Research Note no. 23 2002-03
North Korean CrisisImplications for Australian Trade
Jeffrey Robertson
Foreign Affairs, Defence and Trade Group
3 February 2003
North Korea's decision to
immediately withdraw from the Nuclear Non-Proliferation Treaty on 10 January
2003 emphasises the importance of the Northeast Asian region to Australian
trade and security interests.
Implications for South Korea
Despite the continued sporadic
tension since the armistice ending the Korean War in 1953, South Korea
has developed into the 13th largest economy in the world. However, the
North Korean regime is increasingly a factor in the consideration of South
Korea's longterm economic growth prospects.
The nuclear crisis has refocused
international attention on North Korea following the perceived stabilisation
after the 2000 Leader's Summit meeting between Kim Jong-Il and Kim Dae-Jung.
South Korean domestic business
activity generally has remained resilient to events involving North Korea
such as the July 2002 naval clash in which five South Korean naval personnel
lost their lives. However, the increased level of threat brought about
by the nuclear crisis may affect business and consumer activity.(7)
An authoritative measure of business confidence, the Federation of Korean
Industries (FKI) business survey index (BSI) has fallen to a 14-month
low. Compilers cited geo-political uncertainty as one of the possible
reasons.
The crisis may also deter
foreign investment. In December, the Bank of Korea attributed a contraction in foreign
investors' net purchase position to the dampening of investor confidence
following the unstable international circumstances.(1) South
Korea's credit rating may be affected, with Moody's Investor Service due
to conduct a review in January.
Implications for Australia
Northeast Asia(2)
remains Australia's most important export region despite declining growth
trends. In 20012002 it accounted for 40.7 per cent of Australia's merchandise
exports compared to 12.9 per cent and 12.8 per cent for Europe and the
Americas respectively.
Any disruption to the stability
of Northeast Asia could adversely affect Australia's trade. Japan, China
and South Korea rank amongst our top five trading partners. South Korea
is Australia's third largest export market. With stability, South Korea
will maintain its importance, given its estimated real GDP growth rate
of 5.4 per cent in 2003.(3)
In the shortterm, the current
crisis may dampen Australian business confidence in South Korea, harming
the potential diversification of the economic relationship towards the
services and investment sectors.(4)
Unification Scenarios and Trade
A 1999 study by the Rand
Corporation(5) put forward four possible scenarios for the
resolution of the Korean stalematepeaceful unification; collapse and
absorption; unification through conflict; and external intervention.
Scenario 1Peaceful Unification
This scenario assumes the
planned unification of the Korean peninsula. By building a stronger North
Korean economy a 'soft landing' could be engineered to avoid pitfalls
such as the economic dislocation which occurred after German unification.
The unification timeframe would depend upon the speed of North Korea's
economic transformation. Central to this scenario is the provision of
economic assistance, increased humanitarian cooperation and confidence
building measures.
Under this scenario Australia
could be expected to expand its healthy trade relationship. The complementary
relationship based on the export of raw materials and the import of consumer
goods would expand into services and investment. Australian exports of
raw materials would increase as North Korean infrastructure expanded.
Increased cooperation in areas such as biotechnology,
e-commerce and health services could be expected as a 'peace-dividend'
spurred consumer and investor confidence in the economy.
Scenario 2Collapse
The Rand study suggests
two distinct phases. The first phase would include a period of atrophy
and prolonged instability in North Korea as the regime attempted to cling
to power. The second phase would be marked by more rapid political change
followed by regime and state collapse.
Australian interests under
this scenario would be adversely affected by the strain placed on the
South Korean economy. The cost of unifying under such a scenario has
been estimated to be between US$260 billion and US$3.2 trillion. German
unification was financed by public transfers from West to East of approximately
four per cent of GDP in the 1990s, inevitably affecting the economy. The
economic disparity between the two Koreas is considerably greater.
The cost to the South Korean
economy could affect Australian exports in the short to medium term. The
effects of the Asian economic crisis on South Korea, which resulted in
a real GDP contraction of 6.6 per cent in 1998, led to a 23 per cent
drop in Australian exports. Further, the recovery period adversely affected
Australia's tourism and education sectors.
The collapse of North Korea
would have a much graver economic effect over a longer period of time.
Estimates of the recovery period range from 10 to 20 years.
Scenario 3Conflict
The third scenariounification
through conflictwould have the greatest negative effects. To avert imminent
collapse and ensure regime survival, the North may initiate limited conflict.
Any reduction in South Korean
infrastructure and industrial capacity brought about by conflict would
affect Australia's principal exports of coal, iron ore and crude petroleum.
In 2001, South Korea accounted for approximately 15 per cent and 12.9
per cent of Australia's iron ore and coal exports respectively.
Australian Exports to South Korea
| |
1997 |
1998 |
1999 |
2000 |
2001 |
| Value
(US$ million) |
4978 |
3852 |
4046 |
4742 |
4929 |
| Export
Market Share (%) |
7.9 |
6.9 |
7.2 |
7.5 |
7.8 |
Source: DFAT APEC Region
Trade and Investment 2002
Damage to the South Korean
economy would also affect Australia's major export partnersJapan and
the United States. In 2001, South Korea accounted for approximately seven
per cent of Japan's exports. Decreased demand in Japan's already stagnant
economy would affect the same key Australian exports of iron ore, coal
and crude petroleum.
Economic costs would also
be borne by Australia's second largest export market, the United States.
The US economy, already confronting the possible rebuilding of Iraq would
be put under further pressure by a conflict in Korea. The US has 37 000
troops stationed in South Korea and would be integral in any conflict
and its aftermath.
Conflict on the peninsula
also holds the potential to affect China's relationship with the US and
Australia, resulting in possible disruption to AustraliaChina trade.
China is currently Australia's fourth largest export market with growth
rates far exceeding other major markets.
Scenario 4Intervention
China currently contributes
substantial food and energy aid to the North. The Rand study suggests
that given its historical role(6) there is significant potential
for Chinese intervention.
Chinese intervention might
aim to prop up an alternative North Korean regime resulting in shortterm
instability and longer term stability. By assuming a greater military
and financial role, China would avert both uncontrolled refugee flows
and humanitarian crises on its border.
Under this scenario trade
would continue and expand as the 'alternative peace' continues. The scenario
might also entail more rapid reform towards a state directed market economy.
Alternatively, Chinese intervention
might upset the regional strategic balance, precipitating obstacles to
economic growth, thereby affecting Australian trade interests. Tension
could result from international uncertainty over the legitimacy of a Chinese
backed North Korean regime, mass political opposition to intervention
in South Korea, or a regional military build up in response to increased
tension.
-
Hans Greimel, S Korean Economy Faces Nuke Threat, Associated
Press Newswire, 8 January 2003.
-
Bank of Korea Press Release,
Financial Markets Trends, January 2003.
-
Northeast Asia comprising
of China, Hong Kong, Japan, ROK, DPRK, Macau, Taiwan and Mongolia.
-
Economic Intelligence
Unit (EIU) Estimate, 7 January 2003.
-
The diversification of
the AustraliaKorea trade relationship has been a government priority
since 1999. See Trade Minister Vaile Press Release Expanding and
Strengthening the Australia-Korea Economic and Trade Partnership,
17 July 2002.
-
J. D. Pollack and C.
M. Lee, Preparing for Korean Unificatio, Rand, 1999.
-
China supported the North
in the Korean War 19501953. See Allen S. Whiting China Crosses the
Yalu, Stanford University Press, 1968.
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