North Korea in the Next Five Years

American preponderance in the Pacific, low oil prices and South Korea’s economic needs all argue for reconciliation.

The Korean War, fought from 1950-53, was a result of two earlier wars in the 1940s: the American-Japanese War, which ended with the destruction and occupation of Japan in 1945, and the Chinese Civil War, which ended in a Communist victory (and Nationalist retreat to Taiwan) in 1950.

With the Communists and Americans as the only powers in East Asia following these wars, the Korean Peninsula was split in two, each side taking a piece for itself.

When the United States triumphed over the Soviet Union around 1990, many expected the North Koreans to fix their broken ties with South Korea. That this did not occur was partly the result of inertia, partly the result of Kim Il-sung’s living until 1994 and partly the result of the 1997 East Asian financial crisis, which kept the South Koreans too poor to want to bear the cost of investing in North Korean infrastructure or labor.

It was also partly the result of a miscalculation on behalf of North Korea in 1987, 24 months before the Berlin Wall came down. Seeking to ruin the South’s first-ever Olympics in 1988, the North blew up a commercial airplane. It was by far the deadliest attack on the South since the armistice began in 1953. South Korea’s anger and mistrust of North Korea as a result of this deed persisted during the 90s.

Shifting powers

When the twenty-first century arrived, the situation changed again. The United States, after having fought the bulk of its four major twentieth century wars in East Asia — in the Philippines, World War II, Korea and Vietnam — shifted its focus elsewhere in 2001. This shift was mainly a result of American wars in Afghanistan, Iraq and Libya.

To a lesser extent, it has also been a result of recent Russian interventions in Georgia, Ukraine and Syria.

In East Asia, meanwhile, China’s GDP surged, while Japan’s continued to stagnate like it had in the 90s. Between Chinese growth, Japanese stagnation and American distraction, East Asia became again a two-power region: those powers being the United States and China. But this may now be ending.

In the years ahead, East Asia is likelier to become either American-dominated again, like it was in 1990s, or balanced between three separate powers: the United States, China and Japan.

The two-power status quo could remain in place, but is hardly certain to do so.

American preponderance

In a one-power or three-power region, the powers involved may have less to gain from the continuation of poor relations between North and South Korea. There will be much less reason to split Korea in two, as it has been for 67 years now, when East Asia as a whole is not split between two major powers, as it is today.

The move to an American-dominated East Asia, or an America-China-Japan-dominated East Asia, is likely for three reasons:

First, the United States has been drawing down from the Middle East. It had 150,000 soldiers fighting in Iraq and Afganistan in 2011, but now has fewer than 15,000. Unless it decides to wholly reverse this process — Donald Trump has announced the addition of 4,000 soldiers to Afghanistan, but that is a far cry from the Barack Obama-era surge — the United States will have the ability to focus on other regions, like East Asia, more than it could during the 2000s.

Second, China’s GDP growth has slowed, from 10-15 percent growth during the 2000s to 3-7 percent (depending on whether you believe its official growth rate, 6.7 percent) last year. In order to keep up with 2.5 percent American growth, China must grow around 4 percent. China’s challenge in doing this is that its labor is now much dearer and older than it used to be while its resource wealth, most notably its coal, has led to pollution.

China may struggle to keep up with American power. As it is, the American economy is an estimated 1.6 times larger than China’s. The America-Canada-Britain-Australia alliance, meanwhile (which, unlike China itself, more or less speaks a single language) has a GDP 2.2 times larger than China’s. America’s GDP alone is larger than that of East Asia as a whole.

Third, the economy of Japan, which today is an estimated 37 percent as large as China’s and 18 percent larger than Germany’s, is likely to benefit from the crash in oil and other natural resource prices that began in mid-2015. Unlike China, Japan has few resources of its own and so depends on imports to fuel its economy.

