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Sanctions against North Korea would have to be truly massive to work

By David Nelson, CFA

Bottom line: We screwed up. Every president since Reagan bears responsibility for North Korea. Each passed it on to their successor, and now President Donald Trump is clearly facing a series of decisions that will likely define his presidency.

The administration has repeatedly said all options are on the table. It’s pretty clear that after the events of this weekend—what was potentially a thermonuclear detonation—the sense of urgency is rapidly accelerating. Our ambassador to the UN, Nikki Haley, said, “We’ve kicked the can down the road long enough. There is no more road left.”

Then, add comments from Secretary of Defense James Mattis, and the picture gets pretty grim. He said, “any threat to the United States or its territories, including Guam or our allies, will be met with a massive military response—a response both effective and overwhelming.”

Once you’re in the nuclear club, it’s difficult, if not impossible, to be expelled. We should have learned that lesson with India and Pakistan.

Now we’re faced with some pretty tough decisions.

(Source: The Independent)

I think what Trump called for is maybe the best and only choice available. The question is: Are we and our allies willing to pay that price? Cutting off trade with those who do business with North Korea has definite economic, if not military, consequences.

To date, markets have shrugged off geopolitical turmoil, having learned the lesson that buying the news was more profitable than selling it. Most of these incidents are transitory, and often don’t spill over into the economy. However, terminating trade, or even curtailing it with some of our largest trading partners, will have definite economic fallout. Brazil, Germany and the Big Kahuna, China, all do business with North Korea.

Kim’s end game is to have enough military leverage to threaten or hold hostage an American city. Extortion may not work when it’s some far-off city like Seoul or Tokyo, but San Francisco is another story.

It’s unclear if the rogue nation already has that capability. However, with each nuclear test getting stronger, accuracy becomes less important. Also, with conventional weapons on the border, Seoul is an easy target in the event of a preemptive strike by the United States.

Economic sanctions can work but they have to be massive—leaving few options for the young dictator. China clearly has the most leverage, so without it, this is a strategy that’s finished before it even starts. Even if successful, there’s no guarantee that Kim will respond rationally. Experts and diplomats are conceding he’s a complete wild card, and we may be forced in the end to employ the military option.

Appeasement is never an answer, as the president has pointed out. But for diplomacy or sanctions to work, our allies and all parties with a stake in the outcome need to stand by our side. Hopefully, our trading partners will see it in the same light, understanding that North Korea is not only a threat to the United States, but that it also represents a clear and present danger to the civilized world.


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