Events to Watch: Escalating conflict with North Korea would disrupt 2018 plans for MNCs

In our recently released report FSG’s Events to Watch for 2018 we profiled the downside and upside scenarios that may imperil the strategic initiatives and revenue targets of multinationals. Over the next few weeks, we will be sharing a series of blog posts that highlight some of the major global events, and the potential impact on MNCs.

Part 1 – Prepare for Trump-driven trade conflict in 2018

Part 2 – Geopolitical risks to the oil supply picture in 2018

North Korea’s November 28 missile launch and claim of now being able to target nuclear weapons anywhere in the mainland US is appropriately bringing the issue back to the top of corporate risk analysis for 2018.

Probably the most perilous disruptive event that multinational corporate executives are concerned about is an escalating conflict between the United States and North Korea. The following scenario is sufficiently plausible to bring pause to any executive expecting stability in East Asia in 2018.

Korean Conflict: North Korea tries to drive a wedge between the US and South Korea. After developing a reliable intercontinental ballistic missile (ICBM), North Korea tries to push the American military out of South Korea by threatening to detonate a nuclear weapon on or over a US city. Trump threatens sanctions to pressure Xi Jinping into curbing Kim Jong Un, but China refuses to intervene and retaliates by restricting trade and financial flows with the US. When it becomes clear that the US cannot count on China to curb Kim Jong Un’s provocations against the US and pressure on the South Koreans, the Trump administration decides to act alone. Diplomatic efforts cannot overcome the inability of either side to trust the other. Rhetorical missteps and military activity escalate into devastating attacks on Seoul and possibly urban centers or military facilities in the United States and Japan.

The short-term impact for multinationals would be the following:

  • Production and people threatened – Facilities—particularly in Seoul—may come under attack or be destroyed entirely during an armed conflict, destroying assets and endangering staff
  • Supply chain disruptions – Shipments running through northeast Asia would face significant delays because of operational issues and the commandeering of some transportation infrastructure for military and reconstruction purposes
  • Severe global financial volatility– The potential for military escalation and trade reduction would lead to severe economic uncertainty and a reduction in global business sentiment

Likelihood: 25%. The most likely scenario remains that military tensions on the Korean peninsula remain largely a distraction, rather than a threat. North Korea develops a reliable ICBM and threatens the US with a nuclear attack if it doesn’t leave South Korea. Trump tries ramping up pressure on China with targeted measures and threats to station tactical nukes in S. Korea to curb Kim Jong Un. China responds to US economic measures in kind but also puts enough pressure on N. Korea to stop it from saber rattling. Destructive military confrontation is deterred and deferred.

How to prepare: Consider how you might minimize the impact to your South Korea operations if the country calls up its military reserve forces. Evaluate your global business’s vulnerability to conflict on the Korean Peninsula by considering what would happen if conflict disrupted goods flows through South Korea and destroyed production facilities there.

For more information

In our Events to Watch for 2018 report we provide in-depth scenarios, expected impact on business performance and operations, as well as recommended frameworks for contingency planning and effective market monitoring. Not a current client? You can purchase a copy on FSG’s online store here.

We also invite you to register and join our Events to Watch for 2018 webinar, presented by FSG’s Director for Global Economics, Antonio Martinez, and Global Head of Research, Joel Whitaker. Please register for the viewing time of your choice:

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