LONDON — Rising tensions in North Korea could lead to protectionist measures across the far-east region, impacting the Chinese economy as well as North and South Korea, analysts at Morgan Stanley said on Wednesday.
Morgan Stanley’s research team, headed by Deyi Tan, argues that while they do not necessarily expect the thread of “aggressive protectionism” to materialise, but that it could be highly damaging if it did.
“As policymakers strive to find a lasting solution to the uneasy equilibrium, a relevant and important risk to watch is how geopolitics may spill over to trade if the US undertakes protectionist measures to get China to exert influence on North Korea,” the team wrote.
“Aggressive protectionism would not only have implications on China but also on the rest of the Asia region, given the regional production supply chain.”
“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,” Capital Economics’ team of Gareth Leather and Krystal Tan wrote.
“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 semi-conductor factory from scratch.”
Morgan Stanley makes clear that it does not see this as its base case, setting out three scenarios that it believes could play out.
In the first situation, the North Korean and American regimes maintain a “status quo of uneasy equilibrium,” whereby the two nations “oscillate between temporary escalation & temporary de-escalation.”
Morgan Stanley called its second scenario: “Peak escalation & disorderly resolution.”
Here’s how that looks (emphasis ours):
“In this scenario, North Korea does not de-nuclearise due to factors outlined above. The frequency of missile testing/launches by North Korea increases as part of its deterrent policy. Concurrently, military exercises by the US continue as part of its containment policy; the US also further increases its military presence in the region, while an engagement stance by S. Korea does not reap tangible results. Action/reaction from either side de-stabilise the uneasy equilibrium, resulting in peak escalation and a disorderly resolution.”
Finally, the bank suggests that a de-escalation of tensions is likely, with North Korea conforming to international norms for the first time.
“North Korea agrees to a sustained effort to denuclearise, in exchange for significant economic concessions and, potentially, assurances of regime continuity,” Morgan Stanley wrote.
“It eventually undertakes economic liberalisation/reforms. A nuclear deal, similar to that between Iran and various key stakeholders in 2015, is struck.”