South Korea's election could unnerve markets if the new leader opts for a change in North Korea policy that undermines the U.S. or contradicts the current approach.
Current exit polls show liberal Moon Jae-in decisively winning the presidency with more than 40 percent of the votes. Official results are not expected until Wednesday morning in South Korea. Moon, a former human rights lawyer, has been criticized by his opponents for being a North Korea sympathizer, advocating for a dialogue between the two Koreas — a move which would likely ruffle Washington's feathers.
"A win for left-leaning Moon Jae-in, the favorite in the race, may cause turbulence in Seoul's relationship with Washington. Moon supports a version of the 'sunshine policy' towards the North Korean dictator, and has criticized President Donald J. Trump's attempt to stick the U.S. ally with a bill for the THAAD missile system deployment," said Ariel Cohen, senior fellow at the Atlantic Council.
Bringing back the sunshine policy, which aimed for a more engaged approach with Pyongyang, would mark a sharp departure from current policy under U.S. President Donald Trump and South Korea's previous president, Park Geun-hye.
"I am expecting things to be bumpier and more tension-filled in U.S.-ROK relations compared to the relatively easy road we have had during the past nine years of conservative Korean rule. But it should be manageable if the U.S. can avoid shooting itself in the foot," said Scott Snyder, director of the program on U.S.-Korea policy at the Council on Foreign Relations.
The big test for Moon will be the current U.S. deployment of the THAAD (Terminal High Altitude Area Defense) system in South Korea which he has criticized in the past. While the deployment of the THAAD anti-missile system is to protect South Korea from a North Korean missile attack, people in South Korea have been protesting. The fear among some South Koreans is that THAAD is instigating or encouraging North Korea to organize a strike.
However, any shift away from THAAD could upset Washington, which has been putting concerted effort into bringing more troops and personnel in and around the Korean peninsula.
"This is the worst time to show disagreements and differences in the U.S.-ROK alliance in the face [of] Kim Jong Un 's turbulence," said Cohen.
Given the various tests South Korea is facing, some strategists say Seoul and the new leadership cannot afford to hurt its current relationship with the U.S.
But Washington's response to Moon's foreign policy will also be key.
"This increased willingness to be more assertive in defending South Korea's interests even if that means disagreeing with the U.S. will likely fuel tensions with President Donald Trump's administration. It would take months for these tensions to sort themselves out, especially if Trump publicly criticizes the new South Korean president or penalizes Seoul, perhaps through trade measures," wrote Scott Seaman, director of Asia at think tank Eurasia Group, in a note to clients.
Aside from the North Korea threat, South Korea is dealing with mounting backlash from China. It's currently seeing a slowdown in trade with its No. 1 trading partner following the deployment of THAAD, which Beijing strongly opposes. Naval forces in China see THAAD as a threat to their military in the broader region. Moon will have to find a way to manage both the defense efforts of the U.S. while also not completely abandoning China which it relies heavily on.
"As tensions with North Korea have risen and China continues to oppose South Korea's plans to deploy the U.S. Terminal High Altitude Area Defense (THAAD) anti-missile system, security and foreign policy has become a much larger campaign issue," wrote Seaman.
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