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Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

It's time to put the Korea reunification trade back on the table, but only after ditching the German blueprint.

With China suspending coal imports from North Korea, Pyongyang may have lost between a third and two-fifths of its export income.

One gauge of whether investors perceive the embargo to be harsh enough to destabilize the despotic Kim Jong Un and trigger political reintegration may be the performance of South Korean mutual funds tailored to do well in such an eventuality.

At first blush, they don't appear to be taking the prospect as seriously as they did in 2014, when there was some enthusiasm for the idea. Tiny to begin with, assets under management have shriveled to a combined $65 million.

For the first time in two years, however, the biggest of the funds -- Shinyoung Marathon Unification Investment Trust --  is no longer lagging behind the Kospi Index. The fund's distance from the benchmark started to narrow in November, when the UN Security Council passed a resolution that put a cap on Pyongyang's coal exports. For the sanction to bite, China had to be on board. Now that it is, the embargo's bound to hurt.

Betting Against a Rogue Regime
After languishing for almost two years, funds that seek to benefit from Korean reunification have caught up with the broader market
Source: Bloomberg

It's hard to say if Beijing, increasingly rattled by North Korea's nuclear brinkmanship, is willing or able to engineer regime change. The People's Republic may only be aiming to recoup the leverage it lost after the daring assassination last week at a Malaysian airport of Macau-based Kim Jong Nam, believed to be Beijing's choice to someday replace his half-brother.

Analysts have long held that a combined Korean economy would gain from an influx of cheap labor. There would no doubt be a huge budgetary cost, which could be paid for by faster growth, especially from infrastructure investment in the resource-rich north. In other words, the model for reintegration would be similar to the unification of East and West Germany.

That cheery forecast ignores two crucial differences, however. First, the gap in East and West German life expectancy was just 1 to 1.5 years at the time of unification; it's almost a decade for the two Koreas. Bridging it will be very expensive, according to the Washington-based Center for Strategic and International Studies.

Unity Hopes Are Down, Not Out
Source: Bloomberg

Second, it is by no means certain that integrating North Korea's estimated 24 million people with South Korea's 51 million will be a peaceful process. Even if it is, female fertility in the north, currently sufficient to keep the population from shrinking, could take a hit because of prolonged economic uncertainty. With South Korea already facing a demographic decline, that could only mean fewer workers to repay the debt needed to reunite the two nations.

It shouldn't be a surprise if unification, whenever it happens, ends up carving out a bigger opportunity for services like healthcare, education, telecom, banking and insurance than it does for electronics and auto exports.

The sight of Samsung Group Vice Chairman Jay Y. Lee in handcuffs should also serve as a reminder. If a unified Korea does manage to cut the chaebol down to size, the economy would automatically start moving away from export-oriented manufacturing.

Could it happen? With Beijing likely playing a key role in reunification and its financing, investors need to ask themselves just how comfortable China would be having a "Germany of Asia" as its next-door neighbor. Domestic consumption and services may be a safer bet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net