The Pre-Summit State of Play

June 30, 2017 4:15 PM

In the next couple of days, we will absorb the outcome of the Trump-Moon summit. But two important developments deserve discussion, some getting less attention than they should (a North Korean signal) and some being downplayed even though they are quite important (the new US sanctions and wider Trump approach to China). Both have implications for the narrow—and unlikely—path back to negotiations.

First, on the widely-overlooked signal. Despite some trial balloons floated at various track-II meetings, North Korea has been silent on negotiations that would address the country’s nuclear program. “Peace regime first!” has been the non-starter refrain (see my primer at The National Interest here). According to Yonhap, however, the North Korean ambassador to India suggested last week a willingness to consider the Chinese “suspension-for-suspension” proposal. Arguments that we can’t suspend exercises for military reasons are typically made by civilians; the idea that capabilities would be degraded by scaling back or even canceling a cycle of exercises is pretty far-fetched. But whether such a deal makes sense depends on something much more difficult to assess: whether the freeze is a prelude to negotiations where all issues—including denuclearization—are on the table. Nonetheless, it looks like Pyongyang is at least thinking out loud.

Second, sanctions. After the warning shot several weeks ago that included a few Russian firms, Treasury has finally taken the first significant secondary sanction against a Chinese entity, announced by none other than Secretary Mnuchin himself. (I am putting aside here the Hongxiang case, which Beijing closed down on open-source US intelligence and the ZTE case in which an inter-agency team caught the firm red-handed engaged in sanctions evasion).

Several journalists have asked me quite rightly about whether targeting a small bank in Dandong is likely to have material effect. My short answer is “yes.” The important point to note is that the authorities under which the actions were taken varied. Dalian Global Unity Shipping Co., Ltd. was designated for violating the luxury goods ban under UNSCR 1718. Sun Wei and Li Ron Hi were designated for running front companies. But the Bank of Dandong was targeted under the same Patriot Act measures that were used to bring down Banco Delta Asia (if you want to read the gory details, Google “Notice of Proposed Rulemaking Dandong” and download the .pdf). As we know from that case, the effects of these measures are not the direct ones, but the secondary effects on other banking institutions. Chinese institutions are going to be looking hard at any North Korea business they might have, and American banks are going to ask Chinese correspondents to do due diligence and assure they are not handling North Korean accounts.

I have been saying for some time that North Korea is vulnerable to an old-fashioned balance-of-payments cum financial crisis. The proposition has not been tested because of ongoing Chinese support, and perhaps some squirreled-away reserves that we can’t see. But perhaps by chance, China is also showing its pique by suspending some oil shipments (see Foreign Policy coverage here). There are two theories of the case. The first is that Beijing is sending the signal (finally, it should be added), partly as a result of its own loss of patience, perhaps also as a response to Trump’s Delphic tweet of June 20th, reproduced in full below. But the second theory is that this is strictly business: that China National Petroleum Corporation wants to get paid upfront, and the North Koreans are in fact running out of cash.

In any case, these circumstances are consequential for the Trump-Moon summit. If the US is willing to negotiate, as Tillerson keeps saying, and North Korea is facing a new round of sanctions from both the US and China, maybe the signal from the DPRK is more consequential than it looks. Stay tuned.


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