Every few years, North and South Korea have an incident. And every few years, sabers get rattled, speeches get made… and then everything settles down quickly enough.
Is this time any different? Maybe.
There are two key changes since the last serious tensions between the still-technically warring neighbors.
One, now North Korea has the nuclear bomb. It’s unlikely Pyongyang will use the nuclear bomb unless there is no other alternative – the world would quickly punish the North, and Kim Jong Il would most likely lose control. If there’s one thing Kim cares about, it’s his power.
However, having the threat of the nuclear bomb does increase North Korea’s confidence, and belligerence. The other – and perhaps more crucial – change is that now, North Korea is out of allies.
In years past, China would always back the communist despot in his wars on the West. Recently, though, China has been backing away from the international pariah, as the Middle Kingdom attempts to become one of the great powers of the world.
Now, South Korea is one of China’s more important trading partners, with numerous economic links between the two countries – and the South has a wealthy enough population to buy many Chinese goods.
Without allies, North Korea no longer has a cooler head helping mediation. Without allies, North Korea may believe force is its only method of gaining attention, and power.
Between those two relatively recent changes, the chances of this most recent skirmish turning into something more are greatly increased. With Pyongyang cutting off all ties with the Seoul – and expelling South Korean workers from a jointly run factory in the North – the chances of misunderstandings leading to worse relations is only heightened.
That seems to be the opinion of the global markets as well, with the Dow dropping well below 10,000 in early trading this morning. Without a strong rally this afternoon, the Dow will likely finish below that psychologically important number.
However, there is a silver lining in all this. Secretary of State Hillary Clinton has been in long, fruitful talks with numerous high officials in China, and the two nations appear to be on the same page.
The U.S. wants to calm the situation. China wants the same. With the U.S. military already overextended, China may be asked to provide some muscle before this ends – which would please Beijing to no end. China has long wanted to be taken seriously as an international power broker, and here is a chance to do that in a responsible fashion.
In short, both nations may see the benefits of closer relations and better ties through this crisis. And, long term, that may be a very good thing.
Short term, though, expect stocks – especially Asian stocks – to be hit hard by this brouhaha. Many have been warning about the Chinese bubble for some time now; this is as likely to pop it as anything.
It might be a good time to take a short position on the Chinese market, which will almost certainly trend downward until the Korean situation is cleared up. And, if the peninsula sees further tensions, expect to see a sharp move downward in stocks. That will be true around the world, but nowhere more so than in China.
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