The Macro Report | July 2017

Missiles can lead to mistakes


North Korea’s missile and nuclear programs are an increasing concern, but their greatest impact may be on the U.S.-China relationship.

North Korea has resumed missile testing, and on July 4 test-fired what it claimed and the United States separately confirmed was an ICBM — a missile with a very long range of possibly 6,700 kilometers. As we’ve written before, the U.S. national security establishment is increasingly concerned about the threat posed by North Korea's missile and nuclear programs, and while this threat is not imminent, it is seen to be serious and escalating. The latest test does not provide any evidence that North Korea has a miniaturized warhead that can be mounted on a missile, nor does it establish that the missile can be guided accurately, but the extension of range that its rocket engines can now provide, putting Alaska within reach, is yet another significant advance.

China would rather not get into a trade war with the United States, but our guess is they’d rather have a trade war than a unified Korea.

To Pyongyang through Beijing
To confront these matters, the United States is turning attention to China. Several months ago, President Trump explicitly linked China’s co-operation with North Korea with the trade issues he stressed during his campaign. He has also tweeted his disappointment that China has not been more effective in restraining the regime led by Kim Jong-Un. Trump may also be aware that just a few months ago he tweeted that North Korea would not be “allowed” to conduct an ICBM test, putting him now at risk of further embarrassment.

Signals of impatience
To make the U.S. stance more credible short of a military confrontation, the United States seems to be preparing to increase the pressure on China. A Chinese bank has been sanctioned by the U.S. Treasury for its role in providing hard currency to the North, and there have been a couple of other straws in the wind: The United States agreed on an arms sale to Taiwan, and the U.S. Navy sent a destroyer into open waters near one of the islands in the South China Sea that is claimed by both China and Vietnam but has been occupied by China since 1974.

North Korea's value to China
China’s longer-term interest remains to keep North Korea as a minimally viable buffer state, to avoid the disruptive effects of a regime collapse, and to avoid delivering the North’s nuclear technology into the hands of the South Korean military. China would rather not get into a trade war with the United States, but our guess is they’d rather have a trade war than a unified Korea. On the U.S. side, there are clearly loud voices within the administration that would love to use this Korean problem as a lever to change the pattern of economic relations with China. With the State Department still understaffed, the combined influence of the economic nationalists and the Pentagon may well result in an escalation of tensions. Given the attitude of the North Korean leadership, it may well be that an escalation of tensions is inevitable.

Military action is not likely. But it does seem entirely possible now that we’ll have to start thinking about the economic consequences of an escalation of tensions between the United States and China as the United States may be poised to raise the stakes.


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