To better understand perspectives in the United States and China on internal developments in North Korea, the U.S. Institute of Peace and the Center for Strategic and International Studies, in partnership with the China Institutes of Contemporary International Relations, convened a daylong conference on December 5, 2006. The conference took place on the eve of the resumption of the Six-Party Talks in Beijing, which subsequently ended without tangible progress. The participants discussed North Korea's economy, the role of external actors on North Korea's decision-making, and Chinese and U.S. visions for the future of the Korean Peninsula. The seminar also included a simulation based on a scenario of an explosion at Yongbyon that creates a radioactive plume that moves across the Sea of Japan.

This USIPeace Briefing, written by Bonnie Glaser and Chietigj Bajpaee—respectively senior associate and research associate from the Center for Strategic and International Studies—summarizes key findings, cites common points and divergences among panelists, and analyzes the implications of the discussion.

Background

North Korea's economy faces many challenges and it remains uncertain whether Kim Jong-Il's regime is committed to the implementation of socialist-type market reforms. Food shortages and a shortage of basic consumer goods in the mid-1990s sparked a growth in North Korea's grassroots capitalist economy, which supplemented the deficient Stalinist economy and gave rise to North Korea's new entrepreneurs and its so-called "second economy." In July 2002, the regime announced the introduction of some preliminary reform measures, freeing prices, wages and exchange rates from central control, but these have not been followed up with more extensive reforms. Pyongyang is attempting to secure foreign investment and advanced technologies to modernize its manufacturing base. Nonetheless, Pyongyang's elite continue to pursue a cautious approach toward reforms in order to maintain stability and secure their power base. In October 2005, it was announced that North Korea would revive the Public Distribution System, under which all major food items are to be distributed by the state. The government also continues to pursue a military-first policy.

Aid and trade from South Korea and China continue to prop up the North Korean economy. In 2005, South Korea sent a record $800 million in aid to North Korea. Estimates vary regarding the exact level of Chinese aid to North Korea, with most sources claiming that Beijing provides 90 percent of North Korea's oil imports (between 300,000 and one million tons annually) and 70 percent of its food imports (500,000 tons of grain annually). After hitting a ten-year low of $370 million in 1999, trade between China and North Korea rapidly expanded, and China now accounts for 40 percent of North Korea's trade. Two-way trade was $1.38 billion in 2004, $1.58 billion in 2005, and $1.38 billion in the first 10 months of 2006. China's non-financial investments in North Korea increased from $1.12 million in 2003 to $14.13 million in 2004, and reportedly reached $53.69 million in 2005. There are now approximately 200 Chinese investment projects operating in North Korea. In March 2005, Chinese Premier Wen Jiabao signed an investment-protection agreement with his North Korean counterpart, and the two states have reached five bilateral economic-cooperation agreements between 2002 and 2005. During North Korean leader Kim Jong-Il's visit to China last January, Wen also introduced new bilateral economic cooperation guidelines.

The politics of economic reform and Sino-North Korea economic relations

The first panel assessed the status of North Korea's economic reforms. Are there new developments in North Korea's economic policies? Has North Korea retreated from experimenting with economic reform and, if so, why? What, if anything, has changed since Kim Jong-Il's January 2006 visit to China? What are Chinese objectives in developing trade and investment ties with North Korea? How are external actors having an impact on North Korea's decision-making on economic issues? How are internal politics in North Korea affecting the debate over economic reform?

The U.S. speaker at this session characterized the marketization of the North Korean economy, which began in the 1990s, as a bottom-up process driven by the trauma of famine and state failure rather than a top-down effort driven by government reforms. Essentially an attempt to legitimize and decriminalize capitalist, free-market behavior at the grassroots level, the measures have resulted in the government losing control of the economy. Deep social cleavages have been created, as non-elites have seen their purchasing power eroded while elites have been shielded from the inflation, food shortages and other negative consequences of the expansion of the semi-private side of the dual economy by their access to foreign currency. In terms of economic interactions with the outside world, North Korea's exchanges with China paradoxically have been more market-oriented than those with South Korea, which are predominantly driven by aid contributions.

