Transcript of Executive Policy Breakfast
North Korea's Leadership Transition: The China Connection

STEPHEN NOERPER:
Good morning and welcome to The Korea Society. I'm Stephen Noerper, senior vice president. We're delighted to have you here for the second of our policy events of this spring program season. We encourage you to pick up a program booklet or see us at www.koreasociety.org, where you will also find online resources and educational resources from our Korean Studies Department.

I'd like to offer a special welcome this morning to the members of the Asia Society visiting with us. The Asia Society kindly agreed to co-sponsor this event, and we're delighted to have some of their leaders and members here this morning. We hope to see you back on February 10 to welcome Charles Armstrong that evening. He will be talking about North-South relations, and on February 16 we have a wonderful luncheon session on the Korea-U.S. Free Trade Agreement and benefits, in particular, for the financial sector.

This morning we're delighted to have an important voice from Washington, a rising star in the Korean studies community, Dr. John Park of the U.S. Institute of Peace. John worked here in New York with Goldman Sachs, and he is a significant contributor on many fronts, spoken as well as written, and is a great intellectual force, as you'll hear this morning.

He has agreed to tackle for us the very critical issue of North Korea's ongoing leadership transition and the nature of the China connection, especially the relationship between the Chinese Communist Party and the Worker's Party of Korea (DPRK). We're very interested to hear his observations, and John, welcome to The Korea Society. Thanks for braving the cold, and we look forward to hearing what you have to say.  [Applause]


JOHN PARK:
Well, good morning. Thank you all for coming out this morning. It is a pleasure to be here in New York. As I was talking to Ambassador Minton earlier, Washington is a bit of a bubble, so it's really nice and refreshing and I think, very healthy, to get out from time to time.

What I wanted to do today is present some key findings from the research that we've been doing at the Institute and in Asia with colleagues out in the region, but also when Asian delegations come through Washington. What you'll see here are really snapshots of various pieces, and hopefully it will make sense having drawn these together.

The first caveat that I'd like to mention is that these are my personal views and they aren't reflective of the Institute. This gives me a lot of latitude to have a frank discussion and try to save enough time for Q&A.

The first thing I want to do is start from a macro and go to the micro part of looking at what's happening in the North Korea-China relationship, but before doing that, I think it's important to set a foundation. And when you look at what's happening in Northeast Asia, it's really the role of China. With respect to the Chinese approach to dealing with North Korea, there's a strong foundational piece related to their foreign policy.

It is no surprise to us here, but there are two major principles of Chinese foreign policy. The first is nonintervention in the internal affairs of other countries, and the second is cooperation and their effort to participate in multilateral organizations.

When it comes to North Korea and China's North Korea policy, it's an effort to tailor them to the North Korean situation. And these are basically points from research that we conducted almost ten years ago, but these will resonate even today.

What Chinese government think tank analysts back then painted as a picture is what they call the "four sentences." The first is nonproliferation in East Asia, and that was really a message towards North Korea. The second is peaceful settlement through dialogue, a message to the United States and other countries that in resolving the North Korean nuclear issue, peaceful dialogue would be the way.

The third is that the priority would be peace and stability on the Peninsula, and we've also heard, after the recent North Korean provocations, the priority on maintaining peace and stability in the region.

The fourth is giving due consideration to the security concerns of North Korea. If you recall from the period almost a decade ago, the North Koreans were very focused on having a security guarantee, and that was seen, at that particular point in time, as some sort of bargaining chip; a ploy. The Chinese took that very seriously, and they were very sympathetic to the North Koreans’ talk about their insecurity in their current standing.

Now, if we package this together and try to think conceptually, I think what comes to mind is the Chinese policy of xiaokang. This is a policy of trying to move the majority of their population into the middle class. And here, we see a combination of the "two principles" and the "four sentences" and two essential factors. One is a stable, external environment that is required for the sustainable, smooth, economic development; and the second which is extensive and deep relations with the United States, something that is seen, again, as a very important foundational piece.

The "four sentences" have now, over time, come to really solidify the Chinese long-term approach to dealing with the Korean Peninsula, and I'll go into a little more detail about what that specifically means. But while those goals have been there for a while, the means through which China has been trying to achieve those goals have changed dramatically.

If you recall from August of 2003, when China launched and shared the first round of the Six Party Talks, that was really a monumental change in Chinese diplomatic behavior. Before, China preferred to deal with a lot of these issues behind the scene and discreetly bring the parties together, encouraging dialogue. But here China was front and center; took on a lot of political risk and commenced with, really, an uncertain process. They knew that it would be difficult, that there would be stops along the way, but they still are continuing with their effort, even though it is stalled at this particular point in time.

Now as a snapshot, if we again go back to the mid-2000s, go back in time a bit, if we were to take a snapshot of that period and list the core issues and the countries involved, what we get (and the purpose of this type of presentation) is to show how number one, the priorities are scattered. Here, if you look at the issues and the countries, the darker the circle, the higher the priority for that particular country. And this is a relative diagram in the sense that for a particular issue, the circles are relative among the countries, and then for a country these issues are relative among the other issues.

So if you zero in on any particular combination, it's supposed to be an aggregate. I mean, if you go into the weeds and get into the detail, there are a lot of nuances; but as a snapshot, there is very little pattern to this, and over time, this is a moving target as well because the circles shift.
If we were to do an update, some of these circles would be darker and others would be lighter, but you can imagine how difficult it is to coordinate and move all of the countries in the same direction.

So signing an agreement is one thing, but implementing and moving countries forward and accommodating and dealing with countries' priorities is something of an organizational, Herculean task; and I think we have to factor in capabilities assessment, looking at what the Six Party Talks will look like going forward if they are to resume. Right now there is a tremendous amount of diplomatic activity to get those talks under way.

With this type of diagram, I think we can move to a second one, and that's to look at what's been happening on the surface, but importantly under the surface of the Six Party Talks. If we look at it from the perspective of a shock and a time scale, small-scale to large-scale and something that would happen in the short term and the longer term period, the probability of conflict, now, has significantly been reduced. I would say a lot of focus has been placed on crisis management and the efforts of the countries involved, along with the reduction of the possibility of conflict.

Certainly, we've gone through a very dicey period in 2010, but there's a recognition, now, that there's certain capabilities in place that really weren't there before. And so, countries like China are trying to build on that, but there is, again, the differing perspectives.

When China called for an emergency session of the special envoys of the Six Party Talks, but made very clear that this wasn't a resumption of the Six Party Talks, we saw their crisis management as very nascent. Some would say that they were haphazard and not really well thought out, but there were these efforts, and I think they're a carry-over from the Six Party Talks type of interaction.

With the possibility of collapse being reduced over time (and again, the caveat is that 2010 was a very important year to factor in) the possibility of regime collapse, refugee crisis; these things have been mitigated over this past ten-year time horizon.

But things like nuclear proliferation are expected now to continue. It's now seen as an embedded part of a Northeast Asian security landscape. And with North Korean nuclear proliferation, both horizontal and proliferation concerns, the Chinese and other countries are very clear that they're going to continue with multilateral talks.

