Tag Archive | "china"

As Chinese Tourists Continue to Drop, Korea Turns to the Middle East

By Jenna Gibson

As several KEI analyses have shown, South Korea’s tourism industry  has been one of the main casualties of China’s economic retaliation over deployment of the THAAD missile defense system. New estimates from the Korea Tourism Organization show that China’s retaliation could cost Korea up to 5 million tourists this year, five times as many as when the MERS outbreak significantly dampened tourism in early 2015.

In June 2017, Korea saw a 36 percent drop in tourist entries, due in large part to a 66.4 percent decrease in Chinese visitors compared to June 2016. At that time, Chinese tourists made up 48.8 percent of all entries into Korea – a figure that’s now down to 25.7 percent.

But the numbers also reveal some good news that illuminate an important avenue for future growth in Korea’s tourism industry. While Chinese visitors continued to drop, the number of tourists from the Middle East have jumped significantly, recording a 71 percent increase from June 2016 to June 2017.

And, perhaps more importantly, tourists from the Middle East spend significantly more during their time in Korea than those from other areas, according to a study by the Korea Culture and Tourism Institute. Their recent survey of tourists in Korea showed that Middle Eastern visitors spent an average of $2,593 each during their trip, followed by Chinese tourists at $2,059 each. The average for all visitors to Korea is significantly lower, at $1,625.

In order to cash in on this growing market, the Korean government and the tourism industry are focusing on providing more services for Middle Eastern tourists, including a push to increase the number of halal certified restaurants around the country. Just this month, 117 more restaurants received their halal certification, bringing the total to 252. In addition, many popular tourist attractions have added prayer rooms for their Muslim visitors, including Nami Island, Lotte World, and Coex Mall, as well as Incheon International Airport and Busan’s Gimhae International Airport.

MENA tourism graphic-01

Part of the drive for more tourists from the Middle East choosing to visit Korea is the explosive popularity of Hallyu across the region. Take Iran, for example. There, fascination with Korean culture started back in the mid-2000s, when the historical drama ‘Dae Jang Geum’ was broadcast on state TV and garnered 86 percent ratings nationwide. In a 2017 report of the most popular shows on Netflix around the world, Iran was only one of two non-Asian countries to put a Korean drama (2012’s Love Rain) on the top of their queues.

In June, CJ E&M, Korea’s largest media company, said it will be opening a Turkish unit to increase its presence in Turkey, where locals can’t seem to get enough Korean cultural content. Considering that the filming sites of many popular Korean dramas have become popular tourist destinations, this increase in the popularity of Korean TV shows could lead to overseas fans travelling to Korea to see the spot where their favorite drama couple fell in love.

With the Korean tourism industry continuing to focus on enticing Middle Eastern visitors as well as tourists from all parts of the world, there is certainly an opening to offset some of the losses from the drop in Chinese tourism over the last year or so. But there is still a long way to go – even with the huge increase in visitors, Middle Eastern tourists still only make up around 1 percent of entries into Korea.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from yadem.hayseed’s photostream on flickr Creative Commons.

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Pyongyang’s Deficit Soars: Won Steady But for How Long?

By William Brown

ICBMs are not the only things soaring in North Korean skies.  Comprehensive second quarter data released by China Customs last week shows a huge jump in North Korea’s trade deficit with China—sharply falling North Korean exports and flat imports, a double bad combination.  And, potentially troubling to the Kim regime, the composition of trade seems to be promoting market activity rather than the decrepit, but still enormous, command economy.

China North Korea Trade Balance
*  China stopped reporting crude oil shipments in first quarter 2014 but the trade is reliably said to be continuing, probably at the old aid agreement terms which provides about 150,000 tons of crude each quarter.  The charts, above and below, have added in the value of that volume at generally declining Chinese crude oil export prices–$50 million in the most recent quarter.

Pyongyang has been able to keep a clamp on the exchange rate—won can be traded informally for U.S. dollars in markets around the country—but likely at some cost to the government’s reserves and its ability to expand money supply without sparking inflation, and perhaps with a little help from the balloons. But food and other commodity prices, meanwhile, may be on an upswing as drought followed by flooding diminishes prospects for the critical fall rice crop, and as worries about Chinese supplies may have pushed up gasoline and diesel prices.  An informal inflation index produced by DailyNK has inflation rising to a 16 percent rate in July, suggesting Kim’s signal achievement of fighting inflation may be at risk.

Officially, the Chinese data show a $174 million North Korean deficit in June and $574 million for the quarter, both at record levels. Considering China has taken its crude oil exports “off the books,” the actual North Korean deficit is probably even larger — in the graphics below we have added between $115 to $50 million each quarter to North Korean imports since 2014 to account for the oil.