The Chinese speaker argued that is still too early to say if economic reforms in North Korea have come to a halt. He stated that the North Korean regime remains committed to reform as highlighted by statements during the 4th session of the 11th National Congress and in the 2006 work plan. Pyongyang's economic reforms continue to be driven by a number of internal and external factors. Externally, relations with the United States and the nuclear issue continue to influence policies; internally, energy needs, grain and food requirements, and the need to ensure regime survival and build-up foreign currency reserves have influenced economic reforms. The regime continues to pursue a "military-first" policy and lacks a systematic policy framework for pursuing reforms. Floods and sanctions have delayed further reforms. The speaker maintained that the primary driver of North Korea's reforms remains regime stability. As such, a cautious approach continues to be pursued, with two competing factions--a pro-reform faction and military hardliners--vying for influence, and Kim Jong-Il having the final say.

In the discussion that followed, questions were raised about North Korea's persistent trade deficit with China and the North's inability to take advantage of China's booming economy and commodity trade. A Chinese participant argued that Sino-North Korean trade statistics can be misleading, since much of North Korea's trade with China is based on undocumented border trade.

An interesting comparison was made between China's economic liberalization in the 1970s and 1980s and North Korea's reforms today. Discussants observed that Deng Xiaoping's introduction of reforms in 1978 was a slow process that did not obtain results for many years. They also noted that North Korea's insecurity, emanating from its smaller size and smaller economy, as well as its poor relations with the United States, made it more cautious of pursuing reforms. China stabilized its international standing before implementing reforms, while North Korea remains in a precarious position on the international stage. Finally, the enlightened leadership of Deng Xiaoping and his ability to criticize and distance himself from the policies of his predecessors facilitated the pursuit of reform. By contrast, Kim Jong-Il cannot easily break from the legacy of his father.

An American participant argued that the macroeconomic conditions in North Korea are vastly different from those prevailing in China or Vietnam. North Korea's economy more closely resembles the regimes of Soviet Eastern Europe, with a large industrial base driven by coercion and a large criminal element, rather than an economy dominated by a large agricultural sector, as in China and Vietnam. China's rural reforms were also accompanied by a significant demilitarization, which has not occurred in North Korea. As a result, there continues to be a competition for resources between the military-industrial complex and forces seeking to implement economic reforms.

Another American participant acknowledged the difficulties faced by the North Korean regime in instituting reforms, but nonetheless cast doubt on Kim Jong-Il's commitment to reforming the economy, given the missile and nuclear tests in 2006. A Chinese participant retorted that all the regime's actions are motivated by the desire to get the attention of the Americans in order to normalize bilateral relations.

The role of external Actors in North Korea's decision-making

The second panel examined the role of external actors on Pyongyang's decision-making process. What are the most effective external levers to affect Pyongyang's decision-making on nuclear issues? Is there evidence that inducements work or don't work? Is there evidence that coercive means are effective or counterproductive? Which countries have the most leverage over North Korea and what are their sources of leverage? How can leverage be used more effectively to achieve shared goals? There was also a discussion of U.S. and Chinese perceptions of each other on the Korean Peninsula.

The Chinese speaker stated that there is a tendency to overestimate the extent to which Pyongyang was influenced by external factors. Four factors drive North Korea's nuclear ambitions-sovereignty, security, national pride and development needs. He also stated that the United States and China have differing assessments of who plays the central role in resolving the North Korea issue-while the United States believes it is China, China believes that it is the United States because North Korea's nuclear program is a response to the perceived U.S. threat.

The speaker also questioned the extent to which Beijing can apply further pressure on Pyongyang by reducing or cutting off aid--a frequent U.S. suggestion. Citing the examples of the U.S. embargo on Cuba and the Soviet Union's cut-off of aid to China in the 1950s, the Chinese presenter maintained that such pressure only strengthened the resolve of both Cuba and China. It is not in Beijing's interests to embitter the North Korean regime, he added. Economic sanctions against North Korea may be counterproductive and cause the regime to accelerate its nuclear program. A combination of "threats, guidance and counseling" is necessary to deal with North Korea's nuclear ambitions.