During some of the darkest days of the Six Party Talks, when we talked with the Chinese officials who were dealing with the Six Party Talks, they mentioned that even if the Six Party Talks were to go through a very difficult period and even collapse, the Chinese would try to pursue another type of multilateral venue.

So this focus on negotiations and negotiations done through multilateral means is something of a bedrock foundation in the region. This leads to a conclusion that there's probably a greater focus on managing the issues, and a realization that resolving the issues will be quite difficult.

What I wanted to do today was really highlight two parts: one is the uncertain leadership transition happening in Pyongyang and laying this macro type of foundation and leading up to some comments related to the leadership transition. And the second part is to look at economic engagement that's going on, specifically between China and North Korea, because this is a very important subtext that is now becoming a headline, and this isn't coming out of nowhere. I think if we look at it very carefully from this bilateral North Korean-Chinese interaction, it paints a very interesting picture.

When we look specifically at China's approach to dealing with North Korea and its parallel track in the bilateral sense, as China has moved forward in the Six Party Talks venue, the focus has been trying to, again, develop this sustainable stability to parrot with sustainable economic development.

The foundational piece is trying to get that external environment under control, and that is a Chinese priority in anything that they do related to their economic development activities. They go hand-in-hand. Now, if we zero in on the means, the first means that China has been pursuing is a tremendous amount of political capital investment into the Communist Party equivalent in North Korea, the Worker's Party of Korea.

And the second means is very physical: actual investment in North Korean infrastructure and helping out with the development of the natural resources industry in North Korea. This is, again, all designed to lead to this situation conducive to sustainable Chinese economic development.

Here the distinction is that a lot of this development is happening in the border region in the three Chinese provinces; so this dynamic of North Korean provinces interacting with Chinese provinces to do subregional economic development, that is really where a lot of the action is at, and a lot of implications are drawn from that area.

But in all of this, if you were to paint this picture, I'm very cognizant it might sound like a conspiracy theory, or some kind of theory out there that is designed to show subversive Chinese intent on North Korea; but I think if we look at it, it's like any other country seeking to maximize their national interest. And when it comes to national interest, the economic development component for the Chinese is paramount. This is playing out, again, in this border region where the changes are very rapid.

To give a little bit more background, the chronology, I think, is also very important. I'll very quickly go through this part. If you look at the origins of the diplomatic relations, really between the two parties starting in October of 1949, this lays down a channel of interaction. It's a channel that gets hot and cold over the years, but this is the foundational piece, and we'll see many of the big events happening in intercountry relations, but interparty relations between China and North Korea happening around October. And this is really the origins of that particular date.

If we fast forward to August of 1992, and I know this is a quick history lesson—what happened to the Cold War? It reminds me of college survey courses where if you fall asleep, you wake up and whole wars and whole eras are over—but in this instance what I wanted to focus on is really a pivotal period, and that's the Northern Policy that South Korea launched in the late 1980s going into the early 1990s.

If you look at legacy issues, and a big part of our research focuses on legacies and unintended consequences of various countries' actions, the Northern Policy is truly remarkable. If you think back to a time where South Korea was developing; was lauded as an Asian Tiger, South Korea read the international situation very well, saw a China that was coming out of Tiananmen, a player on the international stage, and the Soviet Union really desperate for loans to kick start their economic reform situation. South Korea, using commercial diplomacy, extending trade credits and so forth, was able to establish diplomatic relations with Moscow and Beijing, in full coordination with Washington, and in a way reset the whole dynamic on the Korean Peninsula.

Now for North Korea, this was a very unfortunate time, because the 1980s, already, was a period where they were shifting to hard currency interactions with their Soviet patron, and the overall preferential trading arrangements that they enjoyed with the Soviet bloc countries had more or less disappeared. And so leading into the early 1990s, we had the end of the Cold War. In the case of North Korea, there were very severe economic contractions leading into natural disasters and whatnot.

So the legacy, I think, in one respect of the Northern Policy is that an enormous diplomatic success for South Korea also created a situation where all these factors combined and aligned for North Korea, where it was truly the very threat of existence being on the line for North Korea. This was a very existential time for North Korea.

And in this bilateral relationship, it's very important to look at it from the lens of China's action, because China consciously made the effort to establish diplomatic relations with South Korea in 1992, knowing that it would damage its relationship with North Korea. North Korea's reaction was to call this the "great betrayal" and we basically have the severing of North Korean-Chinese ties from the early 1990s and almost leading into a lost decade in the bilateral relationship between China and North Korea.

I think a key lesson for China in this period is that there were very specific calculations to normalizing relations with South Korea. South Korea helped, in addition to the economic trade credits and whatnot to bring China back in the international stage. South Korea was very helpful in getting the Asian games for China, and this legitimization and reintroduction to the international system was an important part of this bilateral process between South Korea and China.

But in the case of North Korea and China, this is still a lingering part of the memory. So on the surface, while we hear all these headlines about the alliance between North Korea and China being vibrant, and all these pictures of the senior leaders meeting with each other, the level of mistrust, animosity, and suspicion is a very deep well; with more recent scars from this Northern Policy period.

Now again, if we look at the October datelines, October of 2005 is really the first significant date where China and North Korea draw closer together after repeated Chinese attempts to do that. And at this particular point in time, if you look at the level of senior Chinese officials going to Pyongyang, it is no surprise to see Chinese party functionaries going to Pyongyang to celebrate the anniversary of the founding of bilateral relations.

But it's not so much the presence of Vice Premier Hui, who led that high-level Chinese delegation. It's the fact that in her delegation was the then Commerce Minister Bo Xilai. And this is where we hear about the early leases and deals between China and North Korea for the development of North Korean natural resources.

There was a lot of fanfare. A lot of reports that the North Korean natural resources sector would be developed and would thrive and so forth; but with a lot of deals in the economic front with North Korea, very few of them materialized.

They go through very traumatic ups and downs and with the Uson iron ore deal, it was a similar type of situation, where things started off in a very positive manner. The partners were lined up on the North Korean and Chinese side; but from recent reports looking back at that period of that specific deal, there were periods where the Chinese partner withdrew; another Chinese partner came in, and you'll see this theme play out. So again, I don't want to paint this picture that the Chinese go in, everything works out well for them, they're able to monetize their investments, and they pull out. It's a protracted, long-term play that they're focusing on.

The next event is October of 2009, and this is a more recent one, but the significant aspect of this trip again is not the fact that the Premier Wen Jiabao goes over, but who's in his delegation: the Commerce Minister and the Chief of the National Development and Reform Commission. From a Chinese perspective, these are the very architects and implementers of sustainable Chinese economic development meeting with their North Korean counterparts, and mapping out this joint economic development type of strategy, and a lot of it is situated and straddling the border between China and North Korea.

Now the significance of this is that the Chinese are essentially offering the North Koreans a comprehensive relationship. And a comprehensive relationship is something North Korea has not enjoyed basically since the end of their relationship with the Soviet Union. With the Soviet Union ending and turning into Russia, you see this transformation of their mutual defense treaty continuing as a trade and friendship component, but the security assurance part dissolving, and the Russians notifying their North Korean counterparts that they basically are going to let that part of the agreement lapse.

