WASHINGTON, April 10 (UPI) -- The United States' most successful military operation since Normandy, and perhaps least bloody ever, has raised President Bush's stock to new highs. It should send a stark message to dictators around the globe that their days are numbered.
Unfortunately for the administration, and for the owners of equities and debt in South Korea, the leader of North Korea, Kim Jong-Il, doesn't seem to be getting the message. If he is, he has concluded that the main error Saddam Hussein committed was in failing to complete his nuclear weapons program prior to arousing our wrath.
It's an error Kim doesn't mean to repeat as he continues to expand his existing nuclear arsenal, of about three warheads that could kill 5 million-10 million people in Seoul in say 10 minutes, to a force of 10-12 warheads in the coming years.
The question for investors is, what will Bush's surge in moral-political-military authority mean for the particular situation in Korea, where the main stock index has already fallen from 750 when news of North Korea's nuclear stockpile broke out last fall, to below 600 today?
According to officials in the Pentagon and State Department, the United States lacks the military options it had for Baghdad. We can't and won't organize a plausible coalition to invade. And a surgical strike against Kim Jong-Il's weapons, or Kim himself, won't work. Our weapons are plenty accurate to take both out, if we knew where they were. Our intelligence, though, is not that good.
Even in the taking of Iraq, the United States showed the limits of its spymasters and satellites. We struck twice at Saddam and failed at least once. There can be no failure in an effort to take out North Korea's nukes, and really, not even a 15-minute delay in confirming success. Yet there is bound to be one.
Hence, though there will be a great surge in the credibility of Bush and the U.S. military in general, we don't have the particular options we need to have any leverage with Pyongyang.
There is a more fundamental long-term problem, which nearly everyone in Washington is hesitant to come to grips with, but will come out eventually -- meaning there will be a painful, agonizingly gradual coming to grips rather than a swift resolution.
The problem is this: China is not pressuring Kim Jong-il to give up his weapons of mass destruction, and is unlikely to do so. North Korea is, in fact, China's proxy for international arms sales. The Chinese steal technology from us, they use it to expand and improve their own weapons, and then they merchant the results around the world. They may even be a sales rep for Chinese weapons as well.
For example, there was much noise about a few Russian gas masks and low-tech jamming devices going to Iraq, and similar stern warnings directed at Syria and Iran over suspected terrorist traffic. Yet all was quiet when a Chinese silkworm missile floated into a shopping center in Kuwait.
There was a similar noisy silence in Washington yesterday, after the announcement in California that the Federal Bureau of Investigation had rounded up (another) two spies for China.
The Bush administration, like the Clinton administration before it, is philosophically ambivalent about China. Given this, its ruling impulse is commercial. The White House wants U.S. businesses to be able to make deals with the Chinese, and believes that, in the long run, capitalism will democratize them.
This trade-them-to-freedom model has often worked, and when it works, it works. (Note, though, the French and the Germans had similar ideas about Iraq.) For the moment, whether or not it applies in this case, it is clear that most in the Administration will find it painful and difficult, and against their inclinations, to be tough with Beijing.
Hence the only solution is a long, painful reckoning not only with the South Koreans, and Japan, but with Mainland China, the world's last potential alternative superpower.
This will happen, but it will take a long time, and it will be messy.
First, the administration will come to realize that China does not mind at all having Kim operate as a threatening rogue in the region. Kim's activity doesn't hurt Chinese interests, it furthers them. He's selling their weapons around the world. What's more, his bad cop act raises Beijing's importance. The world sees China as the only country able to deal with this "madman." This gives China leverage. It's a formula the Chinese have been using for, oh, two or three millennia.
Then, the United States will try to raise the stakes. But how? Any major action will face not simply French duplicity, but a unified voice from the region -- Japan, China, South Korea, Russia -- speaking out even against troop buildup. There will be no assist from Tony Blair, who has quite a large enough task trying to mend fences over his loyal support for the Bush administration in Iraq. There will be even more frantic pressure from France, Germany and others to restrain the even-greater threat of a U.S. imperium.
This time, we won't have to worry about the U.N. Security Council, but the point is, it's hard to see how we get even a single major friend. There will be small symbolic actions -- carriers sailing by; troop maneuvers -- but nothing of serious consequence.
Kim Jong-Il knows all this, and he knows that time is on his side. Well, at least, time is on his side over a 1-2 year time span. He simply has no reason to do anything but stall, and keep building weapons.
Gradually (over 6-9 months) it will dawn on the administration that this isn't working, and why. With an election coming up, they'll be hesitant to go to the brink, and will feel no need to.
Aggressive journalists and commentators, such as Bill Gertz, Frank Gaffney or Bill Kristol, may start floating stories about the Chinese-Korean entente. The administration may even help them, but it's a dangerous game -- many Friends of Bush made good money in China in the past. (Never mind that it was during a Democratic Administration; the Washington press corps will still write about "the GOP's China connection.")
At best, it's possible to picture a scenario in which the administration capitulates, and signs a multi-billion dollar deal with the North Koreans before the election, just to get it off the plate. North Korea will plan on reneging on the verification, and the administration will plan on calling their bluff -- after November 2004. In this scenario, we would at least have a major "relief rally" in Korea next spring or summer, followed by a crisis in 2005, followed by regime change.
At worst, in terms of short-term confidence in the Korean market, President Bush won't submit to blackmail, and there will be no resolution until 2005. This would probably put him in a better long-term position. He can then put the screws to Kim with a massive mandate. But this will mean prolonged agony for Korean equities.
All of the above leaves out domestic Korean economic policy. That's probably not what's driving the market. To the extent it is, however, it's not very positive.
President Roh Moo-hyun ran as a Clinton-style growth liberal, like Luis Inacio "Lula" da Silva in Brazil, but all his early actions have been along the lines of raising taxes and increasing transfer payments. Those instincts will worsen as the decline in stocks and stagnating uncertainty in the economy, driven by the crisis with Pyongyang, slow growth and cause unemployment to tick up a bit. Hence domestic policy is certainly not a compensating positive, and may be a net minus.
We're still short the Korean market, and increasing the position on any short-term rallies. It is tempting to think that Kim Jong-Il, watching events in Baghdad, will get the message. But dictators usually don't. There's a reason for the phrase, "shoot the messenger."
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)