Korea-based Samsung is one of the largest consumer electronics companies in the world. LG, another large Korean electronics firm, is an important manufacturer of appliances and electronics. And the Korean Steel Industry produces more than 4 percent of the world’s steel.
So what would happen if the heated rhetoric gets out of hand on the Korean Peninsula, leading to some form of actual conflict?
Economists think any war in Korea has the potential over the short term to cause a lot of economic turmoil. Automobile companies might have to lay off workers until they could line up alternative suppliers, and large consumer electronics firms such as Apple might be hard-pressed to fill orders.
On a longer term basis, though, it might even diminish world trade as companies reconsider how they do business.
“This would be extremely disruptive,” says Gary Haufbauer, a senior fellow at the Peterson Institute for International Economics in Washington. “Beyond the immediate problem of replacing suppliers, it might cause companies to reconsider using suppliers who are such a long way away.”
“Companies might be willing to pay a little bit more for a secure route instead of the cheapest route,” says Mr. Haufbauer.
Even a relatively minor conflict will cause consternation, he says. “It creates nervousness and anxiety, and this is bad for business.”
There is no doubt that South Korea is a vital part of the world economy, representing about three percent of world trade, according to the Korea International Trade Association. China is Korea’s top customer and Japan is No. 3. The United States is Korea’s second largest trading partner. After the US, Korea’s largest export markets are Hong Kong, Singapore, Vietnam, Taiwan, Indonesia and India.
“So, the fallout in any disruption for the rest of Asia would be quite large,” says Michael Smitka, a professor of economics at Washington and Lee University in Lexington, Va. “This would be a big deal.”
For the US, the impact might not be quite as large. Korea is the seventh largest US trade partner with about $100 billion a year moving between the two countries, about the same as the United Kingdom but half the level of Japan. According to the US Census Bureau, the US exports about $3.5 billion a month to Korea and imports about $5 billion a month.
Instead, some economists say the disruption would be similar to what happened with Japan after the March 2011 earthquake, tsunami, and nuclear power plant shutdown. A lot of auto part suppliers in Japan were shuttered, causing disruptions in the US auto industry.
“It took off a couple of tenths from Gross Domestic Product at most,” recalls Mr. Behravesh.
However, Mr. Smitka worries that it could be worse since he estimates as much as 30 percent of the trade from Korea would be hard to substitute.
For example, some South Korean companies have specialized in such things as fans used in vehicle air conditioning units. "If you are getting a fan for an A/C unit from South Korea, you just can't switch to any old fan blades," says Smitka. "They are all carefully engineered, there could be delays."
He too cites the earthquake, in which a Japanese producer of the pigments used in car paints was destroyed by the tsunami. “They were the sole supplier for all paint companies,” he says. “A lot of this is showing up in Korea, which has done a really good job of moving from the commodity sorts of things now made in China to becoming a strong competitor with Japan and the US for products that require very technological skills.”
He estimates a Korean conflict could shut down the auto industry for a couple of weeks since every company uses products made in Korea as do many electronics firms.
"So high-valued products would be thrown into disarray," he says. "This makes it a much bigger deal than 3/11 [the Japanese earthquake]."
Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Oregon, says the disruption could be especially painful for Apple, which counts on Samsung – also a competitor – to produce key parts for the iPhone such as the “flash memory,” the working memory, and the applications processor. According to an estimate in the Economist magazine, Samsung parts count for about 26 percent of the cost of an iPhone.
“If I were Apple, I would be worried,” says Mr. Dickson.
The airline industry might also become quite concerned. South Korea has been working hard to become an airline hub, says Haufbauer. “All that would stop immediately.”
There could be lots of ripple effects around the globe as well. For example, the price of oil might plummet, since South Korea is a large importer from the Middle East.
“I can’t come up with a scenario that does not take the global energy markets and throw them into a tailspin,” says William Martel, associate professor of international security studies at the Fletcher School at Tufts University in Medford, Mass.
Although the cost of any war in Korea would be expensive, Mr. Martel estimates the US economy is sufficiently strong to afford it. “It won’t break us,” he says. “It will be significant, but it won’t change our way of life. But, in the case of South Korea, I don’t see any way it can escape unscathed.”