And so what the Chinese are doing in this comprehensive relationship are offering party, diplomatic, military, economic, commercial; the whole shebang. And within this we see, at least from a Chinese perspective (and there will be other high points) but until that particular point in time, October of 2009 is a very important high water mark.

Now if we shift to 2010 in May when Kim Jong-il and Jang Sung-taek and a very senior cadre of Worker's Party of Korea members go to China and meet with their counterparts, this is the implementation aspect, and further deal making. We're now in the implementation phase. The deals that Wen Jiabao signed are there under the very innocuous sounding headings of economic development, tourism and education, but certainly the deals that are being implemented are quite expansive and very significant.

But with this type of visit with the high level North Korean delegation, I think what we're seeing or what we saw then was an acceleration of the leadership succession process, because one thing that is coming out is that the leadership succession process in North Korea goes hand-in-hand with coordination with the Communist Party of China. There is a very important relationship between the two. So on a standalone basis, the plans for leadership succession in North Korea really can't go on, on a standalone basis, and I'll explain in more detail why that's the case.

In August of 2010, in many respects we see the finishing of unfinished business, because the May visit ends abruptly, and there are differing accounts of why it ends abruptly, but Kim Jong-il returns to North Korea without viewing this very elaborate opera that the North Koreans had prepared for the Chinese. And with this meeting in Changchun in Jilin province, right across the border from North Korea, we see what looks like the final pieces put in place for the September party conference that the North Korean's convene in Pyongyang.

And in the party conference we see a lot of terminology related to the rising generation of the Worker's Party of Korea, and really that's a reference to Kim Jong-un. The Chinese are very adverse to recognizing a third member of the Kim Dynasty, and so I think this labeling of Kim Jong-un as a part of this rising generation is some aspect of a political compromise to allow Chinese support, but not of the individual but rather this rising generation. We're also seeing similar terminology refer to the rising generation in the Communist Party of China.

If we zero in and now move into some of the micro, China, Inc. has been doing a lot of activities with North Korea, Inc., and what I mean by that is that the constellation of state owned enterprises and government linked but officially private companies are interacting a lot with North Korean state trading companies.

If we look at it from the perspective of commercial ties inactive to active, and linkage to denuclearization high and low, Chinese commercial activities with North Korea have no direct (in a bilateral sense) linkage to North Korean denuclearization activities, and that's a very important distinction.

As for other countries like Russia, the North Koreans aren't moving forward on some of the deals that they have signed with the Russians, but not necessarily for political reasons. The Russians are somewhat in limbo, and it will be interesting to monitor those Russian deals because as the Chinese open up on these bulkheads on the port facility infrastructure development in the border region, it may create new opportunities for these Russian deals. So it will be very interesting to see how that lines up.

But as for other countries such as South Korea, Japan and the United States; I really draw your attention to the distance between China and the United States. This is very objective. This isn't a politicized diagram, and the idea is to depict the policy differences, and these are embedded because of political considerations from the respective countries.

But if you run out how these policies have been played out, you see that basically for the United States, everything is linked to denuclearization, and because of this, any of the economic concessions that have been signed in the Six Party Talks in the September of 2005 agreement will not move forward unless there is progress in the denuclearization activity category.

I would say right now, if we were to update this diagram in light of the recent developments, South Korea would probably replace the United States in terms of the diagram, because of the position of the South Korean government. Clearly, there are South Korean efforts to get dialogue going again in the inter-Korean dynamic on South Korea's terms, and that is something that has an important legacy and also an important set of consequences going forward, as well.

Another way to represent the dynamics here is to look at it through the lens of financial sanctions. What the United States and the international community know of North Korean state trading companies is that the focus is to develop, refine and implement further financial sanctions.

What Chinese entities know about North Korean state trading companies and the very powerful elites that they're connected to is the Chinese are developing joint ventures and commercial arrangements, and they're doing it under the heading of economic development because in the unique language of the U.N., member states are not prohibited from carrying out economic development and humanitarian activities, and it's under that heading that the Chinese really justify a lot of these commercial activities.

Now, the border region is a whole tale to tell in a different way, but here the quick message is that a lot of the major focus going forward is really on the northeastern side and the Hamgyongbukto, the north Hamgyong province area, and Jilin province on the northern side and the sliver of Russia to the right of it.

There's a lot of activity on the Tongyang side on the west, but frankly, the reason why North Hamgyong is such an important part is that's where the iron ore and coal is. And if you look at it from the perspective of Chinese energy security, even though the coal in this region is among the poorest quality; high sulfur, very dirty coal, very difficult to process and whatnot, for the energy security needs of China, even this type of coal is very important. Also the iron ore coming from the Musan Mine is a very important ingredient for steel and important for economic development.

So you can see how this plays a very important relationship to the subregional economic development plans on the Chinese side, and this is something for which the Chinese are not looking at all of North Korea. It's very strategic, and it's focused on these areas that are rich in natural resources, but unfortunately underdeveloped. Because of the tremendous cost in equipment required to develop these areas, no private sector company or even countries have the ability to invest the time and the resources as China can.

Now if we go and examine in more detail the Wen Jiabao delegation from October of 2009; this is a photo from that visit. This is the Chinese delegation with Kim Jong-il squarely in the middle. In the Western media, only the three gentlemen seated were pictured, and it's not a function of Western media trying to skew the picture. It many cases, the Western media didn't know who the other individuals were.

If you look at these individuals, they represent the comprehensive relationship. It's not just in words. These individuals met with their North Korean counterparts in Pyongyang, as well, and the deals that they signed and the implementation that's going on at the provincial and municipal level is a function, really, of the tremendous momentum that was created from this particular visit. The two individuals that are most significant, I think, is the fact that the Commerce Minister and the National Development and Reform Commission chief were part of it, as well as their respective delegations.

To reemphasize, this is a party-to-party relationship, but it's something that on the North Korean side is a recent development. If you look at the way that defectors are depicting how Kim Jong-il consolidated his power, it was done primarily through the military and the National Defense Commission, the NDC. The party atrophied, over time, and it went to the extent that when the Party Conference convened in September of last year, there were many unfilled seats; so delegates died and they weren't filled.

It's really a recent part of the North Korean calculus to revitalize the Worker's Party of Korea and use that as an engagement mechanism with the Chinese. It is unclear exactly why. You can try to connect the dots, but I think the coincidence-causation debate is still going on. Certainly it does make it more convenient for the North Koreans to carry out these economic development activities, and also receive the political and material assistance from China in order to have this stable succession process environment.

Again, moving from this macro to micro, and getting further into the details here, if we zero in specifically on China's economic engagement of North Korea, viewed from the lens of China, the internal economic development priorities really focus on one particular statistic, and that is reaching a GDP per capita level of $3,000 per person by 2020. The amazing thing is the Chinese have already surpassed that. The Chinese are beating a lot of their own internally set targets. They are now the second largest world economy, and it's all of these factors combined, that, I think, are leading to internal debates within China how they're going to proceed.

So, a lot of the things that we've been experiencing on the security/economic front in the U.S.-China relationship, the U.S.-South Korea impact on the China relationship, there are many dynamics and many interactions; but in some instances, what we're seeing are the symptoms and the aftereffects of these internal debates; and these debates and these tensions inside of China are continuing.