While Japan’s aging population continues to be a challenge — Japan’s largest age cohorts are 40-45 year olds and 65-70 year olds — it may be able to address the challenge via a combination of robots, cheap energy to power robots and a labor force dominated by highly skilled 50-80 year olds. Japan is already planning to advance its robotic prowess in the near term: it wants to showcase them at the 2020 Tokyo Olympics.

Japan’s robot drive is likely to have consequences not just for the Japanese economy but also for the Japanese military. Japan has already begun to rebuild its military of late, first in response to China’s rise and then in response to Donald Trump’s rhetoric that American allies should “stop freeloading and pull their own weight.”

Already today Japan ranks eight in military spending, despite devoting just 1 percent of its GDP to it. Should Japan double this, to reach the 2 percent of GDP that France and Britain spend, it would then become the third largest military spender in the world and move far ahead of fourth-ranked Russia. (Were Japan to spend 5 percent of GDP on its military like Russia does, it would move far ahead of China.)

Even if Japan does not reemerge, East Asia might not remain a two-power region. Rather, China could fall behind the United States sufficiently that, in effect, it will be a one-power region. American power is rising not only due to its withdrawal from the Middle East but also because its rivals, most notably Russia, are being hurt by the fall in resource prices.

As in the 1990s — when oil prices were at all-time lows — cheap oil works in the United States’ favor. And if American power in the region does rise, the North Koreans might be less willing to resist its demands.

Economic gains

There is an additional reason for improving relations between the North and South: it may benefit the South’s economy.

Unlike in the 1990s, South Korea is now a relatively wealthy country. Yet because of its rapid growth, it has become dependent on imports of natural resources and exports of manufactured goods. South Korea has been importing resources mainly from the Middle East and exporting mainly to China.

The Middle East, however, remains unstable. Qatar, for example, the world’s largest LNG exporter, sells more to South Korea than to any other country. But Qatar is now in open conflict with Saudi Arabia. Uncertainty of this kind threatens South Korea’s GDP growth.

In addition, as China tries to shift from coal to gas, and as Japan tries to shift from human labour to fuel-powered robots, South Korea may have to deal with rising competition from its own enormous neighbors when importing fossil fuels from the Middle East.

Similarly, South Korean exports have been limited by the slowing Chinese economy. China accounts for a quarter of all South Korean exports, more than the United States and Japan combined. South Korea has also been hurt by its own success: its labor is no longer so cheap like it was in previous decades, when it was still a poor country. For these reason, South Korea has already grown more slowly in the past two years that at any time since 1997 (excepting the global financial crisis in 2009).

These economic troubles are occuring at a bad time for the South. South Korea will host the first-ever Winter Olympics in continental Asia this year. It wants the world’s perceptions of itself — namely, that it is a remarkable country, with remarkable companies like Samsung and remarkable economic prospects in general — to endure. It also does not want the North to cause trouble this time, as occured in 1987.

Trading with North Korea could help address both these concerns.

North Korea has an extremely cheap, Korean-speaking labor force; a labor force that includes cousins and in some cases even siblings of the South’s.

It represents a potential Korean-speaking market for South Korean exports, both of media and manufactured goods.

It even, if ties improve enough, offers opportunities in tourism.

And it offers access to natural resources. The North Koreans are rich in coal; the South Koreans are top coal importers.

More importantly, the North offers a land route by which South Korea can access resource-rich Manchuria and Siberia.

It is possible, of course, that the Korean issue will be addressed by war rather than by trade. In the past year alone, the United States has prepared for such a war. It is also possible that the North will not be addressed at all; that the tyrannical status quo will endure. But for the reasons outlined above, I believe reconciliation is most likely.

Dennis Rodman, who played on the 1990s Chicago Bulls (Kim Jong-un’s favorite basketball team) has lately met with Kim. Do not be suprised if Rodman’s Celebrity Apprentice co-star, Donald Trump, follows suit.

This story first appeared at Future Economics, June 27, 2017.