North Korea: An Update

The Kim regime has become increasingly belligerent, launching a number of ballistic missiles and testing what appears to be a hydrogen device. It is also claiming it has miniaturized a warhead, meaning, if true, North Korea is a nuclear power.

The U.S. has indicated this development is unacceptable. Although the Trump administration still says that “all options are on the table,” a full-scale war would be catastrophic and may be impossible to contain. The U.S. wants China to bring North Korea to heel; so far, the Xi government has been reluctant to push hard against Pyongyang. Meanwhile, Japan and South Korea are becoming increasingly worried about North Korea’s behavior.

Although the Hermit Kingdom has been the topic of reports on numerous occasions, an update on the basic geopolitical issue of North Korea is warranted given the volume of recent news. In this report, we will examine the motivations of North Korea and surrounding powers. As always, we will conclude with potential market ramifications.

North Korea’s Goals

Regime preservation: The primary goal of the Kim regime is to remain in power. It views the U.S. as the primary threat to its future existence. Although regime change in North Korea is a goal of the U.S., it is not a primary one. The U.S. has mostly pursued this aim through sanctions and isolation, with the idea that communist economies eventually collapse under their own inefficiencies. Although that worked with the Soviet Union and Eastern Europe (and, arguably, with China), Cuba and North Korea remain stubborn holdouts of Marxism. After President Bush declared North Korea a member of the “axis of evil” (along with Iran and Iraq), and the U.S. forcibly removed Saddam Hussein and Muammar Gaddafi from power, the Kim regime decided that it cannot protect itself from regime change without nuclear weapons.

Korean unification: The Kim regime wants to unify the Korean peninsula under the control of the dynasty. Needless to say, the South Koreans oppose this goal. For years, North Korea was convinced that the U.S. was the only power standing between it and unification. However, from the 1970s forward, the South Korean economy has massively outpaced North Korean growth. Still, the regime continues to indicate that it wants to unify the peninsula and believes that nuclear weapons will further this aim. With a deliverable nuclear weapon, it can threaten the U.S. if it comes to the aid of South Korea in an invasion. North Korea is assuming the U.S. will be reluctant to defend South Korea if the Kim regime can directly threaten the U.S. mainland.

Independence from China and Japan: The Korean Peninsula saw periodic invasions from Japan and China from the 11th century into the 20th century. Over numerous periods, Korean leaders have had to deal with aggressive emperors from China and Japan and, at times, fallen under their control. Korean leaders have a long history of playing outside powers against each other and, to some extent, current tensions have similarities to these earlier periods. In any case, avoiding undue influence from Japan and China is a goal; this is part of the reason South Korea is generally tolerant of U.S. presence on its territory. From the perspective of South Korea, an ally from outside the region is more tolerable than aligning with China or Japan, who were former colonizers of the Korean peninsula.