With tensions rising between the United States and North Korea, China may play a critical role in defusing any potential conflict.
It may be true that the saga of North Korea’s hereditary communist dictatorship is a tiresome topic, and one could be forgiven for thinking there’s nothing new to see in the rising tension on the Korean peninsula. However, we think there are two developments that should give everyone pause. The first is that North Korea seems to have made some important military advances recently. The second is that President Trump has forced the Chinese to pay more attention to the rising risk of North Korean aggression.
A distant threat no longer
We know North Korea has a handful of nuclear weapons and both short- and medium-range rockets. It has also recently tested a solid-fuel rocket, which gives it new flexibility and speed in deployment. We know very little about North Korea’s ability to miniaturize its nuclear technology. They do not yet have what the U.S. defense establishment views as a critical threat: a miniaturized warhead on a long-range rocket — an ICBM — but the progress they have made has brought this possibility into clearer view. North Korea’s nuclear aspirations are no longer a distant or dismissible threat.
Coincident with this development, it appears that President Trump’s intervention has opened up some new and frightening — but also potentially benign — scenarios. After all, anytime a U.S. president says that there could be a “major, major conflict,” countries and markets will take notice. Of course, what politicians (including Trump) and markets have learned more acutely is that China’s role in the Korean peninsula is critical. China provides the economic oxygen that keeps North Korea running — including oil through its own exports, and dollars through its purchases of North Korean coal. One prominent academic Korea expert describes China as having its hands around the North’s throat.
North Korea as China’s strategic buffer
Geopolitically, China has always viewed North Korea as troublesome but worth it — a valuable strategic buffer. In addition, China fears the consequences of regime collapse because of the threat of a massive refugee flow across the border and because a collapse would likely lead to Korean reunification, which would hand the North’s nuclear arsenal to South Korea. Consequently, we can surmise that China would like to keep North Korea more or less as it was until recently: a barely viable state that is strong enough to irritate and distract the United States, but not a big enough threat to attract too much American attention. Again, President Trump’s intervention appears to be forcing Beijing’s hand.
China provides the economic oxygen that keeps North Korea running — including oil through its own exports, and dollars through its purchases of North Korean coal.
Interestingly, Chinese banks that provide dollar liquidity to North Korea’s government have escaped U.S. sanctions because the United States historically has been reluctant to inject this issue into the bilateral Sino-American relationship. Notably, though, it was U.S. financial sanctions against Iran that brought the Iranians to the negotiating table and produced the nuclear deal with Tehran. We do not doubt that the United States could dramatically increase pressure on the North Korean government, but we think it would probably require placing sanctions on Chinese banks. Beijing is likely contemplating this possibility.
In this face-off, we expect China will ultimately get what it wants. The North Korean elite wants its nuclear weapons, but it also wants to survive, and that survival is in China’s power. For that reason, we believe we will see a benign outcome for the North Korean situation. On the other hand, one reason we find ourselves in our current circumstances is that the Chinese authorities, like everyone else, do not know what to make of President Trump. Is he really considering a preemptive strike against North Korea? If Trump were more predictable, he would have to do more to make his threat credible, but his lack of predictability puts Chinese authorities on their heels. Sometimes, achieving a benign outcome requires some volatility.
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