North Korea Bites the Hand that Feeds It

What is US$40 million to the world’s second largest economy? The number, while not insignificant, is merely a sliver of the nearly US$6 billion in annual bilateral trade between China and its mercurial neighbor, North Korea.

Yet the recent news that Beijing and Pyongyang are at loggerheads over a quashed deal to build a Chinese-backed mine across the border has been the latest setback in a series of disagreements between the two. Earlier this week, the New York Times released a report detailing the fallout from a failed business relationship between Chinese mining giant Xiyang and authorities in North Korea. According to Xiyang officials, North Korea attempted to renegotiate its contract with the company about the mine after the fact in order to provide more financial incentives to the government officials helping to run the site.

After Xinyang officials complained to Pyongyang about kickbacks and lavish handouts to state supervisors with few tasks, the mine was closed and its materials seized. Chinese workers were unceremoniously evicted from the site by North Korean soldiers. The North refutes the accusation, claiming that Xiyang was making soaring profits from the mine due to the cheap price of iron ore in North Korea, as opposed to China. Pyongyang said it was protecting its resources and people from exploitation.

The Xiyang dispute is an interesting case but it is only a small window into a relationship plagued by mistrust and inequality that nonetheless remains inconveniently necessary to both sides. China acts as North Korea’s protector, diplomatic foil, most important trading partner and North Korea remains China’s geographic buffer against encroachment by the western powers. That is not likely to change. But as the years tick on and the Kim regime persists despite immense pressure from the rest of the world, North Korea appears emboldened to take a stronger hand in dealing with its most important partner.

In August, Chinese Commerce Minister Chen Deming made a high profile visit to the North and met with influential Jang Sung-taek, the Vice Minister of the National Defence Commission and also uncle to North Korean leader Kim Jong Un. Reports indicate that the two sides met to discuss furthering two special economic zones in the North for trade and joint development. China’s Commerce ministry released a statement following the meeting that boasted the relationship: "The two economic zones have not only created a new model for the economic cooperation between China and North Korea, but also injected new energy for the two nations to further improve their bilateral trade."

The devil however is in the details. The North realizes that China is not the only player that is interested in its resources. Russia, a traditional partner of Pyongyang that has lost influence in recent years, seems keen to reinvigorate its ties. This seems predicated on the Kremlin’s realpolitik approach to Asia. Russia intends to leverage its claim as a Pacific power to its economic advantage – primarily as a market for energy exports. Russia President Vladimir Putin articulated his strategy this week insisting that Russian petroleum companies such as Gazprom should focus their efforts on “diversification of markets to account for the prospective Asian segment and means of delivery.”

Moscow, which also has plans to expand its energy relationship with China and India, has targeted the Korean peninsula as an extraordinary opportunity to supply LNG to South Korea and Japan via a natural gas pipeline that would connect through North Korea.

The proposed deal is not without risks. First, conducting business with the North’s kleptocrats can prove challenging as the Chinese have found. Second, the target consumers – Japan and South Korea – have toxic relationships with Pyongyang and would likely be hesitant to become dependent on the North as a transit for its gas imports. Despite this, the benefits for both sides are tangible. Aside from increased market access to Seoul and Tokyo, Russia could leverage the pipeline to pressure China to give it a better deal on gas imports. North Korea benefits too by receiving an estimated US$100 million in transit fees as well as a geopolitical chip in dealing with China, South Korea and Japan.

But Russia is not the only one with potential eyes to the North. There are also quiet murmurs that Japan – with considerable caution over a long string of humiliations and provocations –may be interested in Russia’s proposed natural gas pipeline that would transit through North Korea. A series of low-mid level exchanges by government officials from both sides has taken place, with a visit by a Japanese delegation to Pyongyang to attend a memorial service held for nearly 2,500 Japanese citizens who were buried on a mountain north of the capital.

This follows up an earlier exchange in August in which Red Cross representatives from both sides met in Beijing to discuss the repatriation of Japanese soldiers’ remains from World War II. This all was a dramatic turnaround from the grand bargain that was struck between Japan and North Korea in 2002 labeled the Pyongyang Declaration. At the time, former Japanese Prime Minister Junichiro Koizumi and North Korean Leader Kim Jong Il signed the high level statement that promised both countries “would make every possible effort for an early normalization of the relations.”

The prospect of a thaw in the Japan-North Korea relationship has appeared increasingly bleak over the past couple years as the North continued its belligerent missile tests and aggressive actions against South Korea. There has also been internal pressure for Japan to respond to the North’s intransigence with more urgency and hard power.

With these enormous caveats and a complex historical relationship, nothing is guaranteed as an outcome and expectations for an imminent détente should be tempered. Despite this, the recommencement of talks between Japan and North Korea is a step in the right direction and could have spillover effects on Tokyo’s engagement with South Korea, China and the region as a whole.

Will it affect Chinese primacy over North Korea? A more realistic and practical foreign policy on the part of Pyongyang would see Russia in particular challenge Beijing’s role as gatekeeper to the North. This would also weaken China’s stranglehold and its frequent use of Pyongyang as an international bargaining chip. But while North Korea may occasionally provoke the Chinese dragon as the country provokes everybody else, it is early days to count on any real movement. The north always goes out of its way to prove its obstreperousness. Going against its only real benefactor is a case in point.