Should investors worry about Syria and North Korea?

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The aircraft carrier USS Vinson is being sent close to North Korea with a ballistic missile cruiser and two ballistic missile destroyers in attendance. The Korean peninsula sits uneasily between China and Japan, adjacent to Beijing and Tokyo.  

As President Xi of China and President Trump sat down to dinner last week, two different US missile destroyers were commanded to unleash 59 Tomahawk missiles against the Syrian airforce base that had undertaken the chemical weapon attack. Whilst we are told that the US President warned his guest of what was to come, and whilst the briefing says there is no intended read across from Syria to North Korea, the importance of the event will not have been lost on President Xi. Mr Trump has already said he will act alone in North Korea if China does not put enough pressure on its neighbour and ally.  Here was a reminder of the considerable mobile firepower of US forces, and an assertion that Mr Trump is prepared to be decisive in their use.

The public purpose of the limited Syrian strike was to show Assad he cannot expect to get away with any atrocity he chooses as he seeks with Russian help to reconquer his country. It was the least President Trump could do to show he is different from Mr Obama, who threatened Assad over chemical weapons but did not carry out the threat when challenged. The US tried hard to separate Russia from Assad, and told Russia in advance so they need not lose any personnel or hardware in the attack. Telling Russia also meant Assad would know and could move all his people out as well. It is doubtful that the Syrian attack marks some new plan for Syria, or is intended to escalate US involvement in the Syrian civil war from here. This week sees the US turn to diplomacy, with the US Secretary of State seeking diplomatic support from allies at the G7 before flying to Moscow to try to restart talks on Syria. He is likely to accord Russia a major role in the future of that war torn country reflecting the reality on the ground.

Investors should worry about the humanitarian disaster that is Syria, but need not worry about a war between the major powers breaking out on the back of it. The West has been hampered by its own divided responses and lack of clarity in objectives over Syria. The West agrees with Russia and Assad that ISIL is a barbaric force that needs to be defeated in Syria as elsewhere. The West also thinks much of the time that Assad’s government uses unacceptable cruelty towards its own citizens, though it remains the official government of the country and the most likely force to defeat ISIL on the ground. The most likely outcome from here is that the misery will continue for Syria, as Assad, helped by Russia, continues the slow and violent re conquest of the country. At best there would be some diplomatic breakthrough, allowing the interested parties to seek a peace through talks allied to some kinds of local or limited ceasefires on the ground.

Financially the US-China relationship matters more to markets. The Trump-Xi summit went as well as could be expected, given the elaborate anti-Chinese rhetoric used by President Trump as a candidate and as President elect, and given Mr Xi wish to show he is strong and will defend China’s legitimate interests. Mr Xi came into the talks with a prior win. He had successfully insisted on the US resuming its acceptance of the One China policy concerning Taiwan which Mr Trump had threatened to overturn. China wisely decided to give the US some ground on the issue of trade. China says it wants to have a more balanced trade. There is talk of China buying more Boeing aircraft, investing more in the US to create jobs there, and offering better access to some sectors of the Chinese market for US exporters. There will follow 100 days of trade talks to try to firm these suggestions into actions.

The two leaders did say after the talks that they also shared a common interest in a non-nuclear Korean peninsula. Whilst North Korea is an important buffer state for China, and a sort of ally and client state, China cannot be happy with some of the words and deeds of its young leader who is pressing to complete development of long range missiles capable of delivering serious bombs. The US wants China to exercise influence to prevent the completion of intercontinental missiles by North Korea, and is threatening unilateral military intervention if nothing happens to arrest North Korea’s weapon progress.

China wants to avoid a united Korea, and is not happy with a heavily armed South Korea strongly supported by the US military relatively close to China itself. All the time North Korea is a threat to the south, US involvement is strong. Both sides do indeed have a common interest in taming North Korea. There remains the danger that China lacks enough influence to do what the USA wants.

Markets have stayed fairly sanguine about these conflicts. We will keep an eye on developments in Korea. In the meantime markets are more likely to be driven by the economics than by the geo politics.


The above article by John Redwood, Charles Stanley’s global chief economist, was first published by Charles Stanley on 10th April 2017.