But as it relates to North Korea, as we've heard of some of the vibrant policy debates on how China will deal with North Korea, one thing is a fundamental point that they return to; and that is that they need stability in North Korea. And we've heard that over and over again; stability in North Korea is the number one priority for China.

I would present this picture, though, that this stability goes hand-in-hand with the ability to do economic development. To make it more tangible, if you think of efforts to revitalize inner city areas that have been the focus of marginalized prosperity, there is a first focus on trying to get rid of the crime. Without that aspect of it and that type of stability, it will be very unlikely to get investors and unlikely to get the sustainable economic activity going.

Now if you were to expand that, I think that's a big part of the Chinese thinking, as it relates not only to North Korea, but other areas where the Chinese are focused on doing more of their economic development activities.

But there also, as I pointed out with these natural resources, is a synergy. This isn't a political synergy but actual inputs that factor into subregional economic development. And the important part of the three Chinese provinces is that they're among the poorest in China. If you were to look at the lens of the Chinese leadership and ask a simple question of what keeps Premier Wen Jiabao and President Hu Jintao up late at night, it's the growing gap between rich and poor in China, and the very strong concern about the potential damage that it would do to social stability.

Now as I mentioned before, a lot of these activities as they translate into Chinese interactions with North Korea have no direct linkage to denuclearization. This isn't to say that the Chinese aren't focused on denuclearization. It's more that their priority is on stability, laying the foundation for what will hopefully, in their mind's eye be a situation conducive to denuclearization. But the Chinese are cognizant that a lot of preparatory work will have to go into realizing denuclearization.

The amazing thing is if you were to do a straw poll among all the members of the Six Party Talks, especially North Korea, no one will come out and say that they believe North Korea will give up their nuclear weapons in the short term, and I think that's another important shift in terms of how the Six Party Talks are evolving, yet it's seen as a very important coordination mechanism at this particular point in time.

Getting into the narrower part, specifically, of Chinese commercial diplomacy, if we look at it from the lens of what is the impact on Washington and Seoul; first off, the significance of the Chinese-North Korean deals, and the implementation of these deals, are really, again, to reaffirm that point, an extension of Chinese efforts to stabilize the most unstable variable in Northeast Asia, and that's the North Korea variable.

The Chinese feel that it's problematic, it's difficult; but those aren't reasons to walk away from it, and I think that's how they interpret a lot of U.S. or South Korean arguments along the lines of South Korea is the vibrant economy. It's the future. North Korea is the past. Why would you want to have any type of investment or relationship with a deteriorating asset? It's a very different calculus from the Chinese perspective.

With this contrast of China trying to become and offer this relationship on a comprehensive basis to North Korea, the limiting factor is North Korea. The Chinese are willing to offer a lot in that comprehensive relationship, but the North Koreans are very selective in what they are choosing and how far they decide to go. What is a part of that calculus? Again, a lot of debate, but we don't have a clear understanding of the North Korean interpretation of a lot of these things.

If we were to look at the implications with the massive political investment, this political capital from the Communist Party of China to the Worker's Party of Korea, and coupled with that the commercial investments, we go to the situation where, in addition to this comprehensive relationship, the Chinese are offering one thing that no other country is really capable of offering, and that's a positive security assurance.

The United States is offering a negative security assurance. It's the idea that the United States will not attack North Korea. But frankly, the North Koreans are looking for positive security assurance; someone who will say they will guarantee the survival North Korea's regime. And you can see how already when you phrase it that way, no one is able to offer that, again, with the exception of China.

This is putting into relief a very strong contrast between the conditional concessions from the United States and South Korea and the other countries within the Six Party Talks. This leads to very serious questions about how the North Koreans are viewing the Six Party Talks going forward.

If we were to wrap this all up (you might hear some repetition here) but the idea here is to take a little bit here, building blocks, and lead to this point. This is a very nuance point with room for a lot of misunderstanding, and I'll revisit this part in the Q&A session. But one way to look at all this is Beijing's Sunshine Policy with Chinese Characteristics. It's a very loaded term. The way I break it down is first, what are these Chinese characteristics?

The first is that China's Sunshine Policy is much brighter—and the Chinese officials point this out—than anything that the South Koreans had under their two progressive governments. The South Korean Sunshine Policy focused on the Kaesong Industrial Complex, a very finite area at the end of the day, an important symbolic area, but in terms of the impact on the North Korean economy, it was really marginal. Also, the Kim Jong tourist site.

In contrast, the Chinese are developing the border region, and trying to catalyze the natural resources, actually sink in not only investment to get the mines going, but to build the railroads, the roads, the ports, build everything around it.

Many of the investment feasibility studies that foreign companies have done on potentially lucrative North Korean mines have all ended up with these foreign parties walking away because they realized that they had to build all the transportation infrastructure, many electricity grids; perhaps even build small, little towns, and that is something that on a private sector basis, no private sector firm could actually afford that.

So with that, we also see this massive investment of political capital from the Communist Party of China into the Worker's Party of Korea. The other aspect, as I mentioned before, is that there's no direct linkage between these joint economic development activities and North Korean denuclearization activities in the short term.

The fourth characteristic is that there's no time limit on this. The Chinese leadership won't be voted out, and I think that's something that they point out in terms of the South Korean Sunshine Policy, is that while they support it and they like that, their critique of it was that it was too short in terms of its time scale, and its scope was too limited.

And so the Chinese have really forensically studied the Sunshine Policy approach, and what they've developed has very severe implications for all of us in both positive and negative ways. This hasn't happened yet, but I think one aspect of it, if you look at it from the South Korean perspective is I think what we'll see on the horizon will be a very contentious debate inside South Korea, which is a divided country on a divided peninsula on the whole question of who lost North Korea.

As these economic development projects accelerate, 2011 will be a very important year, and it will only accelerate further in 2012 as we lead up to Kyeongsangbukdo. This whole debate on who lost North Korea will be one where you could already see the progressives as being criticized for laying down certain seeds that the Chinese have now used to expand and create wedges; or progressive criticism of the conservatives, basically saying that they cut off all ties with North Korea so abruptly, that North Korea had no other choice but to turn to China. But both sides have a lot of ammunition to go after each other, so look for a variation on this theme of who lost North Korea.

In the United States, North Korea has always been a complex issue, but it is evolving into an even more complex relationship issue as a third-party issue in the U.S.-China relationship. Amazingly, if you look at the U.S. efforts, there's a continual focus on trying to apply pressure on China to reign in their North Korean ally as a very important way to stop future provocations. I think for the factors that I laid out, the picture is much more complex, and for the Chinese, the Beijing-centered national leadership; you have to almost do a thought exercise.

Even if they wanted to reign in North Korea, they now have to contend with very powerful Chinese provincial interests, who are focused on the regional economic development. And any of this reigning in of North Korea would damage, already I would say, a growing but still fragile state of party-to-party relations.

With the onset of this type of Beijing Sunshine Policy, Japanese officials already point out that they feel even more marginalized because there's nothing that they can really offer and put on the table. The abductee issue is still on the books, and also they are tying a lot of their participation or any type of bilateral interaction with North Korea very closely to the September, 2005 agreement.