China North Korea Trade exports and imports

How North Korea finances this large deficit in the face of sanctions on its nuclear and missile activities is not well understood, making policy analysis of those sanctions next to useless. Even South Korea’s Bank of Korea, which bravely estimates North Korean GDP, says it can’t guess at the country’s balance of payments or its hard currency reserves.  But for the sake of argument, and given the trade deficit with China has averaged about $200 million a quarter for the better part of a decade, it would seem reasonable to expect that about this amount of hard currency is earned or borrowed in a combination of net trade with other countries; foreign aid to North Korea including the offset for the crude oil; UN and other international expenditures inside North Korea; small amounts of inward foreign investment and loans; remittances from overseas workers and refugees or Korean immigrant families in Japan, South Korea, China and Russia; and tourism.

  • Probably to re-build domestic confidence after the country experienced a disastrous currency redenomination in 2009, followed by hyperinflation in 2010, Pyongyang’s monetary authorities appear to have fixed the unofficial won’s value at just above 8,000 won per dollar, and began to ignore the official 135 won per dollar rate.  Monetary stability since then is impressive, probably owing to some combination of market price caps, restrictions on the use of foreign currency, conservativism in expanding won credit, direct intervention using the regime’s own reserves and, most interestingly, a willingness to allow legal trading and use of dollars in the market places. And now, with five years of stability, won holders appear satisfied not to chase the dollar.
  • Still, the mystery of the day is why smart money dealers in Pyongyang aren’t taking advantage of the deteriorating export situation by buying up U.S. dollars and forcing a panic.  Either something else is happening that we don’t know about or there is trouble ahead for the country’s always-tenuous finances. One easily can imagine another breakout in favor of the dollar and panic selling of won—hugely disruptive in North Korea’s newly forming half-market economy.

North Korean Won

  

North Korean Exports Labor Intensive and Mining Products

North Korean exports to China fell to only $361 million in the second quarter, the lowest level since 2010, and even this was suppported by generally higher prices for most items.  Major export commodities included:

  • Apparel and other textiles accounted for almost half of its exports—$149 million, up from $145 million in second quarter 2016.
  • Ferrous and non-ferrous ores rose to $78 million, up from $65 million.
  • Fish product exports at $67 million, were up sharply from $31 million.
  • In contrast, mineral products, including coal, was recorded at only $2 million, down from $236 million in the same period of 2016.

None of these items would appear to be big hard currency earners for the regime, although they help provide employment.  Labor intensive textiles exports have grown in recent years as the industry makes better use of its antiquated mills, allowing exporters to pay workers directly in some cases and thus improving productivity of labor and capital alike.  Ore exports would seem problematic, given the UN sanctions against them, but Chinese firms were said to have invested heavily in the huge Musan iron ore complex on the border with China some years ago and may now be recouping investment costs by trucking the ore over into China.  This mine previously served North Korea’s largest industrial complex, the Kimchaek iron and steel mill in Chongjin, which is now dilapidated and only marginally productive. So the iron ore earnings may be coming at the expense of higher value-added steel products once exported from that plant and are likely controversial, even in North Korea, as they are thought of as a giveaway of the nation’s natural resources. China has also invested in a copper mine, and likely in other non-ferrous metals, but results from these are spotty and now largely sanctioned.  Fish products are essentially traded by fishing boats, with flows going both ways depending on the season.

Textiles lead North Korea’s imports

Imports from China also appear to be increasingly driven by consumer rather than government or investment demand.  Textiles, cell phones and television imports are growing at the expense of some industrial inputs and agricultural inputs, and cereals. Petroleum product imports, plus gasoline and diesel fuels, remain sanctioned and low.

  • Textiles and apparel imports reached $258 million, up from $198 million in second quarter 2016.
  • TV and cell phone imports totalled $50 million, up from $38 million.
  • Food products of all kinds registered $123 million, up from $96 million.
  • Diesel, gasoline, and kerosene imports were $19 million, down from $31 million, again from second quarter of 2016.

 

Selected Imports from China

 

Visibility of Chinese-made consumer products among the general public is spreading the suggestion that the economy is doing fairly well—South Korea’s Bank of Korea estimated last week that North Korea’s proxy GDP rose 3.9 percent in 2016, the fastest in well over a decade and this despite the sanctions. But a large question is how far the regime will let this go, given what is clearly a big drain on limited foreign exchange.  Grain imports also rose slightly in the second quarter but remain much lower than in the recent past, and may need to rise much more if the fall harvest turns out to be weak.  Some grain is provided by foreign aid agencies, purchased in China and shipped to North Korea, thus counting as a North Korean import in the trade accounts, but with an offsetting credit in the (unpublished)  transfers account.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Illustration by Jenna Gibson, KEI.