Uncertainty about U.S. intentions factor into Beijing's policy toward North Korea and its handling of the nuclear issue. According to the Chinese presenter, a debate persists in China over whether the United States is genuinely interested in eliminating North Korea's nuclear weapons or is using the issue as a means to constrain China's rise. He highlighted areas of Sino-U.S. disagreement on North Korea, such as the link between financial sanctions and the nuclear issue and the appropriate level of pressure to apply on Pyongyang, but at the same time he advocated greater cooperation in other areas, including technical cooperation following Pyongyang's nuclear test.

The American speaker characterized the current situation as a "tipping point." While North Korea has returned to the Six-Party Talks, it has returned as a nuclear-weapons state. On the positive front, the international community remains committed to a non-nuclear North Korea and China's cooperation has been unprecedented. He also suggested that the Six-Party mechanism may need to be supplemented by bilateral talks, as the Six-Party framework does not guarantee high-level government exchanges on North Korea's strategic nuclear capabilities.

In the discussion that followed, an American participant noted that rather than view the United States as attempting to contain China's rise through its manipulation of the North Korean issue, Beijing should look at Pyongyang's "opacity, rhetoric and actions" as a cause of U.S. military mobilization in the region and thus as a source of constraint on China. Debate also arose over the utility of roadmaps and the reluctance of parties to abide by them. Finally, there was a discussion of how to reduce Chinese suspicions over U.S. intentions on the Korean Peninsula. A Chinese speaker indicated that Sino-U.S. mutual suspicions complicate cooperation, even though a stable and nuclear-free Korean Peninsula is a shared goal.

Chinese and U.S. visions for the future of the Korean Peninsula

The morning panels culminated in a lunch session that was intended to focus on U.S. and Chinese visions for the future of the Korean Peninsula. However, both speakers focused on the immediate challenge of making progress toward eliminating North Korea's nuclear weapons--a reflection of both the pressing nature of the nuclear issue and the difficulty of thinking long-term about Korean Peninsula security in the absence of a resolution to the nuclear problem. The Chinese speaker offered a number of observations based on a visit he made to North Korea in mid-2006. First, signs of a free market remain negligible, with more sellers than buyers. Second, the markets cater primarily to the elites in North Korean society. Nonetheless, Kim Jong-Il's unprecedented praise of China's economic reforms following his visit to China in early 2006, which was followed by visits of other North Korean delegations to study China's economic accomplishments, suggests that the regime remains committed to pursuing reforms. Beijing has a strong interest in seeing the North Korean economy put on a sustainable basis. Through reform and opening up, North Korea can not only become more stable, but can be integrated into the international community.

The American speaker disputed the view that the United States is reluctant to engage the North Koreans in talks or to offer incentives to Pyongyang. The U.S. vision is for the future is denuclearization of the Korean Peninsula, and the United States remains committed to the Six-Party Talks. The American speaker questioned the contention that North Korea's actions are driven by a desire to normalize relations with the United States, suggesting that these may be diversionary tactics or attempts to secure concessions from Washington.

In the discussion that followed, Chinese participants disputed the notion that Chinese interests require the maintenance of North Korea as a "buffer state." They stated that Beijing's ultimate goal remains peaceful reunification of the Korean Peninsula, which is viewed as a prerequisite for an enduring peace in Northeast Asia. Furthermore, Chinese participants argued that the idea of a buffer zone is both unnecessary and outdated, given the improving Sino-U.S. relationship and advances in military technology. Questions were also raised about the link between denuclearization and the establishment of a peace treaty on the Korean Peninsula. Participants highlighted the practical difficulties of implementing such a proposal, such as deciding who would be a signatory to a peace treaty.

