Wednesday, August 9, 2017

Here's what a war between North Korea and the US could do to the global economy

North Korean leader Kim Jong Un in an undated photo released by North Korea's Korean Central News Agency in 2014. Reuters
Tensions have escalated between the US and North Korea after threats to the US overseas territory of Guam
Any conflict would cause major economic problems both in Korea and more widely
Global supply chains could be severely affected
US debt levels could spike as a result of any conflict
Tensions between the US and North Korea escalated further Tuesday evening when President Donald Trump promised "fire, fury, and frankly power, the likes of which this world has never seen before" in response to recent threats from North Korea and its leader, Kim Jong Un.
Hours later, North Korea responded by saying it was seriously considering a missile strike on the Pacific island of Guam, home to a US military base.
A physical engagement between the two nations still looks highly unlikely, but it is something that serious analysts and academics have started to talk about.
Clearly, the biggest and most important impact of any conflict between the US and North Korea either nuclear or conventional would be a catastrophic loss of life and huge human suffering.
But in a note circulated to clients, the staff at the research house Capital Economics has assessed the potential economic impact that a conflict could have on the world's economic prosperity.
Writing on Wednesday, Gareth Leather and Krystal Tan of Capital Economics note that countries involved in major conflicts since World War II have seen significant drops in economic output.
"The experience of past military conflicts shows how big an impact wars can have on the economy. The war in Syria has led to a 60% fall in the country's GDP," or gross domestic product, the two wrote.
"The most devastating military conflict since World War Two, however, has been the Korean War (1950-53), which led to 1.2m South Korean deaths, and saw the value of its GDP fall by over 80%."

The chart below illustrates the drop in GDP of nine economies affected by conflicts after World War II:
The Korean Peninsula, the most likely center of a conflict involving North Korea, would bear the brunt of any economic shock, Capital Economics' analysts suggest, with South Korea's economy hit worst. That impact would inevitably spread to the wider global economy, which, given that South Korea accounts for 2% of global GDP, could cause significant disruption.

Supply chains globally would be affected, with Capital Economics using the major floods that hit Thailand in 2011 as a comparison "because of the huge disruption and damage they caused to the country's manufacturing industry." The writers continued: "The impact on the economy was considerable. GDP in the final quarter of 2011 fell by 4% y/y, led by a 16% contraction in manufacturing output."

Further, they said the "impact of a war in Korea would be much bigger," adding, "South Korea exports three times as many intermediate products as Thailand."

They continued: "In particular, South Korea is the biggest producer of liquid crystal displays in the world (40% of the global total) and the second biggest of semiconductors (17% market share). It is also a key automotive manufacturer and home to the world's three biggest shipbuilders.

"If South Korean production was badly damaged by a war there would be shortages across the world. The disruption would last for some time  it takes around two years to build a semiconductor factory from scratch."

Here's the chart showing South Korea's share of global exports:
A conflict could also have a major impact on the US economy, given the cost of waging a war on foreign soil.

"At its peak in 1952, the US government was spending the equivalent of 4.2% of its GDP fighting the Korean War. The total cost of the second Gulf War (2003) and its aftermath has been estimated at US$1trn (5% of one year's US GDP)," Leather and Tan wrote.

"A prolonged war in Korea would significantly push up US federal debt, which at 75% of GDP is already uncomfortably high."

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