BGA Cable: U.S. – North Korea Summit

Winners, Losers & New Opportunities

Besides Donald Trump and Kim Jong-Un, two more politicians were invisibly present on Sentosa Island on June 12th: Xi Jinping and Moon Jae-In. China and South Korea are the most affected by the dynamism unleashed by that meeting. It would never have taken place without their discreet nudging. Shaping the consequences now lies in their hands.

Kim has won a lot and given little

In terms of nuclear disarmament and threat control, the meeting has yielded nothing new. The wording of the final document does not go beyond what has been on the table for the past 25 years. There are no binding commitments concerning time frames, no definition of denuclearisation, no transparency in inventories, no understanding on inspections, no talk of a peace treaty (and its conditions), no mentioning of diplomatic relations or human rights and above all, nor any spelling out of a mutual quid pro quo.
 
Kim has acquired international respectability on a par with the most powerful nation on earth. Nobody will dismiss him as ‘little rocket man’, nor can anyone stigmatise North Korea as a rogue state any more. North Korea wins trading opportunities, formal and informal, it can now claim development assistance. After this impressive peace gesture, nobody can advocate a continuation or even tightening of sanctions. In the face of this charm offensive all threats of force melt away. Yet Kim keeps all his options open. Today Kim is the man to meet – he is the foremost winner.
 

China: The biggest winner

The biggest winner, however, is China. If any pressure was decisive to make Kim go to Singapore, it was China’s, not America’s. China accounts for 90% of North Korea’s foreign trade. Trump himself admitted that the effectiveness of sanctions depends on China.
 
Xi Jinping met Kim twice in Beijing before the summit, coaxing and pressuring him. Xi explained China’s strategy of minimum deterrence. Even though its testing site has collapsed, North Korea’s existing stockpile is sufficient to deter any attack and any attempts at regime change. Missile tests have produced enough evidence that North Korea’s nuclear forces have intercontinental range.
 
Why not use this phase for consolidation and cooperative gestures in order to relax the suffocating grip of sanctions? Xi may also have pointed out that opening up economically does not necessarily entail political change for the North Korean leadership.
 
North Korea has a consistent history of inconsistent behaviour, threatening doom one day and advocating peace and cooperation the next. This has worked well as each opening has been rewarded with generous concessions. Kim now has the military options he needs. It is time for a new phase of cooperation that gives China full diplomatic freedom of action.
 
China is now in the comfortable position to be the ultimate arbiter of the understanding signed in Singapore. It can point to Kim’s readiness to cooperate and relax sanctions. It can equally insist that Kim has not delivered and tighten the screws again. China wants the nuclear threat contained, not North Korea unarmed. It wants tensions reduced, an end to nuclear escalation and an atmosphere favourable to trade, investment and development.
 
But why should China side with the US, after Trump has slammed penalising tariffs on Chinese exports recently? China will retaliate and use the growing isolation of the Trump administration to push its own version of cooperative trade agreements. China wants a reduction in the US military presence at its doorstep, thus strengthening its hand in pushing back US operations in the South and Eastern China Sea. Trump has even mentioned the eventuality of withdrawing all troops from South Korea. That would constitute China’s ultimate triumph.
 

South Korea looks for a new strategic positioning

Next to China, South Korea will emerge as the other principal player and act more and more independently of the US. South Korea realizes that it will have to look for alternative security arrangements. As the North opens up and Trump insists on “fairer” trade deals and a higher fee for providing military security, South Korea can no longer rely unquestionably on US support for its existential survival. Today, Kim is more popular than Trump in Seoul.
 
Like the North, South Korea will look increasingly to China. It seeks to relax confrontation on the peninsula and to build up economic and human exchanges with the North. Family reunions are going to take place this summer. This is more important than the repatriation of soldiers’ remains. Reunification talk is premature. After all, there are no visible changes in the nature of the regime in Pyongyang. Given the huge powershift that is under way in the region, it is not clear how such a reunification would come about and whether it would be led by China/North Korea or the economically much stronger South. With the difference in political regimes, this could potentially result in significant unrest.
 

US standing in the Pacific: Extending deterrence or balancing trade?

The Singapore agreement talks of denuclearising the entire Korean peninsula, this includes all US forces. Trump’s unilateral promise to end joint military exercises with South Korea – a suggestion his administration rejected half a year ago – undermines the credibility of US security guarantees. It casts a shadow over the extended deterrence posture of the US in the Pacific. It has to be considered in connection with remarks that South Korea, Japan and Taiwan – like NATO-partners – have to pay more for US military presence.
 