Simulating a crisis on the Korean Peninsula

Following the lunch discussion, conference participants broke out into three teams (China, South Korea, and the United States) to discuss a scenario in which an explosion at Yongbyon produces a radioactive plume that moves across the Sea of Japan, where it is detected by aerial surveillance monitors. Each team was asked to tackle a number of questions including: What actions would the leadership take, and in what time frame? What would be their government's primary considerations and priorities in formulating a response? What types of international coordination measures might be desirable? What steps would each government take bilaterally? How would the leadership respond to inquiries and offers for cooperation from the United States/South Korea/Japan? Following the team deliberations, all the members joined together to brief the group on their respective responses and to discuss the outcomes.

The three teams adopted a similar approach. Emergency response plans were activated in all three countries to verify the level of radiation and the direction of the radioactive plume, and to treat and contain affected populations. The U.S. team identified the Department of Energy as the head of a taskforce comprising the Department of State, Defense, and other government agencies to deal with the crisis. The Chinese team also established a crisis management mechanism composed of various government ministries including the Ministry of Foreign Affairs and Ministry of State Security. Finally, the South Korean team stated that it would activate its emergency response mechanism for dealing with a nuclear accident.

Of paramount concern was the humanitarian needs of each country's respective populations-South Korean concerns over their civilian populations in South Korea as well as those in Mt. Kumgang and the Kaesong economic development zone in North Korea; U.S. concerns over the safety of their civilians and military personnel in the region as well as the needs of their allies and other affected countries; and Chinese concerns over the safety of people living in border areas and Chinese citizens living in North Korea. The South Korean and Chinese teams also expressed concern over possible refugee inflows into their countries from North Korea, and worried about how to respond if the North Korean military opened fire on refugees attempting to cross the border.

All three teams expressed a preference for a joint coordinated response. Options included bilateral responses as well as multilateral efforts with allies and other affected parties, perhaps under the aegis of the Six-Party framework. Cooperation could take the form of information and intelligence exchanges through local embassies and military-to-military contacts, joint logistical planning to address humanitarian concerns in allied states, offers of assistance to North Korea on securing nuclear facilities and meeting humanitarian needs, and the issuing a joint statement, which could assuage public fears as well as those of the North Korean regime.

The three teams were in consensus on the need to send a clear message to North Korea that they were treating this as a humanitarian incident. They also agreed on the need for caution and about the importance of not engaging in any unilateral and direct intervention in North Korea unless there are signs of regime instability or aggressive intent. Covert efforts would to be made to verify the details of the accident and assess political fallout in North Korea. Direct intervention was deemed unnecessary in the first 48 hours after the incident (during the timeframe of the scenario) given the limited information regarding the accident. Instead, the South Korean and U.S. teams preferred communicating and coordinating with China to offer assistance to North Korea. There was also discussion of whether countries in the region should attempt to seal the reactor. The U.S. team in particular stated that if it were to intervene in North Korea unilaterally, it would be seen as an act of aggression by Pyongyang and the United States would have no choice but to "finish the job." The South Korean team voiced concern about whether the United States would implement Plan 5029 for military intervention in North Korea.

Finally, all the groups discussed the response of parties that were not represented in the scenario. Notably, given the fact that North Korea's nuclear reactors were provided by the Soviet Union, Russia would have a crucial role to play in assisting the North Korean regime in repairing the damaged reactor and containing any fallout. The U.S. team also considered that it might be under pressure from its allies, most notably Japan, to intervene in North Korea given their fears of North Korean aggression.

Overall, there was a remarkable congruity of opinion on a wide range of issues, especially the need for a humanitarian rather than military response to the crisis and on the importance of a joint bilateral and multilateral reaction, possibly under the Six-Party framework. The scenario demonstrated the potential of the Six-Party framework to address issues beyond North Korea's nuclear program and serve as the basis for a sub-regional security mechanism.

This USIPeace Briefing was written by Bonnie Glaser and Chietigj Bajpaee, respectively senior associate and research associate from the Center for Strategic and International Studies.

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