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Target of New North Korea Sanctions Bill: Finances

By Phil Eskeland

(“That’s Where the Money Is.”[1])

Last week, the House of Representatives and the Senate overwhelming passed and sent to President Trump’s desk a new sanctions bill for his expected signature. The bill originally focused on Russia and Iran when it was first adopted by the Senate, but was expanded after bipartisan, bicameral negotiations to include sanctions provisions against North Korea as well.  With all the talk in Washington about the inability of different sides to work together, few issues unite more U.S. public policymakers on both sides of the political spectrum than getting tougher on North Korea.  Last May, the House of Representatives passed the Korea Interdiction and Modernization of Sanctions Act (H.R. 1644) by another overwhelming bipartisan vote of 419 to 1.  Essentially, this new sanctions bill – Countering America’s Adversaries through Sanctions Act (H.R. 3364) – takes almost every word from the House-passed North Korea sanctions bill to include it as part of Title III.

Much of the attention to this legislation has been directed at the first title of the bill affecting Russia.  The debate has primarily focused Congressional limitations on the flexibility given to the Executive Branch to implement the bill.  In the past, most sanctions-related legislation grants the President some discretion to waive or delay the imposition of sanctions, because the U.S. government may need flexibility in diplomacy and cannot wait for Congress to pass a bill to amend or end sanctions.  If there was any constraints on the Executive Branch, it was usually done when there was divided government (i.e., the Republican Congress passed the Helms-Burton Act in 1996, when Democrat President Bill Clinton was in office, that placed into statutory law many of the presidential Executive Orders affecting U.S. trade with Cuba, and thus cannot be unilaterally lifted or altered by the President without the consent of Congress).  It is interesting to observe a Republican Congress reasserting itself as a co-equal branch of government by imposing a series of constraints on the ability of a Republican president to unilaterally waive part of the sanctions against Russia.

However, any additional Congressional limitations on the President’s ability to waive or delay the imposition of these new sanctions do not affect the provisions of the bill dealing with North Korea, despite a last-minute effort by some Senate Republicans.  Nonetheless, the primary purpose of Title III of H.R. 3364 is to close loopholes and target new areas to deprive the North Korean regime of the money it needs to operate.  The fundamental philosophy behind the effort is to “cut off the Kim Jong Un regime’s access to hard cash” and “to restrict North Korea’s ability to engage in illicit trade.”

How does this bill accomplish these goals?  First, the legislation mandates sanctions against foreign persons who engage in five activities that have been identified as major revenue-generating activities for the North Korean regime – high-value metals or minerals, such as gold and “rare earths;” military-use fuel; vessel services; insurance for these vessels; and correspondent accounts, which are used in foreign currency exchanges to convert U.S. dollars into North Korean won.

Second, H.R. 3364 increases the discretionary authority of the U.S. government to impose sanctions on persons who engage in one or more of 11 different activities that generate revenue for North Korea, including those who import North Korean coal, iron, or iron ore above the limits set by the United Nations (U.N.) Security Council resolutions; who buys textiles or fishing rights from North Korea; who transfers bulk cash or precious metals or gemstones to North Korea; who facilitates the on-line commercial activities of North Korea, such as on-line gambling; who purchases agricultural products from North Korea; and who are engaged in the use of overseas North Korean laborers.

Third, there is a provision closing one loophole in the international financial system that would prohibit North Korea’s use of indirect correspondent accounts.  These accounts temporarily use U.S. dollars when converting one foreign currency into another, such as North Korean won.  The aim of this provision is to further cut off North Korea from the U.S. financial system and restrict the ability of the DPRK to conduct business with other nations.

Fourth, the legislation curtails certain types of foreign aid to countries that buy or sell North Korea military equipment in the effort to dry up another source of revenue to the regime.  Nations will have a choice: buy North Korean conventional weapons or receive U.S. foreign aid to help their people.

Fifth, H.R. 3364 augments sanctions that target revenue generated from North Korea overseas laborers who work under inhumane conditions.  It would ban the importation into the U.S. of any product made by these laborers.  The bill would also sanction foreign individuals who employ North Korean laborers.

The legislation also ensures that humanitarian aid destined for North Korea is not affected by heightened U.S. sanctions.  However, H.R. 3364 did not retain a provision in the original House version that contained an exemption for planning family reunification meetings with relatives in North Korea, including those from the Korean-American community meaning that family reunions will still be subject to sanctions.  In addition, the bill contains a reward for informants who report violations of financial sanctions on North Korea, in the hopes of increasing the government’s ability to enforce these sanctions.  Finally, it requires a report from the Administration within 90 days after the bill becomes law on the efficacy of putting North Korea back on the State Sponsors of Terrorism list. The debate over reinstating North Korea on the list was revitalized in light of the assassination of King Jong Nam, the exiled half-brother of the ruling leader of North Korea, at the Kuala Lumpur international airport in Malaysia using the VX nerve agent, a banned chemical weapon.

