When US President Donald Trump took the unprecedented step of using Twitter to threaten “fire and fury” upon North Korea, that was the easy step. Pushing the button to send a tweet or even start a war is not nearly as complex – or costly – as the clean-up and reconstruction phase. A Capital Economics piece out Wednesday considers the economic cost of a North Korea war, pointing out that the collateral consequences could be more meaningful than the initial impact.
Capital Economics: North korea war could see South Korea witness immediate 80% falloff in GDP
North Korea is credited with having one of the top six largest militaries in the world and a budding nuclear program that could inflict damage not just on South Korea, but increasingly reach the continental United States.
Initial estimates say the bulk of war damage is likely to be felt near the border – Seoul, South Korea’s capital sits just 35 miles from the border with one fifth of the nation’s population – pointing to a meaning immediate impact.
If history is any guide, the Korean War from 1950-53, which led to 1.2 million South Korean deaths, witnessed GDP fall by over 80% in the sovereign region known for its export heft. A modern war has potential to hit this milestone or exceed it, particularly when correlated damage in a globally connected world is considered. If the war were to take a nuclear turn, the economic consequences could only multiply by an unknown numerator.
Capital Economics analysts Gareth Leather and Krystal Tan point out the economic winter that would follow such a war is likely to infect more than the Korean Peninsula.
In a conventional North Korea war, world GDP could drop by 1.6% on South Korean damage alone
Because South Korea accounts for around 2% of global GDP, an 80% collapse in the South Korean economy could result in a direct GDP drop of 1.6%. In a tepid global economy that would be meaningful, but it might only be the initial fallout.
Leather and Tan point to a global supply chain that is increasingly venerable to disruption. This is particularly the case as just-in-time delivery systems mean worldwide economic activity could be impacted with no product to sell in key categories.
South Korea is the larger producer of liquid crystal displays in the world, accounting for 40% of global supply. This means cell phones, televisions, laptop computers and a host of LCD dependent economic activity, which has a significant economic multiplier effect, would be taken out of global GDP.
Leather and Tan also consider the impact in the semiconductor industry, where South Korea accounts for a 17% market share. This impacts not only computers, but the cars, appliances and other smart technology that is increasingly dependent on such chips.
While South Korea is a component manufacturer, they also produce automobiles and are home to the world’s three biggest shipbuilders.
“If South Korean production was badly damaged by a North Korea war there would be shortages across the world,” Leather and Tan wrote in an August 9 report. “The disruption would last for some time – it takes around two years to build a semiconductor factory from scratch.”
The impact of a North Korea war could be far reaching, particularly if a nuclear exchange ensues. If radioactive material were to be released into the ocean, it could deaden the waters and whatever surrounding coastline it touches for decades. US nuclear testing in the Bikini Atoll, for instance, has rendered the region uninhabitable.
The economic price of a nuclear war with North Korea war are unknown but could easily multiply cleanup costs to untold levels, with some estimates in the $5 trillion range. If cleanup costs for the Fukushima nuclear plant are any indicator — they have doubled from initial estimates, totaling $178 billion and counting — the cleanup from an all-out nuclear war could reach historic proportions.
While Capital Economics did not model the impact of a nuclear fallout, the impact of traditional warfare and the rebuilding costs, as seen in Iraq and Afghanistan, might be economically horrific. Those conflicts cost nearly $170 billion on reconstruction alone. With South Korea’s economy is nearly 30 times larger than that of Iraq and Afghanistan combined, the reconstruction costs could add another 30% of GDP to the national debt.
But the larger impact of a conventional North Korea war can be seen as even more chilling, as Capital Economics points out:
The impact of the war on the US economy would likely be significant. At its peak in 1952, the US government was spending the equivalent of 4.2% of its GDP fighting the first North Korean War. The total cost of the second Gulf War (2003) and its aftermath has been estimated at US$1trn (5% of one year’s US GDP). A prolonged North Korea war would significantly push up US federal debt, which at 75% of GDP is already uncomfortably high.