by Mark Mobius, Franklin Templeton Investments
The world is watching the Korean peninsula. The situation between North and South Korea has been tense for a long time, but it has been escalating amid increasingly bold rhetoric and threats from the leaders of North Korea and the United States.
When North Korea’s leader, Kim Jong-un, threatened a missile attack on the island of Guam (a US territory) and launched a missile over Japan, the situation became even more highly charged. North Korea has been developing a nuclear program for more than 30 years, and despite warnings from the United States and others, it has actually accelerated.
Kim and Trump have been engaging in a Twitter war, with creative name-calling on both sides. And in a show of force, eight US aircraft recently skirted North Korea’s coastline, which was the furthest north of the demilitarized zone between North and South Korea that American warplanes had flown since North Korea started testing ballistic missiles and nuclear weapons in the 1990s.
The sanctions against North Korea the United Nations (UN) Security Council unanimously passed at the beginning of August 2017 were a big step forward in terms of resolving the situation through diplomatic means. However, there is much “leakage” in the global financial system that could still enable the North Koreans to transfer money around the world, possibly using Bitcoin and other cryptocurrencies to evade sanctions.
Governments have found it increasingly difficult to implement sanctions on North Korea because of its proximity to China and China’s reluctance (at least so far) to implement drastic embargoes. But I think China is key in terms of helping to resolve the situation.
Trade between China and North Korea has been substantial, but China has so far been unwilling to show much displeasure with North Korea’s actions. As part of the UN sanctions, China recently announced it would impose an immediate ban on textile imports from North Korea and would limit oil exports starting in 2018.
The Chinese also announced sales of liquefied natural gas and condensate oil to North Korea would be banned outright. This was after Beijing cut off purchases from North Korea of coal, iron ore and seafood as well as other goods. Since China accounts for about 90% of North Korea’s trade, these sanctions could eventually have an impact.
Some media reports indicate the Chinese could be reluctant to cut off trade completely for fears a North Korean government collapse could trigger a mass migration into China. Sanctions don’t just impact governments, they hurt ordinary citizens. If all the oil exports from China to North Korea stopped, some observers speculate Russia might take over that role.
Observations on North Korea
In a commentary in the Wall Street Journal in August 2017, former US Secretary of State Henry Kissinger mentioned that although North Korea had not developed an operational intercontinental ballistic missile (ICBM) arsenal, its short- and intermediate-range missiles were already a threat to countries like Vietnam, South Korea and Japan. Those countries could therefore be incentivized to develop their own nuclear weapons, which would mark an ominous turn for Asia and the world. Of most concern to China would be the development of an armed force in Japan capable of offensive action.