The Peninsula

The Economics of Why a “Bloody Nose” is at Odds with “Maximum Pressure”

By Kyle Ferrier

News of the White House dropping Victor Cha as a candidate for Ambassador to South Korea triggered a wave of concern over the administration’s seriousness in pursuing a “bloody nose” strike against North Korea. President Trump’s State of the Union address soon after, reaffirming his strategy of “maximum pressure” and insinuating more forceful action against Pyongyang, further added fuel to the fire.

The chorus of voices drawing attention to the dangers of a “bloody nose” strike in response to these developments build on a number of articles since last summer that advise against the premature use of military force in North Korea. Despite this growing opposition, a faction within the Trump administration seems convinced, or at least he has gone great lengths to make it appear so, that a military strike is the best option to prove U.S. resolve in pressuring North Korea. Yet, even in the best-case scenario where Washington conveys its resolve to pursue all options and escalation is contained without unacceptable losses to South Korea, which is highly doubtful, a “bloody nose” attack would still likely undermine “maximum pressure” for economic reasons.

How the administration hopes a “bloody nose” will work has been both well-documented and thoroughly debunked. In short, it would target Kim Jong-un’s nuclear and missile facilities to demonstrate that the Trump administration is both willing and able to destroy Kim’s regime should he attack the United States. Some within the White House, most notably National Security Advisor HR McMaster, support this option on the grounds that it is the only way North Korea can successfully be deterred. Arguments against a “bloody nose” strike center around claims that North Korea can be deterred along the lines of past adversaries and that the strike will not work as planned, achieving little else other than increasing the chances of a military conflict.

While economics is central to other discussions on pressuring North Korea, it has largely taken a back seat in the “bloody nose” discourse. Delving further into the economic implications of a limited military strike pokes more holes in the administration’s argument. Even if the Trump administration were to prove the naysayers wrong and send the right signal to Pyongyang, the same signal in financial markets is likely either to offset any perceived gains in Washington’s credibility to pursue wider military options or decrease Beijing’s willingness to enforce sanctions.

Although it is difficult to predict the severity of a market drop, it inevitably would occur in response to a U.S. military strike. Those arguing for a “bloody nose” seem to at least nominally acknowledge this, but are optimistic markets can be stabilized. However, this overlooks the possible long-term consequences of the initial drop. Trading activity in the past year presents a strong case that investors are now more concerned about the uncertainty generated by Washington’s approach towards Pyongyang than they are about North Korean provocations. A “bloody nose” strike would certainly create tremendous uncertainty, including perceptions of an impending nuclear war, strongly suggesting a major financial market plummet in its wake. Even if markets were to recover, the damage from the initial drop would leave a lasting impact on investors and thus policymakers. It would essentially provide a glimpse into what the cost of a military conflict might be. The deeper the dive and the longer the recovery, the greater the impact it will have on the psyche of investors.

A market dive after a “bloody nose” could completely undermine the administration’s efforts to credibly demonstrate its willingness to use broader military force against North Korea. Since taking office, Trump has repeatedly tied stock market performance to his administration, crediting its successes to his leadership. It may be difficult to definitively state the degree to which the president’s actions are responsible for stock performance under normal circumstances, but financial market activity after a decision as significant as a limited strike against North Korea would clearly be linked to the White House. Considering that domestic economic growth is central to his presidency, market fallout after a “bloody nose” would be a major black mark against Trump. Should the dust settle and markets stabilize as hoped, that black mark will loom over the president and others in the administration as they consider more aggressive military options, which would only have worse financial implications. North Korea may not be a democratic market society, but its leaders are certainly smart enough to understand this. This may even put the U.S. in a worse spot than it started in if the point of a limited attack is to convey all options are on the table. Despite this, Trump could still be vocal in his support for further military action if provoked. Should it be convincing, Beijing could conceivably challenge the trajectory of U.S. policy on the peninsula to prevent conflict.

As its only formal military ally, China has consistently warned that should the United States lead a military attack against North Korea, it would intervene on their behalf. Recent comments also suggest that if North Korea hit first and Washington were to retaliate, Beijing would not pick a side. How much China favors either country at any given time is certainly a topic up for debate, but far less controversial is that Beijing’s core interest in Northeast Asia is political and economic stability. The same signals sent to U.S. markets after a “bloody nose” would hit China, worrying leaders in Beijing. A major military conflict on the peninsula in which China was not directly involved would still hit an increasingly open domestic economy hard, and a conflict in which it was involved would hit much harder. China would thus have an incentive to intervene against the U.S. before things get out of hand. The nature of a “bloody nose” strike may also provide the necessary pretext for Beijing to do so without losing face in the international community.

It may be legal under U.S. law to launch a preventative strike against North Korea, but without the support of the UN Security Council it is illegal in international law. Not least because of China’s place on the Security Council, UN support for such an attack is unlikely for the time being. Rather than intervene militarily as Beijing has said it would if Washington were to seek regime change by force in Pyongyang, Beijing could undermine existing UN sanctions as a middle-of-the-road option in retaliation. While this would also run counter to international law, China has arguably gotten away with lax sanctions enforcement in the recent past. A wrong by the U.S. and China won’t make a right, though it would make it more difficult to convincingly argue against the other’s actions. Thus, even in the best case scenario, it is certainly plausible that a “bloody nose” attack would make the international coordination necessary for “maximum pressure” to succeed all the more difficult and potentially exacerbate tensions between the U.S. and China.

The only way a “bloody nose” could possibly further the administration’s goal of pressuring North Korea would be if it were maintained as a credible threat and never implemented. This plays into the argument that the Trump administration is purposefully not acknowledging the recent success of sanctions to ensure no country takes their foot off the pedal. By disavowing the status quo and threatening to attack, the administration may be hoping to elicit more leverage to squeeze Pyongyang than it otherwise might be able to. The problems with this strategy, however, far outweigh the benefits and have been well articulated: it strains U.S. relations with key allies, it creates an environment rife for miscalculations, and weakens U.S. credibility.

The administration’s proclivity for keeping everyone guessing on its foreign policy choices makes it difficult to say with any certainty whether they view a “bloody nose” strike as an actual policy option or as a threat. What is clear, however, is that either way, a “bloody nose” attack harms U.S. interests and should be abandoned.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from MarineCorps NewYork’s photostream on flickr Creative Commons.