H.R. 3364 should not be seen as an end-goal, but as part of a continuing process of ratcheting up pressure on North Korea to denuclearize.  As this bill is implemented, North Korea will find new ways to evade sanctions.  Further legislation or action by other nations and the U.N. Security Council may be required to further clamp down on these loopholes.  However, the question remains unresolved if heightened sanctions from both the U.S. and the international community will produce the desired outcome – a nuclear-free Korean Peninsula – particularly before North Korea acquires the ability to launch a nuclear warhead on top of an intercontinental ballistic missile (ICBM) capable of reaching the mainland of the United States.   Sanctions are only as strong as its weakest link.  Thus, North Korea’s main trading partner, China, needs to do much more if it is to live up to its rhetoric that “they will strive for the complete, verifiable and irreversible denuclearization of the Korean Peninsula.”

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Image from Shawn Clover’s photostream on flickr Creative Commons.      
———-
[1] Response by bank robber Willie Sutton to the question as to why he robbed banks, January 20, 1951, edition of the Saturday Evening Post, “Someday, They’ll Get Slick Willie Sutton.”

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Secondary Sanctions on North Korea Should Be About More than China

By Troy Stangarone

In late June, President Donald Trump signaled a shift in the administration’s North Korea policy when he tweeted that “While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried.” Little more than a week later the administration placed sanctions on a Chinese bank and shipping company and two individuals. More recently, there are reports that the administration will continue to increase the pressure on China by placing sanctions on additional small banks and firms doing business with North Korea. While sanctioning Chinese entities that are evading sanctions to do business with North Korea is a key step, the administration should continue to go after non-Chinese actors engaged in sanctioned activities with North Korea.

Shortly before shifting track on China, the administration sanctioned two Russian firms for their ties to North Korea’s weapons programs. Now there may be an interesting new case to consider. Recent investigative reporting by NK News found that Singaporean based OCN (S) Pte Ltd., which built a new commercial development in North Korea and operates two high-end department stores in Pyongyang, has ties to Office 39 and is involved in importing luxury goods banned under UN sanctions. If the claims are corroborated, it could expose OCN to U.S. sanctions. Under tools available to the administration OCN would be subject to U.S. sanctions for both its ties to Office 39, which is an entity sanctioned by the United States and the United Nations, as well as it aid in the facilitation of luxury goods imports into North Korea.

There are three good reasons for the administration to pursue sanctions on entities not based in China. First, for sanctions to be effective against North Korea they need to deprive the regime not simply of access to resources, but the effects need to be felt by the ruling elite in Pyongyang. While North Korea will not give up its weapons due to a few less bottles for cognac or a decrease in other luxury goods, limiting the regimes access to luxury items is one means to create discontent among the ruling elite with the regime’s policies. If the burden of sanctions is only borne by the broader population, it will have little impact on North Korean policy.

Second, while China receives the majority of the attention on sanctions enforcement, as North Korea’s most significant trading partner should, it is not the only source of revenue and goods for the regime. If the administration is able to utilize secondary sanctions against Chinese entities to either restrict North Korean trade or induce greater Chinese cooperation, it also needs to be closing off alternative sources that might be able to provide the regime in Pyongyang a lifeline in a crisis, if not to the same degree as China. Focus on China is necessary, but not sufficient for sanctions to work.

Going after sanctions violating entities in other countries sends a signal to those doing business with North Korea that they are not safe merely by not being a Chinese entity.  It also begins to constrict Pyongyang’s options.

Lastly, targeting third countries provides political space for both the United States and China. China has long opposed the use of U.S. domestic laws to achieve foreign policy goals. However, while China may oppose the method, if the evidence for the violations is solid and firms other than those in China are targeted it may provide space for Beijing to begrudgingly continue to cooperate with the United States. For the United States, it demonstrates that Washington is going after any and all entities that are violating sanctions on North Korea and avoids leaving the appearance of solely targeting China. Maintaining space for Chinese cooperation is important as the United States eventually will need China’s cooperation to deal with North Korea.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are his own.

Photo from aotaro’s photostream on flickr Creative Commons.