Then this brings us to North Korea. The question here, I think is, there is an element within the Sunshine Policy of a bailout package, because if you look objectively at the assessments of many researchers, government officials, economists and whatnot, mainly the consensus view is that North Korean and the North Korean economy on a standalone basis probably would not be able to function. And so this tremendous support that they're receiving from the Chinese is important.

But the support coming from China now is also qualified, in the sense that it is no longer strategic. The Chinese are trying to move to what they call a normal relationship, and portray what they're doing with the North Koreans as commercial relations, the same way that China is conducting trade relations with any other country.

But with this type of bailout package, with the political capital investment, with the development of the natural resources, you have to wonder what strings are attached. Maybe they're not in the short term, but this will have legacy issues in terms of the leadership succession process now, but also after the transition period. And how the post-transition North Korean leadership will deal with these strings will say a lot in terms of the continuity of the scale of Chinese interaction with North Korea.

Now, with a lot of these type of pictures, as we move to the micro, usually the question is what's next on the horizon. If we take a step back and look at it from the perspective of nuclear missile activity and brinkmanship, more to less, and multilateral talks activity less to more, if we see a situation where there's less brinkmanship, there's less nuclear missile activity by North Korea, but at the same time there's less multilateral engagement dialogue, then we've seen episodes where North Korea becomes neglected, and benign neglect is something that we've heard a lot.

If that were to continue in the future, certainly we've seen episodes in the past. North Korea kind of becomes the Cuba of Northeast Asia, where sanctions are in place. We're trying to change North Korean behavior, but North Korea, more or less, continues to do what it does.

Another combination is less type of brinkmanship activity, more multilateral negotiations. I think that's a revisiting of the Six Party Talks, really, when it was functioning; and denuclearization activity was going hand-in-hand with discussion of timetables of economic and diplomatic concessions.

But if we see a combination of more brinkmanship and more multilateral talks, the combination really evokes the image of rewarding bad behavior. We've heard this refrain over and over in Washington, this idea that the United States won't buy the same horse a third, fourth, fifth time, and that's echoed in South Korea a lot, these days, as well.

I would say that we're in the current phase of more brinkmanship and less talks, where the focus will be on sanctions, containment and deterrence. And the latter part, deterrence, really is a priority. We've seen that a lot with an uptick in the U.S.-South Korean naval exercises to show this very strong stance to North Korea in an effort to try to prevent future North Korean provocations.

I'm going to wrap up here, so I apologize if I'm being a little long-winded. This brings us to the whole question of leadership succession. What I wanted to do here is view this from a different angle. We've heard a lot about fur hats being worn, and how that might be indicative that Kim Jong-un is rising because he has the same fur hat as his father has.

Let's look at it from a different angle. Here one basic foundational piece (and it's an inconvenient truth or a brutal fact, whichever way you want to call it) Kim Jung-un or Jang Sung-taek or whoever emerges as the leader in a post Kim Jong-il situation, either because of Kim Jong-il's death or his incapacitation, that individual or that group will have to be able to make money on a recurring basis.

That is no easy feat in North Korea. And in order to do that, China is a very important partner, because China will be there. They won't turn it off and on. They may undulate the volume and the scale of it, but they won't shut it off, because again, the Chinese are so focused on stability.

Now again, if we revisit the relative positions of the various countries, this diagram is really to reinforce that point. China and their location relative to the other countries, this distance is unlikely to change going forward, so this is, I think, another fact in Northeast Asia. Just as some countries are coming very accustomed—they don't like it—but they're treating the North Korean nuclear issue as now a chronic issue, and something that won't go away anytime soon. This gap won't go away anytime soon, either.

So let me quickly wrap up here. When we look at it from the lens of implications for Washington and Seoul, the first is that the evolution of China's interactions with North Korea has led to a Chinese conclusion that they have to follow a balanced Korean Peninsula policy approach. Their view is that they can't have a standalone South Korea policy. They can't have a standalone North Korea policy. From their experience, whenever they choose one Korea over the other, it contributes to a period of instability, and it's something that they are very key on avoiding because they can't afford another "lost decade" with relations.

In this delicate period, we've already seen how far this has been tested. In 2010, we had two North Korean provocations, not just one, and when I presented an earlier version of this right after the Cheonan, the focus there was on this very point; that even if there's a future North Korean provocation, China won't deviate from this game plan. Along with the Yeonpyeongdo incident, and even if this year we add another provocation, I don't think this statement will change.

The second point is that with this significant progress in the party-to-party track there has been material benefit in the North Korean regime in terms of stability. One important fact to remember is that there are 20,000 defectors, now, in South Korea. But if you were to ask yourself this simple question (and to provide a little background on this) North Korean defectors who used to work in North Korean state trading companies are saying that as Kim Jong-il consolidated his power through the military and the National Defense Commission, he created a two-tier economy. One tier is for the general economy, where there are great food issues, security issues, disruptions related to currency redenomination and so forth. He then created a second tier, which is the royal palace economy, where the elites function.

Now if we look at that 20,000 defector community in South Korea, you have to ask, "How many of them are from the royal palace economy?" Defectors who are in the know say that it's less than a hundred. So I think, as a statistic, if the royal palace economy members are the ones who have the greatest mobility, they go into China quite a lot for doing business deals or for vacation or what have you; they have ample opportunity to defect if they wanted to.

But the fact that we have less than a hundred of these royal palace economy members in Seoul, I think, speaks volumes of how the regime in this royal palace economy has been stabilized. There is a great deal (and I think this is genuine) of North Korean officials who are enthusiastic. They're bullish about the future, because if they look at the interactions they have with China, they know that China is not going to go away anytime soon, and that the Chinese economic development and three Chinese provinces will have a certain trickle-down effect into North Korea, as well.

We're seeing certain aspects of that in the Jilin-Hamgyeong province area. Now if you think of Heilongjiang and Jilin-Ji, Yanji is a very important concept to monitor going forward as well, because it's through this symbiotic relationship that wholesale products on the Jilin side are brought into North Korea and sold on a retail basis, and now I think Hamgyeong is becoming wholesale to other parts of North Korea which are becoming retail. So this all can really function because of what's happening in the border region in China.

The third point is that with this deepening party-to-party partnership, this is taking place again in this atmosphere of tightening screws on financial sanctions which, in this particular environment, tapping into the concerns of many in South Korea is creating an environment where North Korea is more dependent on China during this very fragile and delicate leadership succession process.

So let me end there and open it up to questions. Thank you. [Applause]


STEPHEN NOERPER:
We'd like to ask you to please step to the microphone if you have a question. John, thank you for those wonderful comments.

And two quick questions. One is about potential backlash in South Korea. One can imagine that regardless of party affiliation or political leanings, that this will be seen as something very much against the grain of some South Koreans. So how do you see that potentially playing out?

Secondly, although your focus wasn't the leadership transition, some have suggested we have, in fact, something of a Gang of Four phenomenon, loosely. You have Kim Jong-un. You have the regents; you have the sister and the brother-in-law. And you have the general in place to mind the son. Are there things that can be learned from the process of Chinese political transition or instability in the mid-seventies that might bear itself out in the course of the transition in North Korea?


