World Economy

War with North Korea could increase smartphone prices, disrupt global trade and widen US debt


Pricier consumer electronics, disrupted global trade and higher U.S. federal debt are among the major consequences from a potential war on the Korean Peninsula, according to a new report from economic research consultancy Capital Economics.

The prospect of American and South Korean armed forces entering full-blown conflict against North Korea is a last resort for Washington and Seoul — the principal targets of Pyongyang's nuclear aggression — in their quest to halt the rogue nation's nuclear development but many believe the risk of military action has grown.

North Korean leader Kim Jong Un reacts during the long-range strategic ballistic rocket Hwasong-12 (Mars-12) test launch in this undated photo released by North Korea's Korean Central News Agency (KCNA) on May 15, 2017.
KCNA | Reuters

President Donald Trump has previously stated "a major, major conflict" with North Korea was possible and that all options were on the table. Meanwhile, Japanese Prime Minister Shinzo Abe recently told CNBC that the international community must "firmly and solidly stand upon the principle of action for action" as the isolated state continues to fire ballistic missiles that are growing technologically advanced.

If military action does break out on the Korean Peninsula, global industries will certainly be impacted given the likely possibility of U.S. involvement and the size of South Korea's economic footprint.

Smartphone prices will rise

South Korea is the world's fourth-biggest producer of electronics goods on a value-added basis, accounting for just over 6 percent of global production, according to Capital Economics. "Even a relatively short conflict would deal catastrophic damage to South Korea's economy," the report stated, and the manufacturing sector isn't likely to be spared.

If electronics production was damaged during a war with North Korea, companies would be scrambling to find alternative suppliers but the global economy lacks enough spare capacity to compensate for South Korea's lost output, the report explained.

That means several companies worldwide would be forced to halt production, which would translate into a sharp rise of various electronic products globally, Capital Economics said.

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But the disruption doesn't stop there — pricier products could impact developed economies.

"U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused prices of these items to double, it would add 1 percentage point to U.S. inflation," the report warned.

As other industrialized nations encounter similar impacts, the real purchasing power of consumers would fall and the lower spending could prompt central banks to respond by hiking interest rates, the report continued.

Global trade will be disrupted

"The biggest impact (of war) on the global economy would likely be felt through the disruption to global trade flows" due to South Korea's deep integration into regional and global manufacturing supply-chains, Capital Economics stated.

Nine of the world's ten busiest container ports are located in Asia, including the South Korean port city of Busan, so even countries that aren't involved in the conflict could be affected if it becomes too dangerous to transport goods around the region, Capital Economics continued.

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If South Korean GDP fell 50 percent as a result of war, that would directly knock one percentage point from global GDP, the consultancy noted.

US debt could increase

"A prolonged war in Korea could significantly push up federal debt in the U.S., which at 75 percent of GDP, is already uncomfortably high," the report stated.

But given Washington's military superiority over Pyongyang, Capital Economics believes that any conflict would be of a relatively short duration, "months rather than years."

Should the U.S. involve itself in South Korea's post-war reconstruction, that could further increase Washington's financial burden. "If the US were to spend proportionally the same amount on reconstruction in South Korea as it did in Iraq and Afghanistan, it would add another 30 percent of GDP to its national debt," the report warned.