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Is China Helping? We Might Be Surprised

By William Brown

President Trump made lots of people a little nervous last week, tweeting that China had been “helpful” on North Korea but that “It just hasn’t worked out.” As if resigned to the inevitable, he typed “At least it tried”.  With breaking news TV stations reporting activity at the nuclear test site it seemed something actually might happen.  Maybe years of crossed red-lines was finally coming to this, a Kim Jong-un test of Trump’s resolve.  I must admit, I woke up in the middle of the night just to check my USGS earthquake tickler.  It, and KOPSI, was quiet.

 

China Tried Tweet by Trump

North Korea, we all know by now, can surprise us with a nuclear test at any time but so far, in the five months of Trump’s tenure, it hasn’t, nor has it crossed a different red line and tested an ICBM, despite warning of such in January.  Many short and medium range missiles have been test fired, of great danger to South Korea and Japan, but nothing close to one capable of hitting the US mainland.  So, while it is still early, it is fair to ask; is China finally bringing effective pressure to bear on Pyongyang to stop the tests that so worry the United States, as we and others have demanded?

China Trade May 2017

Surprisingly, after so many years, perhaps so.  Over the week-end, China released trade data for May and it seems to show, despite lots of naysaying from Washington pundits, that the economic pressure is building.  Monthly data is volatile, and this is not seasonally adjusted, but the trend clearly is not in North Korea’s favor.  Chinese exports to North Korea were fine, in fact up 19 percent in the year through May from the same period of 2016, but imports plummeted 24 percent, largely attributable to a zeroing out of anthracite coal imports.

For Pyongyang, the rise in imports and fall in exports pushed the long-term average $50 million monthly goods trade deficit to about $200 million in each of March, April, and May.  This seems unsustainable, meaning it is likely larger than the funds North Korea can garner from other activities, i.e. trade with other countries, and from services sales and remittances from overseas workers and from families who have fled, leaving their relatives.  Almost no aid is flowing into the country, the Kaesong money pot is broken, and the capital account, usually a balancer for a poor country with a large trade deficit, is likely flat given no one is willing to lend anything to Pyongyang, let alone invest. If all this is correct, imports will not hold up for long and the people will begin to experience the brunt of shortages of all kinds of imported goods.

The first of these might have already happened.  In May, after mere threats that China may reconsider its decades long provision of free crude oil, a legacy of the Mao-Kim era, lines for gasoline formed and prices leapt in Pyongyang, holding high at least through the end of May  (see May blog).

China NK Trade Surplus

Of course, one has to be cautious in depending too much on published Chinese trade data, especially in an area like this with such important policy dimensions and with great lack of transparency.  Ever since Beijing prohibited imports of coal from North Korea back in February, the data has shown exactly zero imports, an unlikely proposition.  The same can be said for other products such as precious metals although it is not true for all UN sanctioned items which have seen reductions but not to zero.  Observers have seen some North Korean coal in Chinese ports and are thus skeptical the coal really has been stopped. And Beijing has a track record of fooling around with its crude oil export data, off the books since mid-2014 (this flow is not counted in the above graphics).  If North Korea had to pay for the vital crude oil, this would likely add another $30 million or so to the monthly deficit.  And even if Chinese customs faithfully records what it sees, there is no doubt a lot of smuggling takes place.  Even so, the data, even if inaccurate, is telling North Koreans who can see it an important story; as Trump says, China is trying to limit economic interchange, a strong and worrisome message in and of itself.

China Coal May 2017

Market data should begin to help confirm if the Chinese cutback on imports is real.  With Kim Jong-un having bought in to at least passive acceptance of a partial market economy, domestic prices are reasonably free to rise sharply, if and when the market exchange rate deteriorates and demand for dollars rises. So far, except for gasoline and diesel, though, such changes have been only slight, as indicated by the DailyNK website.  And clever North Koreans may find other things to sell in exchange for hard currency or imports.  Nonetheless, price and exchange rate stability are two of Kim’s most important success stories to date and are something his father or grandfather never achieved.  It will thus be important to watch these indicators to see if Chinese pressures really are building, giving the young leader worrisome things to think about, even more than Trump’s tweets.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Photo from Global Panorama’s photostream on flickr Creative Commons. 

 

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China, Korea, and the AI Program that Could Bring Them Together

By Nathaniel Curran

When Google’s AlphaGo computer program beat South Korea’s top Go (baduk) player Lee Sedol last March, it didn’t take long for AI experts to hail the event as a milestone in artificial intelligence and machine learning. Nor did it take long for China’s top player, Ke Jie, to issue his own challenge to the AlphaGo team, which culminated in a match two weeks ago. Ke’s claim was especially bold considering that Korea’s Lee had been handily defeated four games to one. In fact, it may have been a matter of national pride that prompted Ke to issue the challenge, considering that the game originated in China thousands of years ago.

With China and Korea both playing high-profile matches against AlphaGo this year, might now be the moment for a resurgence of Go diplomacy? Go is certainly enjoying an unprecedented degree of interest worldwide following the two AlphaGo matches, and China-Korea relations are in need of a boost after the last year of tension over THAAD.

Considering China and Korea’s shared appreciation for the game, as well as the massive press AlphaGo has received, might Go serve as a way of improving the currently frayed relations between China and Korea?

Go Diplomacy

This wouldn’t be the first time Go has been called upon to smooth relations; the game was used to help pave the way for the normalization of Sino-Japanese relations in 1972. Nor is mixing Go and politics unprecedented in the contemporary era, either; Barack Obama gave a Go set to China’s former President, Hu Jintao, on Obama’s first state visit to China.

Now, Go could present a new opportunity to strengthen the relationship between Korea and China. The relationship, currently under severe strain from the backlash against the THAAD deployment, is in quick need of repair, considering Korea’s reliance on China, its largest trading partner.

One reason that Go might be helpful in promoting better dialogue is that although the game is originally from China, it is something of an East Asian cultural bricolage, influenced by the innovations of both countries. The fact that both China and Korea have assisted in the game’s development increases its attractiveness as a tool of diplomacy in the region.

While few know the game outside of East Asia, millions play Go across China, Korea, and Japan, and each country has fostered a unique Go culture and playing style. During most of the 20th century, Japan was the undisputed global center of Go, drawing players from all over the world, including a few Westerners. But for the past thirty years, the top players have been from either China or Korea. More recently, in the 2000s, Chinese players have started to dominate the top ranks of the Go world, mirroring China’s rise on the international stage. However, Google chose to challenge Korea’s Lee Sedol in last year’s highly publicized $1,000,000 match rather than Ke Jie, or any of the other top Chinese players.

Although many associate Go with a vanishing cultural past, its continued popularity is evident; in South Korea there is a 24-hour television channel devoted to the game and Lee Sedol’s match with AlphaGo was front-page news in all the major South Korean newspapers. In China, 60 million internet users watched the match.

Go Graphic

While it’s hard to envision the exact direction Go diplomacy make take, there are a number of possible avenues. China and Korea could work together to form a new, jointly-funded Go federation to promote the game at home and abroad. Simply holding some highly publicized friendship-matches between the two countries would be one way to use the game to increase diplomatic dialogue. Another possibility is AI vs. AI matches, which might also pay dividends to each country’s tech industry.

However, in spite of its potential to improve Sino-Korean relations, the game might hypothetically lead to further division. China must feel snubbed to some degree that Google originally challenged Lee, rather than Ke Jie. Some have even suggested that China’s support for the event was a reaction to the media coverage that the AlphaGo game received. It’s also possible that the countries might struggle over who holds a legitimate claim to the game, and also its narrative. China can make the case that Go originated in China, while Korea’s claim is bolstered by the fact it has received the lion’s share of the Western press’s recent infatuation with Go. Korea also has Lee, who notched one victory against AlphaGo along the way to his eventual 4-1 defeat. Considering that AlphaGo has continued to improve since last year, Lee’s one win probably marks the last time a human will ever manage to win a game against a top Go AI, and Koreans must feel some pride in Lee’s achievement.

Whatever happens next, it’s undeniable that Go has made something of a comeback; a rarity for a game with a twenty-five-century history. Whether the ancient game will serve to exacerbate tensions in East Asia or relieve them remains to be seen.

Nathaniel Curran is a PhD student at USC’s Annenberg School of Communication and a 2017 COMPASS Summer Fellow. The views expressed here are the author’s alone.

Photo from Prachatai’s photostream on flickr Creative Commons.

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China’s Potential Actions in a North Korean Nuclear Contingency

This is the fourth in a series of six blogs looking at a nuclear crisis at North Korea’s Yongbyon nuclear facility. Other pieces will look at the prospective issues of a nuclear crisis in North Korea from the perspective of North KoreaRussia, Japan, South Korea and the United States.

By Yun Sun

Although information on the exact technical specifications of the North Korea nuclear programs remains scarce, insufficient and in-definitive, the prevailing perception is that many, if not most of these programs are located close to the Chinese border.  This is perhaps inevitable given the limited size and terrain of North Korean territory. The famous Yongbyon Nuclear Scientific Research Center, for example, is located 110 km from the Chinese border, while the Punggyeri Nuclear Test Site is around 90 km away. The safety of these nuclear facilities, especially the potential nuclear radioactive contamination has become an increasing concern for the Chinese government given their geographical proximity to China. In 2013, North Korea’s nuclear test had propelled the Chinese Ministry of Environmental Protection to set up dozens of radiation detectors and announced the results at an unprecedented press conference. Although the radiation levels in major cities were reported to be within the normal range, complains from the Chinese public opinions were still rampant.

China’s planning and preparation for a North Korean contingency in recent years have been mostly focused on an internal instability scenario, most likely an implosion caused by a military coup or an unexpected death of the North Korean leader. In such a scenario, the common expectation is that China is prepared to intervene to preserve a functional North Korean government as well as the survival of North Korea as a country if South Korean and/or American intervention is detected. Similarly, if the contingency is a conflict between the two Koreas and U.S. steps in as Seoul’s ally, China will also most inevitably intervene militarily. Depending on the scenario, the impact and the grand bargain, China could aim at supporting the North Korean regime against foreign invasion, establishing buffer zone along the border to prevent refugee inflows, or imposing a ceasefire.

Despite the Chinese preparation for a political/military contingency in North Korea, however, a North Korea contingency due to damage to its research reactor’s core causing the core to burn or a nuclear meltdown at its light water reactor is much less discussed in the Chinese policy community. This could be because that the probability of a nuclear contingency is significantly smaller than the probability of political instability due to implosion/explosion, therefore has not been prioritized. It could also reflect China’s lack of information, experience and anticipation for a nuclear meltdown scenario. After all, China has never been directly exposed to a nuclear crisis domestically or on its border.

In a Yongbyon reactor crisis, China’s first priority would be to prevent or minimize nuclear radioactive contamination of the Chinese territory. Yongbyon is located 110 km from the Chinese border. In both cases of Chernobyl and Fukushima, the nuclear disaster exclusion zones set up have been of 30-km radius approximately. This probably means that China will not be the center of nuclear contamination in the event of a nuclear crisis in Yongbyon, but some level of radiation contamination seems inevitable.

China will see the handling of a nuclear crisis within North Korean territory primarily as the responsibility of the North Korean sovereign government. After all, a crisis with North Korea’s nuclear reactor does not automatically constitute the sufficient justification for international intervention. However, given the widely shared assumption that North Korean capacity, equipment, resources and ability to handle a nuclear crisis are extremely limited, China as North Korea’s sole ally and main supporter will likely be the first country to be asked to provide assistance. And given the nature of a nuclear disaster, the Chinese agencies to provide such assistance are more likely to be military rather than civilian.

Some Chinese military analysts have demonstrated certain levels of confidence about the Chinese ability to deal with North Korean nuclear reactors, citing the shared Soviet origin of the nuclear technologies of both China and North Korea. However, the counter-argument against the Chinese presumed confidence is that older technologies and facilities are more difficult and more dangerous due to their outdated and less sophisticated design. Having said that, the Chinese policy community seems to be convinced that China will have to be responsible, at least partially, and provide technical assistance, dispatch experts, engineers and military personnel for evacuation and the establishment of the exclusion zone.

China will also prioritize the internal stability of North Korea in the event of a nuclear contingency. Depending on the level of disruption and turmoil the nuclear crisis creates, the Chinese military personnel could include a stabilization force to prevent political upheavals. This presumably will be done in coordination with the North Korean government.

China is highly likely to work with Russia to jointly intervene in a crisis involving a North Korean nuclear reactor. Russia is also subject to radioactive contamination given its geographical proximity and therefore has a vested interest. More importantly, Russia is better positioned and equipped to deal with nuclear disasters given its technical knowledge of North Korean nuclear programs and its past experiences with Chernobyl. Russia has a relatively friendly and positive relationship with North Korea. A joint operation with Russia will not only dilute the responsibility China has to carry, but also diffuse a perception of Chinese unilateral intervention by North Korea and by the international community.

Given that a nuclear crisis in North Korea will inevitably create a humanitarian disaster, including radioactive contamination crisis, food crisis and refugee crisis, international humanitarian aid will be solicited and most likely provided. However, HADR (humanitarian assistance and disaster relief) efforts by foreign militaries other than China and Russia most likely will be rejected by North Korea due to its heightened sense of insecurity and vulnerability in a nuclear contingency. North Korea and China will share the goal of preventing South Korea and the U.S. from exploiting the situation to facilitate invasion or unification.

South Korea and the U.S. could possibly refer the nuclear crisis to the UN Security Council. However, without sufficient justification that the nuclear crisis and radiation leakage creates a dire threat for regional and international peace and security, and/or a dire humanitarian disaster, any resolution that China will support will be unlikely to authorize a military intervention. China most likely will support the United Nations to organize and manage the international humanitarian efforts, including aids and donations from South Korea and the United States. China could even request that IAEA dispatch expert teams and provide technical assistance to deal with the nuclear situation. However, military personnel are unlikely to be the invitation list.

