FROM THE ECONOMIST INTELLIGENCE UNIT
After a slow-burning start, the crisis over the sinking of the South Korean naval vessel, Cheonan, with the loss of 46 lives on March 26th is escalating. Having officially blamed the North, the South Korean government has announced an initial package of retaliatory measures. Further punitive actions may well depend on the degree of support that the South receives from the US and China, but the greatest concern is how the North’s unpredictable dictatorship will respond.
The South’s president, Lee Myung-bak, adopted an admirably cautious approach in the wake of the Cheonan incident, refusing to blame the North officially—although some administration and military officials made it obvious that Kim Jong-il’s regime was their primary suspect. Investigators soon found strong evidence of the North’s involvement, with the discovery of the remnants of the torpedo that sank the vessel, which appeared to have North Korean numbering written on it. The torpedo is believed to have been fired from a mini-submarine.
On May 24th Lee Myung-bak announced the South Korean government’s first steps in response to the attack. With the exception of trade with the Kaesong Industrial Complex (KIC), an export-focused zone in the North where a variety of Southern firms manufacture goods with Northern labour, all North-South commerce is to be suspended. South Korea will participate in the Proliferation Security Initiative (PSI), a multinational naval operation aimed at blocking the spread of nuclear materials, and ban all Northern vessels from South Korean waters. “Psychological warfare”, mostly involving sending leaflets and radio broadcasts into the North, will also be resumed. These may not be the end of the response to the matter. President Lee Myung-bak has referred the sinking of the Cheonanto the UN Security Council, and may seek a further toughening of sanctions against the North.
The response has so far been tougher than some had expected. However, in many ways the options for further actions are limited. The attack came at what was already a low point in the North’s relations with the outside world. Following its testing of a second nuclear device in May 2009, economic sanctions on the regime were tightened. Moreover, ties with the South have already frayed substantially since the hawkish administration of Lee Myung-bak was elected at the end of 2007. The North recently seized Southern assets at a tourist resort, Mount Kumgang, which together with the KIC was one of the core achievements of the past “sunshine” policy designed to relieve tensions between the two countries. Many feel that the KIC’s days are also numbered, and bilateral trade fell in 2009 (helped also by the economic downturn in the South).
If the North is to be punished further economically for its aggressive behaviour, China’s support will be vital. However, the chance that the Chinese government will support such a strategy is very low. China was unusually forthright in its criticism of the North Korean government following the nuclear test in 2009, and allowed sanctions to be ratcheted up, but it has since back-pedalled to its usual softer approach. China’s main concern is to avoid an implosion of the Northern regime, which could send thousands of refugees across the border and potentially result in a destabilising military struggle, possibly expanding US influence in the peninsula. It has consistently sought to nudge the North instead towards economic reforms along the lines of those it has implemented successfully itself.
Indeed, in recent months China has appeared to be actively strengthening its economic engagement with the North, despite the sanctions. Chinese parties have been involved in many infrastructure deals that have been unveiled, such as a new bridge across the Yalu River and the development of a North Korean port, Rajin. They have also been involved in many mining projects. Meanwhile, China has overtaken South Korea as the North’s most important trade partner. Bilateral Sino-North Korean trade increased 6.3% year on year in January-March, according to Chinese statistics, although it remained relatively modest at just US$486m in the period. Having thus backed a deepening of economic ties, China’s leaders would find it difficult to undertake a U-turn and support tougher sanctions. On the contrary, there have been rumours that Chinese partners could actually take over South Korean assets seized by the North. This remains unlikely—such a calculated affront to the South would risk destabilising the far more important Sino-South Korean relationship—but it highlights the fact that many in China would like to see more investment in the North, not less.
Perhaps the most worrying aspect of the whole Cheonan incident is the continued lack of clarity over the North’s motives. In some respects, Kim Jong-il’s government had looked to be moving back towards talks with the outside world before the sinking. There had been some signals that it was seeking another inter-Korean summit, and meetings with US and Chinese officials had raised hopes about a return to the table on the nuclear issue after the 2009 test. Any such aspirations have now clearly been abandoned.
Speculation as to the reasons for the attack has focused on the idea that it was part of the North’s ongoing testing of the Northern Limit Line (NLL, the de facto western sea border since the 1953 Armistice). North Korea rejects the NLL, proposing instead an alternative boundary line further to the south—which would have put the Cheonan in Northern waters. The dispute over the waters has erupted into fire-fights three times in the past decade, most recently in November 2009. The Cheonan incident could also have been designed to bolster domestic support, both for the regime as a whole following the recent economic crisis caused by a badly managed currency redenomination, and for Kim Jong-il’s third son and heir apparent, Kim Jong-un.
However, more worrying possibilities also exist. With recent reports also suggesting that the North sent assassins South to kill a senior defector, it is possible that the regime is shifting back towards old habits of state-sponsored terrorism. In the past it has attacked South Korean interests abroad—notably bringing down a Korean Air flight in 1987 killing 115 people—as well as kidnapping Japanese citizens. There is also a small chance that the sinking of the Cheonan was undertaken by individuals or factions in the military without Kim Jong-il’s knowledge, although the Economist Intelligence Unit does not believe the regime is disintegrating to this extent.
Recent events have highlighted once again the instability of the Korean peninsula, and the fragile state of the region’s peace. Although South Korea’s currency and markets have taken a pounding as investors have grown nervous about the prospects for further escalation, the situation has the potential to suck in other players, notably China, the US and Japan. It is still most likely that the situation will stabilise over the next few weeks, with largely symbolic penalties being applied by the US, Japan and South Korea, but more worrying scenarios cannot be ruled out. As ever, the outcome will depend on the unpredictable North Korean dictator and his increasingly irritated Chinese allies.