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Economy

The Trump-Kim Summit: What Next?

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US President Donald Trump and North Korean leader Kim Jong Un met for the first time in Singapore last Tuesday, signing a joint declaration that North Korea will work towards “complete denuclearization of the Korean peninsula”. According to a Bloomberg report, Trump was quoted saying the two sides will hold further meetings as soon as this week.

 

Although the two parties released a joint statement at the end of the summit, the statement lacked any concrete steps or timeline for implementation. Citi analysts believe further negotiations and implementation could be long and fragile, considering the vagueness of the concluding summit statement. North Korea has also historically failed to deliver on promises to freeze its nuclear weapons program – even after agreeing to concrete plans in 1994, 2007 and 2012.

 

Apart from North Korea’s pledge to denuclearize, the statement also includes the US’s promise to provide North Korea with “security guarantees”. However, sanctions on North Korea will remain in effect for now. Economic sanctions on North Korea may have caused its 2017 GDP growth to fall into negative territory, at around -2% or below – which might have driven North Korea to the negotiating table. This negative economic growth could be the lowest since 1997, when North Korea suffered a famine.

 

Roughly 86-87% of North Korea’s exports were shipped to China in 2016-17. However, its annual exports to China contracted 36% in 2017 – mainly due to a sharp decrease in its coal and iron ore exports to China amid the implementation of these sanctions.

 

 

For the short term: Citi analysts continue to expect positive economic impact to be limited as the US may not lift economic sanctions quickly, given North Korea’s previous failures in honoring deals. Also, economic transition in North Korea could require foreign government-backed investments – which would take time to flow in.

 

For the long term: As North Korea trade only accounts for less than 0.1-0.2% of China’s and South Korea’s GDP, any positive spillover from improving economic prospects in North Korea is likely to be inconsequential from a macro standpoint. However, prolonged geopolitical stability should be positive for the region.

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