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N. Korea could demand 'different treatment' in rare inter-Korean talks

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Prime Minister Lee Nak-yon said Tuesday that North Korea could demand "different treatment," apparently as a nuclear power, if rare talks take place between the two sides to discuss its participation in PyeongChang Winter Olympics, reported Yonhap News Agency (South Korea).

"It appears that South-North talks will take place for the first time in a long time," Lee said during a ceremony to kick off New Year, noting that North Korean leader Kim Jong-un spoke in his New Year's message of a need for the two Koreas to hold a meeting at an early date.

Lee said the talks, if realized, could be daunting.

"There is a sufficient possibility of North Korea demanding different treatment as it is arguing (that is now a nuclear power)," Lee said. "Nonetheless, however we have to exercise imagination and wisdom and muster courage to take advantage of this opportunity."

Lee didn't elaborate on what "different treatment" may mean, but it apparently indicates that the communist nation could demand the South treat it as a nuclear weapons-armed state. Pyongyang has carried out six nuclear tests so far and recently claimed it has become the world's newest nuclear power.

Kim Jong-un said in his New Year's address that his country is willing to send a delegation across the world's most heavily fortified border to next month's Winter Games and said the two sides could hold an urgent meeting to discuss the issue.

But he also threatened nuclear attacks on the U.S., saying the "whole of its mainland is within the range of our nuclear strike and the nuclear button is on my office desk all the time."

On Tuesday, the South's unification ministry proposed high-level talks next week.

Referring to Kim's message, Lee said that Kim's mention of inter-Korean talks is considered a response to long-running calls from President Moon Jae-in for reopening dialogue between the two sides. But Lee also took note of the fact that the address included menacing threats.

Despite the conciliatory gestures between the two sides, Lee said the security situation around the Korean Peninsula isn't likely to change.

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Kim Jong-un welcomed the new year stating that “the nuclear launch button is on his desk,” and that North Korean nuclear missiles can reach the US. A “last ditch” diplomatic effort to resolve the crisis jointly organized by the US and Canada is to take place in Vancouver on January 16, reported Asia Times (Thailand).

Allies using force to resolve the North Korea problem will be the defining event of the 21st century, with a range of possibilities from a limited “surgical” strike to nuclear war between Western allies and China and/or Russia. Anticipating and positioning for economic consequences of war on the global economy will be the most consequential investment decision of the year. Depending on what China under President Xi Jinping does, the war could devastate the Chinese economy.

Scenarios for all-out nuclear war between the US and China or Russia can be ruled out of bounds as being improbable, and, even if such a conflict did happen, anything but survivalist plans would be moot. At the other extreme, a decision by the US and its allies to accept North Korea as a nuclear-armed power would undermine and ultimately destroy the liberal international order, akin to how a declining Roman Empire or Ching Dynasty resorted to bribing “barbarians” at the gate until they were no longer able. Between these extremes are more plausible scenarios.

The likelihood of US military action against North Korea has been dismissed by many experts who earnestly believe that the US does not have a military option that does not involve mass casualties in South Korea, Japan, US territories, the United States itself or allied nations.

Suppose, though, that the US has good military options that meet the requirements of international law for necessity and proportionality, would not result in mass allied and North Korean casualties, and would result in the permanent elimination of the North Korean nuclear threat with manageable risk? Then military action is both practical and feasible.

Retired Lieutenant-General Dave Deptula and Trump administration officials have hinted that such options exist and are being refined and readied to be used this year should diplomatic efforts fail.

Restrained response
How would China and Russia respond to allied military action? History suggests they would be restrained, but they would adopt a responsive posture, for example by placing their nuclear arsenals on high alert. China would be constrained by the recognition that US nuclear ballistic-missile submarines are standing by off the coast, ready to respond to any Chinese attempt at nuclear attack.

But what about lower-level “limited” responses such as dispatching “people’s volunteers” or aiding North Korea with materiel, weapons, intelligence and knowhow to prevent a US victory? Whether President Xi agrees or not may not matter to the People’s Liberation Army warlords and Chinese “local” governments making these decisions.

