to the President of China that a trade deal with the U.S. will be far better for them if they solve the North Korean problem!” Trump, of course, has repeatedly promised tariffs on Chinese imports and other trade protections meant to combat the decline of American manufacturing jobs. But a nuclear North Korea is a far more dangerous and complicated problem than cheap imports that actually benefit many American families. After the Xi meeting, Trump seemed to link his theories on trade with the very real problem posed by North Korea, in effect making a complicated and increasingly urgent national-security problem even more complex. The Chinese are dogged and clever, and unlikely to take the bait.

Trump is obviously learning that some of his rowdier campaign promises—repeal Obamacare, tear up trade deals, ban certain immigrants—are impractical or politically difficult. North Korea requires an accelerated learning curve. “We’re running out of time,” says Long. “The pace at which testing has occurred, and the technological leaps, are moving more quickly than people had anticipated. Options are falling off the table.”

One option still on the table is simply tolerating a nuclear North Korea, much as the United States had to tolerate other states that acquired the bomb, such as China in the 1960s and Pakistan in the late 1990s. That may have been the ultimate outcome under Obama’s “strategic patience” approach. But Trump promised to clean up global messes Obama left behind, and the time will soon arrive for him to decide how much he’s willing to risk to give it a try. The answer could lead to the most momentous developments of 2017.

Confidential tip line: rickjnewman@yahoo.com

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman