Get Full Access:
Save 44% Now
Trusted by over 50,000 readers

As North Korea Goes Nuclear, U.S.-China Relations Sour

Beijing will use what leverage it has to prevent the U.S. from taking a tougher stance on trade.

  • View count: 2766 views
  • Last updated: January 16
  • Total word count: 2099 words

By Jacob L. Shapiro

The decision to attack North Korea or to allow its government to acquire nuclear weapons was always a choice between the lesser of two evils. One option brings with it the death and destruction that come with war. The other option brings with it the chance, however remote, that the United States could be nuked by an enemy state. Both options bring an additional consequence that must be taken into account: a worsening of U.S.-China relations. China promised to help with North Korea so that the U.S. wouldn’t have to choose either evil. China has failed, and the U.S. appears to be moving toward a decision to accept a nuclear North Korea. That, in turn, creates yet another decision the U.S. must make: whether to hold China accountable.

A Reprieve, With a Condition

The U.S. has promised to get tougher on China for almost a year now. On the campaign trail, presidential candidate Donald Trump promised that, under his administration, China would not be allowed to take advantage of the U.S. through its trade practices. After Trump became president, his Cabinet excoriated China for its moves in the South China Sea and promised to push back. Then, just three months after Trump’s inauguration, while eating chocolate cake with Chinese President Xi Jinping at his Mar-a-Lago estate, Trump gave China a reprieve, albeit with one condition: that Beijing agree to help stop North Korea from acquiring nuclear missiles capable of striking the U.S.

For China, this deal was more charade than aligned interests. The government in Beijing would prefer a non-nuclear North Korea but ultimately does not consider it existential. China’s economic relationship with the United States is far more consequential. Because almost 20 percent of all Chinese exports go to the United States, the stability of China’s economy depends on access to the U.S. market. 2017 was the year Xi solidified his dictatorship over the country; he couldn’t risk its economic well-being during such a pivotal time. He therefore needed to stop the U.S. from following through on its trade-related threats. In effect, Xi paid for social stability at home with promises of Chinese cooperation on North Korea.

The issue now is that North Korea is closer than ever to having a deliverable nuclear weapon. And the closer it gets, the less valuable China’s offer of keeping Pyongyang in check becomes, and the more the U.S. begins to view China as a rival. Signs that their relationship is becoming more contentious have already appeared. In December, the U.S. released its National Security Strategy, which identified China and Russia – not North Korea – as the key threats to American security. More ominous from China’s perspective, Trump received an in-depth briefing on U.S.-China trade relations last weekend, suggesting action is coming. China has been quick to respond. Recent moves from Beijing are designed to show the U.S. government will pay the price if it follows through on Trump’s threats.

The significance of U.S.-China trade relations shouldn’t be understated. Since the Soviet Union’s collapse, economic dependence has been the only thing tying U.S. and Chinese interests together. It’s the result of a strategic decision made by both sides. China and the U.S. were enemies for the first few decades after World War II, but by the 1970s, China had come to see the Soviet Union, not the United States, as its most dangerous foe. The Nixon administration capitalized on this. Successive U.S. administrations, both Democratic and Republican, not only maintained the U.S.-China relationship but strengthened it. Even the Reagan administration, outspoken as it was against communism, encouraged economic interdependence with China in the 1980s. It was considered the glue that would bind the U.S. and China against the Soviet Union for a generation.


(click to enlarge)

Of course, China’s help was not needed for a generation. As it turned out, the Soviet Union was on the verge of collapse. But U.S.-China economic interdependence couldn’t dissolve as quickly as the Soviet Union had. The spigot had already been opened, and the potential profits made it difficult to shut it off. In 1972, the year Nixon went to China, final household consumption expenditure in China was just over $59 billion. In 1990, at the end of the Cold War, it was just over $180 billion. Last year, it was $4.4 trillion, the second-highest household consumption expenditure in the world. Particularly attractive for foreign businesses is the annual growth in consumption. Since 1991, the lowest annual growth in consumption expenditure in China was 5.4 percent – higher than any year in the U.S. in the same time frame.


(click to enlarge)

Charging Headlong

U.S. corporations saw the potential for growth in China as a huge opportunity. They charged headlong into the Chinese market, and they made a lot of money doing it. As a result, the U.S. and Chinese economies are more tightly linked today than at any point in history – and China is hoping to use that fact to its advantage. Now that it’s clear China can’t help on North Korea, this is China’s Plan B: to show the U.S. that it has just as much to lose from taking a harsh stance on trade relations as China does. In recent weeks, China has done this by suggesting it could slow or halt the purchase of U.S. treasuries and by taking aim at U.S. companies active in China.

The first measure – halting the purchase of U.S. treasuries – might generate some fear in the financial sector about a declining U.S. dollar but has little consequence for the U.S. economy. Last week, senior government officials told Bloomberg that China was reviewing its foreign exchange holdings and was indeed considering halting purchases of U.S. treasuries. The government has denied the report but likely didn’t mind that it set off jitters in the bond market. China can set off a lot of jitters when it leaks comments such as these, and it has a habit of doing so for political purposes. In 2011, it threatened to use its holdings of U.S. debt as “a financial weapon to teach the United States a lesson,” after the U.S. increased arms sales to Taiwan.

In reality, though, this “weapon” is fairly useless. Its holdings of U.S. securities are actually a symptom of China’s economic irrationality. China needs a place to park its foreign exchange reserves outside the Chinese economy, and U.S. debt is still considered one of the safest investments money can buy. If China were to sell a large quantity of U.S. securities, it might increase the value of the yuan – which would make Chinese exports more expensive. In addition, history shows that previous Chinese sell-offs of U.S. securities have had little effect on the U.S. From October 2015 to October 2016, China sold $140 billion in U.S. securities – about 11.1 percent of its total holdings. During that period, the yield on the 10-year bond increased by only 40 basis points – four-tenths of 1 percent. China can move markets and likes to play up its U.S. debt holdings, but this is an empty threat.

The second measure is potentially more damaging to the United States than the first. U.S. companies have made a fortune in China over the past 20 years, and many have formulated future business plans under the assumption that there is a great deal more money to make over the next 20 years. Beijing knows this and is sending a message to those companies that they access the Chinese market at the pleasure of the Chinese Communist Party. Last week, the Shanghai branch of the state cyberspace administration shut down Marriott International’s website in China because the hotel chain listed Tibet, Taiwan, Hong Kong and Macau as separate countries in a customer questionnaire. The questionnaire set off a firestorm on Chinese social media that eventually made its way to China’s Foreign Ministry. A spokesperson for the ministry said that if foreign businesses wanted to continue to do business in China, they should “respect China’s sovereignty and territorial integrity, abide by Chinese law, and respect the Chinese peoples’ feelings.”

Then, on Jan. 12, China’s aviation authority singled out the second-largest U.S. airline, Delta, for listing Taiwan and Tibet as countries on its website. It called for an investigation and an immediate apology.

American companies were not the only targets of this campaign. The cyberspace regulator also castigated Ireland-based medical device maker Medtronic and Spain-based clothing company Inditex for similar violations.


(click to enlarge)

But a closer look at the U.S. businesses caught in Beijing’s crosshairs reveals they were not chosen at random. For Marriott, China is a crucial market in terms of current revenue and future growth. It owns 569 properties in the Asia-Pacific region, 300 of which are in China. The chain plans to build or acquire at least 300 more hotels there, which would mean nearly 10 percent of its properties would be located in China. In August, Marriott announced a partnership with Chinese e-commerce company Alibaba Group that would allow Chinese travelers to book rooms at Marriott hotels via Alibaba’s travel service. The deal would give Marriott access to more than 500 million new potential consumers. As for Delta, the airline is in the midst of a multi-year restructuring of its Asia-Pacific operations. It plans to move its main hub in the region from Tokyo to Shanghai – the “hub of the future” in the words of Delta’s CEO.

Marriott and Delta are not the only American companies heavily invested in the Chinese market. Boeing, for example, derived over 10 percent of its revenue from Chinese sales in 2016. Apple’s 2016 annual report noted that the U.S. and China were the only countries that accounted for more than 10 percent of the company’s net sales in the past three years. To be more precise, in 2016, “Greater China” announced for 22.4 percent of Apple’s net sales. Perhaps Apple will be next in China’s dog house. In the company’s publicly available reports, revenue for the “Greater China” segment includes China, Hong Kong and Taiwan. Should China’s Foreign Ministry read the report, it will likely be displeased that Apple has chosen to treat these parts of China as if they were separate.

U.S. businesses make a lot of money in China, and they have influence in the U.S. government. These companies do not want to be shut out of the Chinese market, and they have little concern for geopolitics. The only geopolitics these companies care about is the geopolitics that affects their bottom line. If apologizing for listing Tibet as a separate country helps their bottom line, it’s in their interest to do so. And if lobbying the U.S. government to refrain from putting pressure on the Chinese economy helps their bottom line, it’s in their interest to do so. By putting pressure on U.S. companies, China is in effect putting pressure on the U.S. government. Whether or not the U.S. decides to antagonize China on the issue of trade, U.S. and other foreign companies can expect to experience more Chinese nationalism firsthand. China’s market is so big that it can afford to be tough and expect that it will still find companies willing to kowtow to its demands.

In the early 1950s, the Korean War began as a U.S.-North Korea war and quickly became a U.S.-China war. The current North Korean crisis began as a U.S.-North Korea issue and will now become a U.S.-China issue. China sees the coming storm and is demonstrating what it can do if the Trump administration gets tough on trade, the area where the U.S. can hurt China the most. This clash is different from the North Korea crisis, where the U.S. had very limited options and China could easily manipulate the situation to its benefit. It is much more dangerous for China to duel with the U.S. over the bilateral economic relationship. At this point, however, China has little choice. It agreed to help on the North Korea issue to buy time and stall U.S. trade retaliations so Xi could consolidate his power and prepare the country for a rocky path of reform ahead. That power is about to be tested as China braces for the U.S. response.