US operational readiness is weakened, a build-up more difficult to explain, doubts cast over security guarantees of the past 70 years. If US commitment to South Korea loses credibility, what about Japan, Taiwan, the Philippines? It will become costlier and more difficult to project force to the Asian coasts of the Pacific. In the meantime, China continues its resolute expansion in the South China Sea. China creates facts whereas trust in America’s words is being undermined.

 

Change in atmosphere

The real achievement of the Summit is the radical change in atmosphere. Trump now depicts Kim as a serious, reliable, trustworthy partner. It will be extremely difficult for him (after all the prestige he has himself invested) to disavow this new assessment. While there may be no more imminent thunder and lightning, black clouds remain on the horizon. The sky could quickly darken again, particularly if, within a couple of years, the understanding on nuclear disarmament unravels – as it is most likely to do.
 
The devil is in the technical detail, not only concerning nuclear disarmament and arms control, but above all in the thorny question of balancing the implementation, i.e. defining mutual obligations, which commitment will be made in return for which concession, and when. Past experience suggests that this is extremely difficult and prone to misunderstanding. The Iran-Agreement (JCPOA) has shown how easily divergent expectations and assumptions can derail such an agreement.
 

New trade opportunities

Even if sanctions were to be lifted, North Korea would remain cautious in admitting foreign capital from the West and foreign workers or in opening up to trade. If Kim was primarily interested in investment and capital flows, he could have acted differently a long time ago. The joint industrial zone in Kaesong was closed in 2016. Will it now reopen? Will tourism receive a fresh lease of life in Wonsan? All this had been achieved but abandoned recently by the same chairman that now promises the opposite. Tight political control, repressive stability, unchallenged power of the Kim dynasty and of the huge military complex that supports it are still paramount. All economic considerations of competitiveness or efficiency will remain subordinate to these imperatives.
 
After Trump’s passionate words about Kim, the US will have to relent and permit an economic normalization. Trump kept raving about gigantic development opportunities, hotels, golf courses, shopping malls. For those with a taste for high risks, quick returns and adventurous projects, North Korea could become an attractive destination. But it is still far away from a calculable, business-friendly, profit-oriented environment.
 
However, direct trade and investment between the US and North Korea will remain restricted and slow. There is no market with any meaningful purchasing power. Technology and infrastructure are decades behind comparable countries in Asia, Central Asia or Eastern Europe. While the North Korean workforce receives extremely low wages, any trade would come with the stigma attached that foreign companies are exploiting poor workers. More likely, opportunities will go to China or South Korea in areas such as construction, infrastructure and minerals, of which North Korea is believed to hold vast resources.
 

Impact on Markets

For investors, the change of direction in US relations with North Korea removes the tail-risk of an escalating nuclear stand-off that in 2017 briefly affected currencies and asset prices in the region. The possible lifting of sanctions offers only very limited upside to markets, except in niches such as South Korean construction firms and, potentially, certain commodity prices if North Korea starts exporting to the West. Any such upside would have to be weighed against the much larger and imminent threat against the region of a Sino-American trade war. In the long-term, Korean reunification, possibly under Chinese/North Korean leadership, could have a significant economic impact on South Korea and its neighbours in view of the huge cost, but that scenario remains remote.
 

BGA Expert

Rudolf Adam

Rudolf Adam

Munich
Rudolf’s Bio

Rudolf Georg Adam serves as an Advisor to BGA. As a former German diplomat and security analyst,  he began his diplomatic career in 1976 when he joined the German Foreign Service. Following his service as Second Secretary in Singapore and First Secretary in Beijing, he was speechwriter for German President Richard von Weizsäcker in Bonn, political counselor at the German Embassy in Moscow and worked in the Planning Staff at the German Foreign Office in Bonn.

In 1995, he became director of global disarmament and arms control in the Foreign Office and in 1998 European correspondent (EU foreign relations, since 1999 including security and defence policy). In 2001, he became vice president of the Federal Intelligence Service. From 2004 to 2008 he was president of the Federal College for Security Policy.

In 2008 he became the German Deputy Chief of Mission in Moscow and in 2011, he held the same position in London. He retired in 2014 after a year as Chargé d’Affairs at the German Embassy London. He is currently an external lecturer at the Bundeswehr University, Munich, and president of CSASC.

Education

He holds a BA, MA and D.Phil. in Modern History from the University of Oxford.