Here’s what a war between North Korea and the USA could do to the global economy

Tensions escalate between USA and North Korea after threats to US overseas territory of Guam. Any conflict would cause major economic problems both in Korea and more widely across the globe. Global supply chains could be severely impacted. US debt levels could spike as a result of any conflict.

Tensions between the USA and North Korea escalated further on Tuesday evening when President Donald Trump promised “fire and fury and frankly power, the likes of which this world has never seen before”in response to recent threats from North Korea and its leader Kim Jong Un.

Hours later, North Korea responded by saying it is seriously considering a missile strike on the Pacific island of Guam, home to a US military base.

A physical engagement between the two nations still looks highly unlikely, but it is something that serious analysts and academics have started to talk about.

Clearly, the biggest and most important impact of any conflict between the US and North Korea – either nuclear or conventional – would be a catastrophic loss of life and huge human suffering.

However, in a note circulated to clients staff at research house Capital Economics have assessed the potential economic impact that any conflict might have on the world’s economic prosperity.

Writing on Wednesday Gareth Leather and Krystal Tan note that in previous major conflicts since World War Two, countries affected have seen significant drops in economic output.

“The experience of past military conflicts shows how big an impact wars can have on the economy. The war in Syria has led to a 60% fall in the country’s GDP,” the pair write.

“The most devastating military conflict since World War Two, however, has been the Korean War (1950-53), which led to 1.2m South Korean deaths, and saw the value of its GDP fall by over 80%.”

The chart below illustrates the drop in GDP of numerous economies affected by conflicts in the post Second World War era:

Understandably, the Korean peninsula – which would be the likely arena for any conflict – would bear the brunt of any economic shock, Capital Economics’ analysts suggest, with South Korea’s economy the worst hit. That impact would inevitably spread to the wider global economy, which given that South Korea accounts for 2% of global GDP, could cause significant disruption.

Supply chains globally would be impacted, with Capital Economics using the major floods that hit Thailand in 2011 as a comparison with any potential damage in South Korea “because of the huge disruption and damage they caused to the country’s manufacturing industry. The impact on the economy was considerable. GDP in the final quarter of 2011 fell by 4% y/y, led by a 16% contraction in manufacturing output.”

However, the “impact of a war in Korea would be much bigger. South Korea exports three times as many intermediate products as Thailand,” Capital Economics’ writers argue.

“In particular, South Korea is the biggest producer of liquid crystal displays in the world (40% of the global total) and the second biggest of semiconductors (17% market share). It is also a key automotive manufacturer and home to the world’s three biggest shipbuilders.

“If South Korean production was badly damaged by a war there would be shortages across the world. The disruption would last for some time – it takes around two years to build a semi-conductor factory from scratch.”

Here’s the chart showing South Korea’s share of global exports:

Any conflict would also have a major impact on the United States economy, given the cost of waging a war on foreign soil.

“At its peak in 1952, the US government was spending the equivalent of 4.2% of its GDP fighting the 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),” Leather and Tan write.

“A prolonged war in Korea would significantly push up US federal debt, which at 75% of GDP is already uncomfortably high.”