Regional tensions around the Korean peninsula are sharply on the rise and involving several players. The past few weeks have indeed been marked by the murder of Kim Jon-un’s half-brother in Malaysia, and Pyongyang’s firing of ballistic missiles in the Sea of Japan which led to a Chinese ban on key coal imports (i.e. about 40% of the country’s total exports) from North Korea until the end of the year and to the hastened decision to deploy the US ‘THAAD’ (Terminal High Altitude Area Defence) anti-ballistic missile shield on South Korean soil. The latter, strongly opposed by Beijing for defence reasons, triggered a range of retaliatory economic measures (e.g. suspension of Chinese tourist tours, Korean shop closures, boycott of Korean products). Last but not least, the US made clear that a revision of their North Korea policy is necessary yet not ruling out the military option.  

Impact on country risk

In barely one month’s time, North Korea has seen its relations deteriorate with Malaysia, China, South Korea and the US. The assassination of Kim Jon-un’s half-brother and the intensification of missile launches, seen as a test to the new US administration and frequent reactions to joint US-South Korean military exercises, just confirm Pyongyang’s unwavering determination to develop its capacity to launch missiles with nuclear warheads reaching the West Coast of the US and ensure its survival through nuclear dissuasion. In consequence, Pyongyang will continue to move forward in this direction until those goals are reached and allow it to enter potential negotiations in a stronger position. This could become more likely if North Korea’s economy and revenues are harmed by stricter UN sanctions and China’s ban on coal (if it is applied, though) while local banks have recently been banned from access to the SWIFT system. The US and South Korean positions will matter a lot in the coming months. The US strategy is uncertain and increases the risk of miscalculated actions. In the coming months, Mr Trump seems determined to move forward through higher pressures on Beijing and Pyongyang. Claims of pre-emptive strikes simply bear too high potential human costs as they would not prevent Pyongyang from threatening the life of millions of South Koreans and Japanese and striking back the US (military bases). In the near term, the regional situation might evolve with a new South Korean president said to be more conciliatory and willing to ease tensions with its neighbour. It could put the THAAD system in balance with the aim to reduce dependence on the US and normalise relations with its first trade partner, China.

Analyst: Raphaël Cecchi, r.cecchi@credendo.com