The United States would respond to Chinese intervention or that of Chinese elements (or other parties) swiftly and certainly. Unlike the first Korean War, when the US had few economic and political levers against Communist China, the People’s Republic of China in the 21st century is vulnerable to Western sanctions short of war.

A coordinated sanctions campaign that includes freezing Chinese assets abroad, halting trade, cutting communication links and rounding up operatives of the Communist Party of China (CPC) is a foregone conclusion if the PRC intervened like in 1950. Therefore, what economic impacts should we be prepared for?

A trade embargo by US allies against China would almost immediately choke off about half of all Chinese exports and impair much more. Allies might also ban vessels flagged, owned or chartered by China, including those carrying Chinese goods, from access to ports and facilities worldwide. Allied protection for Chinese shipping could be suspended and contraband seized. Connections to unrestricted allied communications links including the Internet would be disabled.

Curtailing Chinese trade would lead immediately to mass layoffs across the export-dependent provinces of China, particularly in the southern coastal regions. Chinese economic growth, expected to moderate to 6.5% for 2018, would plunge. Recession is to be expected.

Freezing Chinese assets abroad and locking China out of the international finance system would bring trade and financial flows denominated in dollars, euros, yen and pounds to a halt. Chinese imports would have to be paid for with a mutually acceptable medium such as gold. Few vendors would accept yuan, for it is not a credible or stable storehouse of value in wartime.

Social, political unrest
Beijing would retaliate by seizing foreign assets in China, interning foreigners, and re-establishing essential trade via alternative routes that were not subject to embargo. By far the biggest problem for the CPC would be social and political unrest among hundreds of millions of workers thrown out of a job and returned to their “home” villages.

Regional rivalries and disparities in impact would put intense pressure on Beijing, resulting in local authorities challenging or disregarding the Xi regime. Peasants’ rebellions and local uprisings are the norm in Chinese history under such circumstances. The “strongest leader since Mao” might become the weakest since Chiang Kai-shek within months as warlords sense his impotence.

Chinese real property values, especially in the first- and second-tier towns that are overbuilt with many properties purchased as unoccupied “investments,” would risk collapse, as investors become unable to keep up the shell game premised on cheap financing and rising prices.

In order to head off a property crash, the People’s Bank of China would have to resort to flooding the economy with yuan and the CPC ordering many make-work projects to keep the army of unemployed busy, at least for a time. Inflation would consequently skyrocket, leading to devaluation and additional pressure to raise both real and monetary interest rates. People borrowing from underground banks and online micro lenders would be hit hard.

Sensing disaster reminiscent of 1937-49, or 1989 (all within living memory), Chinese citizens with means would en masse attempt to squirrel wealth away abroad by any means possible irrespective of any attempt by Beijing to control capital outflows, putting further pressure on the yuan and inflation.

The yuan, abruptly untethered from the US dollar, would collapse in value worldwide – ending any dreams of it being a global reserve currency. Chinese people would rush to “hard” – ideally movable – assets to protect their wealth. The second-largest economy in the world could abruptly disaggregate as core “backstop” institutions like the banking system wither and investors lose confidence in the CPC.

Plunging asset values
Implausible scenario? Given the advocacy by Xi and the CPC leadership of nationalism and imperial aspirations, the Beijing regime will be under intense pressure to prove its mettle as a superpower to the Chinese people – pushing it into taking action to save North Korea, however symbolic and unwise it may be strategically for the survival of the CPC.

In any event, uncertainties generated by how Beijing and Chinese elements would respond to an allied military attack in Korea would cause asset values to plunge. That is before consideration of the inherent vulnerabilities of the highly leveraged, wobbly and fragile Chinese economy and government.

For those who have no choice but to invest in China, buying non-safe-haven Chinese assets (that is, not physical gold or platinum) during the downturn make sense. Others (non-Chinese nationals) who have the option of investing in safe havens abroad would do much better betting on fundamentally strong allied economies whose assets will be temporarily depressed by uncertainty.

As Nathan Rothschild once observed, “Buy on the sound of cannons, sell on the sound of trumpets.”

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