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War with North Korea could hike smartphone prices, slow global trade and increase US debt

CNBC logo CNBC 5/18/2017 Nyshka Chandran
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Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not represent the views of MSN or Microsoft.

Pricier consumer electronic products, disrupted global trade and higher U.S. federal debt are among the major consequences from a potential war on the Korean Peninsula, according to a new report from economic research consultancy Capital Economics.

The prospect of American and South Korean armed forces entering full-blown conflict against North Korea is currently a last resort for Washington and Seoul — the principal targets of Pyongyang's nuclear aggression — but many believe the risk of military action has clearly grown.

President Donald Trump has previously stated "a major, major conflict" with North Korea was possible and that all options were on the table.

While diplomatic and economic measures remain the preferred tools of choice in curbing North Korea's nuclear development, policymakers such as Japanese Prime Minister Shinzo Abe have suggested the need for action as the rogue nation continues to fire ballistic missiles that are becoming increasingly technologically advanced.

As the world's ninth largest economy, accounting for around two percent of global gross domestic product, South Korea holds influence on the world, Capital Economics' report explained. And as a long-term ally of the country, the U.S. is likely to be involved in any military action on the Korean Peninsula, increasing the conflict's global knock-on impact.

Smartphone prices will rise

South Korea is the world's fourth-biggest producer of electronics goods on a value-added basis, accounting for just over 6 percent of global production, according to Capital Economics.

"Even a relatively short conflict would deal catastrophic damage to South Korea's economy," the consultancy's report stated, and the manufacturing sector isn't likely to be spared.

If electronics production was badly damaged during a war with North Korea, companies would be left scrambling to find alternative suppliers. But given South Korea's key role as a producer of
intermediates, there won't be enough spare capacity elsewhere in the global economy to compensate for South Korea's lost output, the report explained.

That means several companies outside of South Korea would be forced to halt production, which would translate into a sharp rise of various electronic products globally, Capital Economics said.

But the disruption doesn't stop there. Pricier products could then negatively impact developed economies.

"U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused
prices of these items to double, it would add 1 percentage point to U.S. inflation," the report warned.

As other industrialized nations encounter similar impacts, the real purchasing power of consumers would fall and the lower spending could prompt central banks to respond by hiking interest rates, the report continued.

Global trade will be disrupted

"The biggest impact (of war) on the global economy would likely be felt through the disruption to global trade flows" due to South Korea's deep integrated into regional and global manufacturing supply-chains, Capital Economics stated.

Nine of the world's ten busiest container ports are located in Asia, including the South Korean port city of Busan, so trade even among countries not directly caught up in the conflict could
be disrupted if it became too dangerous for ships to transport goods into and around the region, Capital Economics continued.

If South Korean gross domestic product fell 50 percent as a result of war, that would directly knock one percentage point from global GDP, the consultancy noted.

US debt could increase

"A prolonged war in Korea could significantly push up federal debt in the U.S., which at 75 percent of GDP, is already uncomfortably high," the report stated.

But given Washington's military superiority over Pyongyang, Capital Economics believes that any conflict would be of a relatively short duration, "months rather than years."

Should the U.S. involve itself in South Korea's post-war reconstruction, that would further increase Washington's financial burden.

"If the US were to spend proportionally the same amount on reconstruction in South Korea as it did Iraq and Afghanistan, it would add another 30 percent of GDP to its national debt," the report warned.

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