JOHN PARK:
Thanks, Stephen. On the first point, in South Korea, there are snippets of reactions, I think, on a tactical basis. I don't think there's been a full assessment of the strategic implications of what's happening in the border region. So you'll hear their Blue House saying that perhaps the Chinese commercial activities in North Korea is a good thing; that now this activity will change North Korean behavior and interests shift away from things like nuclear weapons development to things like economic development. So in one sense, I think there is an effort to portray the positive aspects of it.

I haven't heard this specifically, but I'm thinking if you're an architect of Sunshine Policy from the progressive governments in South Korea, you're not welcoming what the Chinese are doing because theirs is bigger, better, and shinier than yours; and as a competition factor, that Sunshine Policy is having the type of impact that the South Korean Sunshine Policy architect had hoped. So I don't think there is the sense that they're carrying on in the passing of the baton and carrying the torch type of aspect, but it's when we start seeing headlines coming out of [South] Korean newspapers of this whole debate of who lost North Korea where I think that will be a trigger that people are fully realizing the strategic implications.

Presenting something like this in Seoul, the reactions aren't particularly interesting. It's very focused on preventing provocations; a big focus on extended deterrents, and this view that unification is something that has to be seized in the short term, and that if the opportunity presents itself, that perhaps this could be a way to deal comprehensively with future North Korean provocations.

So the thinking is in a very different area. And granted, I think a large part of it is because they live in the shadow of a lot of these things. So tactical responses, crisis management, that is something of the norm.

Regarding your second question of what are the lessons from the 1970s and the Chinese experience, Chinese officials and academics draw a lot of lessons, and their recommendations are usually wrapped up and embedded in statements along the lines of only if North Korea did X, Y or Z, because X, Y or Z unleashed the potential of China with the economic reforms and so forth. So that road map is seen as almost the perfect solution for what North Korea is going through.

There are gaps, but I think the important part there is that the North Koreans are echoing what the Chinese are saying. And so, if you look at KCNA and how they portray a big, high-level visit at the party level, the North Koreans are playing on those themes. Now, do the North Koreans really believe it or not? That is a little unclear, but North Korea is looking more and more like China. We don't know exactly all the steps that led up to the Party Conference, but one result of the Party Conference of September of last year is that the Worker's Party of Korea structure looks very similar to the CPC's structure. Yes?


QUESTIONER:
Thank you for a very enlightening view. I have a question about interparty relations. You seem to begin in 1949. Now according to history, the relationship between the Korean Party and the Chinese Party began in the 1930s. And were it not for the Koreans and the Communist Party in the 1930s, the survival of Mao and company in the north would not have been anchored. And so, the Chinese owe the Koreans a big debt.

Now over time, there may have been ups and downs in this relation, but the Chinese have never forgotten this, and that's also a reason to come into protect, I think, during the Korean War.

Now perhaps Lee Myung-bak's very aggressive policy to the north raises questions, again, if you read the cables that China wants a unified Korea under South Korea. The Chinese, I think, do not want this because they want a stable border. Anyway, I didn't find that in your talk.

Secondly, on the border of development, the North Koreans in the early 2000s, I think, wanted to develop an economic zone on the western part, and the Chinese said no, so there may have been seeds of discontent there. But I think stability is the important factor. The North Koreans, for its own security, do not want to see a failed North Korea.


JOHN PARK:
Thank you. Your points in history are absolutely right. It's just that in my previous experience, when the chronology is too long, I lose members of the audience, large numbers of the audience. But there is a deep history, and it's a very convoluted, very intricate, very complex history. And rifting on that more recently is the Korean War.

The Korean War is being revisited by both countries, and that's playing out a lot. We're seeing statements coming out of senior Chinese officials where, it's not really how the narrative goes, in terms of who provoked the war and how things turned out; so history is a big part of how this relationship is being defined. Yes?


HENRY SEGGERMAN:
My name is Henry Seggerman. I manage an equity fund in Korea and I have a column in The Korea Times. Thank you for your analysis of the situation over there and your charts and diagrams.

I felt as if your analysis spoke of these economic agreements in a very optimistic way, as if they were already far under way; whereas they're still mostly in the talking stage. You did mention that China has a policy of nonintervention, but one word that was left out of your presentation is "dependence." Also, you did not use the words "propping up." I'm just going to read you something from the New York Times.

"Most of Korea depends on China for up to 90 percent of its oil supplies, much of which is sold on credit or for bartered goods, according to Chinese energy experts. Any sustained reduction could cripple its isolated and struggling economy."

I would contend that regardless of these current discussions about possible mining ventures and such, the situation between China and North Korea is one of utter dependence, and that it's a totally interventionist policy. They have intervened to prop up this regime the same way that the United States, right now, is propping up the regime in Iraq or Egypt with massive financial support.

I've always felt that what South Korea should be doing is talking to China about changing that [and] about the possibility of reunification. Even if the Chinese leadership right now is scared of that prospect; if they just look at what's happening in Egypt, they should realize that this kind of propping up activity is self-destructive.


JOHN PARK:
Thank you for your comments. I think on the first point, my intention wasn't to be optimistic about this, but to try to describe a phenomenon or how this thing is evolving, and there are a lot of moving pieces. But if there is a take-away from all that, it is there's a lot of work to be done, but there are very significant changes, such as development of the ports, development of the roads, and economic development.  

Reports have been coming out since the Tumen River Development project days, in the early 1990s, and lot of those things didn't come to fruition. But the political pieces are in place now. The development of the old Tumen River Development Area has been designated as a Chinese internal priority. At the last two National People's Congresses in Beijing, you had the senior party leadership saying that this is in our top tier priorities for the upcoming five years and these various plans.

Now, there won't be an immediate change, but when the Chinese leadership makes those type of statements, things end up happening. And I think one benefit of those type of announcements is it's almost like a government insuring investment in the region. There is now a movement in different parts of China where if you look at the names of a lot of these Chinese companies coming to the border area, they're not all Chinese provincial companies from Heilongjiang, Jilin and Liaoning. The come from all parts of China.

So if you think of China as the EU, as different provinces at different stages of development, there's internal capital reallocation and investment going on. So the role for other countries to play in this area is one of competing with this internal mobilization that's happening. It's not going to happen overnight, but the fact that the movement has started, I would say keep your eyes focused on the year 2012, because there are political priorities. Not only will there be a leadership transition expected in North Korea, but in China.

Shee Jin-ping is expected to be the new leader, but with any new generation going to Beijing, you have to look at the composition of those new party officials. A lot them are provincial officials, and in that new generation, the rising generation of the CPC in 2012, there will be many from the three Chinese provinces bordering North Korea, but also other provinces that are focused on the national game plan of closing the gap between rich and poor. So it's through that lens that it's important.

But we're also seeing early reports that I think are glimpses of the future. There was a shipment of coal, a very modest one, from Hunchun through a North Korean port to another part of China. The reason why the Chinese are focused on using a North Korean part is that Dalian and Qingdao are too expensive. And so, costs are rising all over China, and things in North Korea are viewed as cheap, and they factor into larger plans along those lines. So sustainability of economic development is a top priority, and North Korea fits into that, or even provinces in the coastal region in the south.

