Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska. North Korea has made it very clear that their
intention is to grow their nuclear capability to be able to reach the Continental
United States. This would destabilize
the region, and world overnight.
Now I don’t expect the war drum beating will spill over into
mortar shells raining down on Seoul anytime soon. There has been a choreographed diplomatic
dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with
help from China). North Korea gives up
their acting out activity (promises they won’t do it again), a North Korean
South Korean gesture of goodwill takes place, such as joint Olympic teams,
joint economic projects, North Korea gets to declare victory.
This morning the president tweeted…
“The
United States made some of the worst Trade Deals in world history. Why should we
continue these deals with countries that do not help us?”
“Trade
between China and North Korea grew almost 40% in the first quarter. So much for
China working with us - but we had to give it a try!”
This is a clear shot across the bow to China, from the
United states, saying you need to stop trading with North Korea or the U.S.
will respond. The market has brushed
this off as another silly thing our president tweeted. But this is something as a republican
candidate for president Trump had campaigned hard on. He called China currency manipulators, said that
the U.S. trade policies were a laughing stock, and that he would change that.
I have not seen any predictions on what actions the United
States might take against China, but many have predicted what would happen to
the global economy if China’s growth slowed down. Ironically it would hurt South Korea the
most, since trade with China in South Korea makes up a large percentage of
their GDP. It would also seriously hurt
Australia and Russia, who are large exporters of the raw materials China needs
to fuel their growth. The ripple effects
beyond that are uncertain, by comparison, a smaller ripple caused the 1997 Asian
financial crisis. In 1997, easy to
forget, we saw the VIX spike to 48 at the peak of the crisis.
And how would China respond?
As the largest owner of U.S. Treasuries, they have their own trump card
to play. Bottom line, the market is
blowing off any threat the Korean Peninsula might bring. It is clear the U.S. can not sit back any
longer and wait while North Korea gets closer and closer to being able to wage
a preemptive nuclear strike. As of
right now, China is not motivated to stop them.
But until we act, China can have its cake, and eat it too.
Joe Tigay
7/5/17
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