Reluctant Partners

Feb. 14 issue — The White House emissary was packing heat. As Michael Green, senior director of Asian affairs on the U.S. National Security Council, made the rounds in Tokyo, Beijing and Seoul last week, he confronted his counterparts with the diplomatic equivalent of heavy weaponry—a handwritten note from U.S. President George W. Bush. It was Washington's latest effort to convince governments in the region that North Korea has been peddling nuclear materials to nefarious customers. U.S. officials last week claimed Pyongyang appeared to have supplied uranium hexafluoride to Libya, which gave up its own nuclear-weapons program at the West's urging.

Increasingly, however, the calculations of Pyongyang's neighbors may differ from Washington's. All the heated headlines about North Korean nukes have obscured a more subtle shift in the local dynamic, in particular the country's blossoming economic relationship with China and South Korea. In July 2002 North Korean leader Kim Jong Il signaled the end of decades of Stalinist economics with a package of market-oriented economic reforms—including freeing up some prices and allowing private markets. The measures have had mixed effects, creating skyrocketing inflation along with limited economic opportunity. But they've also interwoven the North's economy more closely with its neighbors to the west and the south. That means both have more leverage, yet less reason to wield it.

Since the 2002 reforms, trade between North Korea and China has skyrocketed. In 2003 trade over the previous year shot up by 39 percent to around $1 billion; official figures for 2004 are still out, but growth estimates range from 25 to 40 percent. Before 2002 most of what crossed the border were raw materials, such as fishery, clothing, steel and coal exchanged as barter for Chinese fuel and basic machinery. These days, by contrast, more than 80 percent of the consumer goods in North Korea's markets come from China, says Lee Young Hoon, a Bank of Korea analyst.

Compare that with Japan, whose trade with the North recently fell to a 28-year low of $260 million. The Japanese government has been cracking down on North Korean traders by enforcing regulations and tightening monitoring. Japan-based executives have figured out that it's hard to turn a profit dealing with such unreliable business partners. Hundreds of Chinese joint-venture companies, on the other hand, now employ tens of thousands of Northern workers in garment factories and other labor-intensive businesses on the North Korean side of the border.

The Chinese border town of Dandong, which endures traffic jams daily at the narrow crossing into North Korea, is thriving. On the North Korean side of the border, Chinese cell phones are ubiquitous, though their use is technically restricted. Indeed, everything from Chinese beer and refrigerators to VCRs and DVD players are, by some accounts, becoming increasingly common among North Koreans who have the money to pay.

To the south, Seoul's Sunshine Policy has fueled increasing economic integration. The North is less dependent on the South in terms of overall trade (from 1990 to 2003, in fact, North Korea had a total trade surplus of $1.6 billion with South Korea, driven mostly by Northern exports to the South of fish, farm products and steel.) But Seoul's role is crucial when it comes to food. In the mid-1990s, thanks to its chronic inability to feed its own people, the North endured famine that may have led to the death of as many as 2 million people. Since the late 1990s the South has delivered enough rice every year to make up much of the shortfall and to prevent widespread starvation. The Bank of Korea's Lee notes that Pyongyang these days includes nearly half a million tons of rice aid from the South in its annual budget plan set early in the year because it is taken for granted.

Both China and South Korea know their economic ties provide a degree of leverage over the North. When Beijing recently clamped down on Chinese gamblers crossing the border, some North Korean casinos virtually shut down. China could potentially cut off fuel supplies, resulting in the shutdown of much of North Korea's industry. A suspension of South Korean food aid could contribute to another famine. Pyongyang suspended inter-Korean talks last September after a large group of North Korean citizens defected to the South. But many in Seoul expect the North to change its tune soon because of its need to counter the food shortages that usually begin in the spring, when the previous year's harvest runs out. It's no coincidence that the South usually waits until March to offer the new round of aid—or that next month is also when many observers expect North Korea to announce its willingness to resume talks with the United States, China, Japan, South Korea and Russia.

Still, Pyongyang's neighbors are loath to use their growing leverage. Seoul is openly playing for time, fearing the immense burdens that German-style unification would impose on the South's economy (which is far weaker, comparatively, than West Germany's was back in 1989). And the last thing the Chinese want is to squeeze Pyongyang so hard that the regime collapses, launching a flood of refugees and geopolitical uncertainties that could damage its own economic progress. Even worse, in China's view, would be Korean unification under the aegis of Seoul, possibly ushering in a strengthened U.S. presence on the peninsula at a time when Beijing already feels encircled by U.S. forces in the Pacific, Central Asia and Southeast Asia.

That may help explain the relatively mild tone Washington is taking toward Pyongyang, even after the Libya revelations. In his State of the Union address, Bush assured his listeners that "we are working closely with governments in Asia to convince North Korea to abandon its nuclear ambitions." A State Department official told NEWSWEEK that "there has been an effort underway for some time to lower the rhetoric." Yet just a few days earlier another member of the stalled six-party talks took a hands-on approach that seemed to borrow from South Korea and China: Russia sent a high-level delegation to Pyongyang centered around Alexei Miller, the head of Russian energy giant Gazprom. Miller, in North Korea for the first time, was trying to persuade his hosts to buy Siberian natural gas to power their economy. Sounds like yet another competing bid in the struggle for pull over the Hermit Kingdom.

With B. J. Lee in Seoul, Sarah Schafer in Beijing, Eve Conant in Washington and Hideko Takayama in Tokyo