As to your second point, dependency is a very, I think, accurate way to describe it, and one way that I try to do that is through the concept of the bailout. I mean, I think bailout is all about dependency. And when you get into that kind of bailout relationship, there will be preferential terms, but there will be many strings attached. So it's quintessential dependency. And bailouts don't go away.

In the North Korean case, it sounds like North Korea will pay back the bailout loans. These things are going to be, I think, a current version of defaulted North Korean loans. Those are still on the books with former Eastern European countries and so forth. This is another round of legacy issues, again, for the leadership succession process and after the leadership succession process.


QUESTIONER:
My question is somewhat related to the previous question. You mentioned how it's difficult for North Koreans to make money in North Korea, and I was wondering if you envision a scenario where the Chinese leadership comes up against these diminishing returns of bailing out North Korea, and that ultimately leading to a tipping point in terms of their policies.


JOHN PARK:
On that vein, during the debates that occurred after the North Korean nuclear test in October of 2006 and then in May of 2009, as reported by a lot of observers, there was very tense debate within the Chinese leadership; in the party, the military and what have you on the direction of North Korea policy. So tipping points have been explored, options have been explored in terms of shutting off oil or cutting off shipments for three days, what have you, to send a message; but they always return back to North Korea representing uncertainty.        The Chinese don't like high risk situations, but they can hedge and they can prepare for high risk situations with a lot of different tools. But one thing they can't respond to is uncertainty. There is no mathematical formula for uncertainty.

And so, they have come to the very painful realization that despite the damage to their reputation, despite concerns from other countries that they will stick with what they are doing, that time will prove them right. When any party uses that argument, it's hard to convince them otherwise. So they'll sustain the criticism from the United States and [South Korea] right now, with the knowledge that their balanced Korean Peninsula policy and trying to stabilize good relations with both Koreas will be the recipe. And again, conveying points from Chinese scholars and analysts will create the situation conducive for reunification in the future.


QUESTIONER:
John, that was terrific on the economic engagement side. Let me just poke at two little holes here. One is you seem to say that that's key to the succession, as opposed to stabilizing North Korea in a transition. And I want to know what evidence is there that the North Koreans need the Chinese to back the kid? Is there any evidence for that at all, or is the North Korean view, "We pick our leaders, but we do need your help on the economic side." That's question number one.

And question number two is, again, flipping it from the North Korean position, the history of Korea, as you well know, is one of not wanting to be solely dependent on any one of the neighbors. And another way to read North Korea policy is that they see the China move, particularly in their carefulness about its being selective, which you've noted, as a way to try to get the South Koreans back into the game to engage.

And that raises two questions. One is, is that what we're seeing, on the North Korean side and secondly, you've assumed that the whole debate is going to be in Seoul about who lost North Korea. But there's another debate in Seoul, and apparently you didn't pick it up, but it's there, which is, "We better get back into the game so we don't let China dominate North Korea."


JOHN PARK:
Thank you. First point, overall, is that the economic factors here, I don't want to, again, convey the image that this is the factor. It's a factor, and it's a factor that I just wanted to put more attention on, because there isn't much focus on this in any specific detail. And you could do a lot of research with this.

There are now statistics available, but not necessarily the national accounts. A lot of economists are concerned the trade statistics on the Chinese side are skewed to show that China isn't dealing so closely and it's not as lucrative as it looks. These very early stage projects are going at pace, but there is also the idea that the Chinese are very sensitive about appearing to be interventionist.

But frankly what they're doing in certain parts of North Korea concerns their image, because we're in the implementation phase of delegations at the municipal level of party officials going in. And if you look at the municipal composition, they're everyone from public service providers to people who are focusing on different services at this very low level. It's a bit of a stretch, but conceptually, it's like a PRT [Provisional Reconstruction Team]. And the Chinese are trying to go in and help, literally shoulder-to-shoulder, to implement and improve the situation, and again, create a fertile ground for economic development.

The Chinese aren't just going to invest money, because their view is that they have good seeds, but there has to be fertile ground, and without the transportation infrastructure and building those out first, those seeds will wither away. That's one of the major lessons that they take away from analyzing the South Korean Sunshine Policy approach. Attracting South Korean companies into the north didn't result in the South Korean government doing an adequate job of creating fertile areas. So that's a long-term strategy. That's not something you do in twelve months, and that's why I think if you look at these big landmark visits, and whatnot, they're preparatory in that sense.

But with respect to this whole notion of to what extent the North Koreans need the Chinese to back Kim Jung-un, I can't really monitor the political factors in what's been happening in that kind of highbrow horse trading and negotiating that's going on in things like the meeting between Kim Jong-il and Hu Jintao in Chungchun in Beijing in May.

But again, the money flows. Kim Jong-un, in the grooming process, yes, there has to be important backing by the military. All those things have to be in place. But at the end of the day, he has to be able to make money. Not for one year, but for the entirety of whatever term that he's in, in the leadership position. And in making money, any entity in North Korea needs a Chinese or Chinese partners.

And on the Chinese side, certainly there are some private Chinese companies, and the Chinese government would say, "We have no control over them, and they're doing it for their own volition." But when it comes to sustainability issues, these North Korean state trading companies have pretty interesting partnerships with Chinese partners, and some of these Chinese partners are recurring; then other partners are these private companies who come in and out on particular deals.

So the question to me is, defectors know that Kim Jong-il has a group of what are called economic advisors, suh-gees. The suh-gees run North Korea, Inc. and the royal palace economy and try to administer parts of the general economy, but the suh-gees are designed to run the royal palace economy. So again, it is very difficult to monitor, but how will Kim Jong-un either inherit the suh-gees or bring in his own suh-gees.

That's going to be an important component because miraculously, with whatever little that the North Koreans have, the stability of the royal palace economy, I think, is a large function of almost the MacGyver type of aspect of the suh-gees. They're able to maximize whatever they have and try to get into relationships that create a little bit of a forward momentum. They're certainly not thriving, so that's an important aspect.

But this is a question. I don't have an answer to this. What is the relationship between the suh-gees, right now, and their Chinese counterparts? Because if you have the political agreements, the implementation, the suh-gees are very important architects of that. And how that flows to Kim Jong-un is another aspect, but I think it's that angle where the Chinese are important.

In terms of the two-part formula of Strong and Prosperous, the North Koreans really believe they're strong now. They're a nuclear weapons state in their mind's eye. They've checked that box. Now they're focused on economic prosperity. And if you focus on the economic prosperity, the language is very similar to xiaokang, of trying to move the majority of the Chinese into the middle class. Similar type of references from the Worker's Party of Korea now, in terms of economic prosperity and economic development.

And I think it's that overlap that has created a certain type of dynamic between the two parties where they're very focused, and it's through that where North Korean officials have said that they're uncomfortable. In moments of frankness there, they are very uncomfortable. They don't go into much detail. There's no official, direct reference to that sense of unease.

All the propaganda is about pandas appearing in the Arirang games, big references to China. If you look at the big placards in the Arirang games before it was all Hangul or Choson'gul, but now, they're Chinese characters under huge references to the friendship and things like that. But that's where one part of it is trying to show this picture of allies and comrades and revisiting of what they went through in the Korean War, and then another part, under the surface, where North Koreans officials will say pretty unpleasant things about the Chinese.


