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A Korean peace would cut billions of dollars from US trade deficits

Dr. Michael Ivanovitch
There are new dynamics in Washington's attempts to move beyond the terms of the Korean armistice, Michael Ivanovitch writes.

It is too early to expect a solution of a 64-year-old problem, but the chances of seeing the beginning of a constructive process toward a peaceful Korean Peninsula have rarely been better.

The Koreans seem eager and ready. Just look at those broad smiles, four-hand handshakes and the warmth of official greetings shared by estranged Korean cousins.

And don't underestimate the U.S. leader warming up for the "art of the deal."

It makes me think of similar scenes among the divided Germans while I was standing on Checkpoint Charlie of the wall-separated Berlin in late 1980s. That is now a museum in a bustling and sophisticated capital of a reunited Germany.

All it took to get there was a wise and affable Chancellor Helmut Kohl, and the enlightened leadership of President George H.W. Bush and the then Soviet leader Mikhail Gorbachev. They worked together to reunite, in October 1990, a country that savagely destroyed Europe during World War II and created the worst human tragedy the continent had ever known.

What followed was another miracle: The long process of establishing a European currency was stepped up to create a genuine European customs union and an operational single market for goods and services. These measures helped to firmly anchor a reunited Germany within the continent's community of nations, and to make an epochal progress toward the European economic and political unification (aka, the "European project").


A deal in the offing?

This is not an attempt to draw close analogies with a vastly different Korean situation, but it is just a reminder of one of the events that have marked occasional accelerations of history.

The North Korean pledge to stop ballistic, nuclear and thermonuclear tests during the peace talks may be a small step, but it is also followed by (a) the revival of a hotline between the Korean leaders, (b) an announcement of the inter-Korean summit at the border village of Panmunjom sometime next month and (c) a meeting between President Donald Trump and Kim Jong Un .

It would be unwise to ignore, or dismiss, the importance of these entirely new dynamics in the long history of Washington's attempts to move beyond the terms of the Korean armistice signed at Panmunjom in July 1953.

Yes, this time seems to be very different. The two Koreas have apparently made a firm decision to move toward a closer and cooperative relationship. Equally important — and an entirely new event — is a reportedly determined effort by China and Russia to work with the U.S. and the Koreans to get rid of Pyongyang's nuclear weapons, and their delivery vehicles, in exchange for peace and security.

At long last, the U.S. and Korea's closest neighbors seem to have put their political games aside by agreeing that the Korean nuclear standoff is in nobody's interest. That is an excellent point of departure in a difficult confidence building process that should lead to the common objective of a nuclear-free and peaceful Korean Peninsula.

A gradual lifting of debilitating sanctions on North Korea is expected to be part of the ongoing inter-Korean rapprochement, starting, most probably, with the reopening of joint projects in Kaesong, a special administrative region in North Korea that has been closed since January 2016. That would open up the way for a more active engagement of American, Chinese, Russian and Japanese companies on the Peninsula and in the rest of East Asia.

Let the US make some money

For the U.S., such a lowering of security and political tensions could create an opportunity to plug a seemingly unstoppable $467.2 billion hemorrhage on trade accounts with China , Japan and South Korea .

So far, some progress has only been made with South Korea. Last year, the trade deficit with Seoul narrowed 17 percent, an excellent trend that continued with a 24 percent decline in January of this year. A large part of this progress was achieved thanks to a 14 percent increase in American exports to South Korea during 2017, and a further 9 percent annual increase last January.

That is exactly the kind of trade dynamics the U.S. should seek in its quest for more balanced trade accounts. In the particular case of South Korea, a growth impetus from a peaceful and cooperative relationship with the North would expand export markets for American products and services.

China would be another beneficiary of its stable and rapidly developing Korean neighborhood. But it remains to be seen how the U.S. can use that to stop and reverse its soaring trade deficits with the world's second-largest economy.

In spite of Chinese pledges of a "win-win cooperation," Beijing's trade surplus with the U.S. increased 8 percent last year to an excessive $375.2 billion. Things got worse at the beginning of this year. There was no increase in American export sales to China last January, but the deficit increased 15 percent from the year earlier and ran at a whopping annual rate of $432 billion.

How will the U.S. square the circle of cutting its deficits with China and challenging the Chinese maritime borders while relying on Beijing's help to reach a peaceful resolution of the Korean armistice, where nuclear weapons and ballistic missiles serve as guarantees for the survival of North Korea?

And here is an equally intriguing question: Does China realize that its huge, and growing, trade surpluses with the U.S. are economically and politically intolerable?

And then there is Russia. Will the U.S. stand idly by as its close allies Japan and South Korea run big business with Russia via their "8 and 9 bridges" pledged by Japan's Minister Shinzo Abe and South Korea's President Moon Jae-In at the Vladivostok Eastern Economic Forum last September? Would American businesses be simple observers of multi-billion transactions, while the Koreans and the Japanese pocket the money and America continues to bleed on trade and military outlays to provide their defense umbrella?

Investment thoughts

This is, inter alia, what Moon Jae-In said at the Vladivostok Forum: "I believe … that the successful exploration of the Far East through cooperation between Northeast Asian states is a kind of solution to the North Korean problem. If North Korea sees cooperation between Northeast Asian countries and a successful example of economic cooperation in the Far East, it will realize that participation in such cooperation is very fruitful … I would like to see the Korean railway connect to the Trans-Siberian Railway via North Korea, so that trains from Busan would go all the way to Europe. I also want Russian gas to be delivered to my country via North Korea. This is the future I would like to see."

And that's where the "art of the deal" comes in, and where the trade and investments can become vectors of peace and economic development.

Would you bet that there could be a meeting of minds between Trump and Kim on this one?

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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