QUESTIONER:
One question about financial ties. Are there any known relationships between the North Korean Foreign Trade Bank and its the Chinese equivalent. How is the trade financed? Is it loans? I think North Korea defaulted on every single loan they ever took from anyone. Is it loans that the Chinese are giving or it's pure barter? How is the trade financed?

And lastly, there are Chinese [involved] in kind of these economic deals. Do they ever take any property interests in North Korea? Is that even possible? Do they own property or assets?
Thank you.


JOHN PARK:
The first question. There are different arrangements, and whatnot, but there is one thing I've become aware of in doing research with these defectors who were working with Korean state trading companies. There are unintended consequences of financial sanctions. There are two stated purposes of financial sanctions. One is to change North Korean behavior, to get them back to Six Party Talks, less interest in denuclearization and other prohibited activities. Another is to raise transaction costs. And that's more of a treasury type of mentality. And in some areas, they're very effective.

The Bank  is lauded as a good example of raising transaction costs and getting other countries, third parties, to exert a certain type of response that eventually produced a desired policy response. But when it comes to these financial sanctions, North Korean state trading companies operate openly in China, and they will in a local trade association say, "We have a contract bidding process. This is what is entailed. We invite proposals (RFPs)," and Chinese private companies submit their bids.

But what is happening, an unintended consequence, is before 5 percent was the commission fee, apparently, of the overall deal size. But as Chinese private companies know that North Korean state trading companies are under the heat, Chinese companies are saying, "Well, we'll do it for 10 percent, or we'll do it for 12 percent, and increments go up.

But then as word gets out in their community that if you do a deal for a North Korean state trading company subsidiary in Beijing or another large Chinese city, that you can get a pretty good commission fee, it's attracting through market forces more sophisticated Chinese private companies.

Now what comes out is that these private Chinese companies have very sophisticated shipping and procurement and sales networks. So the North Korean state trading companies now have capabilities enhancements that they didn't have on a standalone basis. Traditionally sanctions try to whack North Korean state trading companies and their shell companies as they operated in four corners of the world. That's not the picture anymore.

So another example is there's a big focus on banning luxury imports into North Korea. And again, the focus was North Korean officials and state trading companies roaming Europe and procuring things and bringing them back in diplomatic pouches. The rising level of economic development in the three Chinese provinces bordering North Korea, those officials, those local population members, have similar luxury brand tastes.

So now North Korean officials just have to go over the border, buy things there and bring it back. And so the capabilities have been significantly enhanced ,and it's an unintended consequence of sanctions in the case of this bidding process. So the credits, loans and things like that I'm not familiar with, but when it comes to these type of contracts and whatnot, apparently it's cash. It's done on specific timelines as outlined in the contract. And it goes all the way to insuring the freight. So North Korean companies are insuring their freight through these Chinese partners.

It raises a lot of questions, but I think from that angle, just focusing on North Korea and the border region and sealing the border, those days are long gone. North Korean companies are very active in China.


QUESTIONER:
Property interests?


JOHN PARK:
Property interests, when you get to that level of party-to-party interest, you make rules up. There are exceptions. I mean, if a Chinese party official wants a certain property arrangement, things can be arranged. So I mean, it's not a rule of law aspect of it. There are certain aspects and prohibitions, but there are already reports that they've toyed around with the idea of long-extended leases, where you don't own it, but because of the duration of the lease, you might as well own it.

So there's a lot of creativity and flexibility. I think Chinese partners see that, and if you tap into your local senior party official on the Chinese side, I think they can open up doors. But tracking all these things and how far they'll go is uncertain. But with the Chinese, once the political doors are open, other things follow. It's not the other way around where the private sector, in most countries, goes out and tries to create some activity, then they lobby their politicians. On the Chinese side, you have to follow the political action first. Yes?


QUESTIONER:
Thank you very much, Dr. Park, for the very eye-opening and informative presentation. My question is based on your analysis. Do you have any suggestions for the United States government as to any current policy direction that should be changed, and if so, what? Thank you very much


JOHN PARK:
Thank you. That's a very difficult question. In my work, it's not a cop-out. What I'm trying to do is put a spotlight on things that I think require and deserve more research by others, because it would be great to debate some of this stuff by other researchers. Frankly, I get into soliloquies because no one else is doing this type of research. And that's where I think you get more sophisticated policy analysis and understandings, and you get to see a better, more sophisticated understanding of the picture.

And so, to all my colleagues in the think tank community in Washington and Asia, I always encourage them to do more in this area and also pass along anything that they find along these parameters. But to date, nothing. Usually they forward New York Time articles or Wall Street Journal articles, because they do focus on these deals. And out of all of the media, I think they're the ones who consistently follow big statements; some new satellite imagery and so forth. But beyond that, there isn't much primary research.

Regarding the United States, it sounds like an oversimplification, but the way I would describe U.S. policy, in as nonpartisan manner as possible, is there are two conditions and a policy tool. The first condition is that U.S.-North Korean direct negotiations are possible, but only if North Korea comes back to the Six Party Talks. The second condition is that if North Korea comes back to the Six Party Talks, they have to commit to irreversible denuclearization. No more internal freezes and things like that. The U.S. threshold is much higher now.

And wrapping this all up, as the U.S. waits, are financial sanctions as a policy tool. And then wrapping all of that up is the concept of strategic patience. So the idea is the U.S. has objectively laid out all the opportunities on the table. Now it's up to North Korea to come to the table and engage in a meaningful way. And that has become a very mirrored type of message from Seoul, as well.

But as you can see, that's a very rigid point. And the question is how can you be flexible on rigid points? If you back down on all of these things, there's a concern that erodes all the credibility of the other conditions and the other firm positions. To me, that's the dilemma. To me that's a portrayal of the overall situation right now.

In terms of policy recommendations, I really respect the senior officials who are working on these issues, because they know what's at stake, they know the complexity. In many instances, they are very focused on one particular objective, so we only hear them comment on that issue. But they're fully cognizant of how difficult the situation has become. And you'll hear a lot of officials say this, but the complexity of these issues right now, the U.S. approach has traditionally been bilateral relations. But if there's any take-away from this, it's the view that the China-North Korea piece has fused together, and they're getting closer and closer.

In Washington, our China experts don't understand the complexity of North Korea, and our North Korea specialists don't understand the evolving complexity of China. So if you have this phenomenon getting closer, we need a different skill set, and no one has that skill set. So that's a growing priority.

And if you look at it from a conceptual framework, issues in the world are becoming so complex for the U.S. that it's no longer, again, U.S. bilateral relations, but the U.S. having to understand the interactions on a bilateral, even trilateral basis with other countries, and then how it impacts the U.S. approach. You can only imagine the different permutations and how that makes a U.S. policy approach very, very complicated.


STEPHEN NOERPER:
Ladies and gentlemen, please help me in thanking John Park. [Applause] And we're delighted to present John with Missionary Photography in Korea: Encountering the West Through Christianity as well as Living Through the Forgotten War: Portrait of Korea. And John, we look forward to seeing you back often, and for our annual dinner again. So, thank you. And we hope to see you all back on February 10 for Charles Armstrong and February 16 for our discussion on the FTA and financial sector benefits. Have a good morning, and thank you.