Despite North Korea’s damage of the Chinese national security through its nuclear program, a crisis at North Korea’s nuclear plant does not change the geopolitics involved in the Korean peninsula for China. A nuclear disaster in North Korea will increase the cost of China’s current policy, and China probably will use the opportunity to shape Pyongyang’s thinking and curtail its future nuclear provocation. However, China’s fundamental calculation regarding the U.S.-ROK military alliance and U.S. role in the region will not evaporate from a nuclear disaster in North Korea. Under the current circumstances, China will continue to want to preserve the North Korean state until it is shown a desirable endgame in a unification scenario. China’s potential reactions to a nuclear crisis, including military intervention, technical assistance, humanitarian aid and cooperation with Russia all originate from that calculus.

Yun Sun is a Senior Associate with the East Asia Program at the Stimson Center. The views expressed here are the author’s alone.

Photo from Beyond Neon’s photostream on flickr Creative Commons.

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Just How Dependent is South Korea on Trade with China?

By Kyle Ferrier

China’s punitive economic measures against South Korea over THAAD may have shrouded Beijing-Seoul relations in uncertainty, yet they highlight Korea’s economic dependence on China. Throughout the extensive media coverage of impacted Korean companies as well as the regional geopolitical implications, particularly as they relate to the North Korean problem, is a common thread of economists suggesting Korea is too dependent on China for growth. While this is hardly a new development, recent events seem to be reinvigorating scrutiny of the size of bilateral ties. But, in the context of other global relationships how does this one stack up?

The Korean economy is reliant on trade for about half of its growth, making each large external relationship of crucial importance. Of the nearly $500 billion goods exported to the world last year, around $125 billion were sent to China, or a quarter of all exports, placing China at the top of Korea’s list of export destinations. Though both trade as a portion of GDP and the percentage of total exports sent to the top export destination are high, it is not a unique phenomenon, as shown in the Chart 1. In terms of GDP, Korea is the eleventh largest economy in the world. Among its peers in the top sixteen largest economies it is only just slightly behind Germany in terms of total exports as a portion of GDP. Korea’s exports to China as percentage of its total merchandise exports in 2016 is behind Australia’s 31.6 percent, but this pales in comparison to Canada and Mexico’s exports to the U.S., 76 and 81 percent of exports, respectively.

Merchandise Trade

Chart 2 provides a complementary perspective. It measures variance in the share of total exports between the top two export partners and among the top five partners for a subset of countries from Chart 1. Or, in other words, it illustrates how spread out exports are. The first bar is reflective of the spread of exports to the top five export partners. The lower the bar, the less of a difference in the share of total exports between each partner, or the more equally distributed exports are. The second bar reflects the difference between the first and second ranked export destinations. The higher the bar, the bigger the drop-off between the share of total exports. This is also suggestive of the extent to which the first bar is driven by the top export market.

Chart 2 reveals exports for major European economies are more equally spread out than in major Asian economies, with the exception of Indonesia. It also reveals that within this group of Asian economies, Korea and Australia stand out for their dependence on exports to China. Although Japan may also have a more unequal degree of export concentration within its top five markets, the cause for this is divided between the U.S. (20.2 percent) and China (17.6 percent).

Variance Graphic

Yet more is revealed on how the Korea-China trade relationship compares to others if the charts are observed together. Korea and Australia may both heavily rely on trade with China, but Korea is nearly twice as dependent on exports for growth as Australia. While Germany is the closest to Korea in terms of exports as a percentage of GDP, exports are much more equally distributed among its top five trading partners. However, clearly absent from Chart 2 are Canada and Mexico, the inclusion of which would have dwarfed the differences between the selected Asian and European states due to their outsized trade ties with the U.S.

In essence, characterizing the magnitude of Korea’s trade dependence with China in a global context really depends on how it is framed. Compared to other large economies in Asia it is high, and to European countries very high, but in relation to North America is it is practically negligible.

Though the size of the relationship is important, so also is the composition of trade, especially considering why Korea-China economic ties are again garnering attention. Around three quarters of South Korean exports to China is processing trade, meaning goods are sent to China only to be assembled and then exported to a third country who is the ultimate driver of demand for these Korean exports to China. Australian exports to China on the other hand are driven by raw materials (i.e. HS codes 26, 27, and 71), composing nearly three quarters of all exports to China and are directly tied to domestic Chinese demand. During the past several months when Beijing has seen to be punishing South Korea over THAAD, Korean exports to China have increased, rising 10.2 percent year-on-year in April and 12.1 percent in March. While there is obviously still room for China to hurt the Korean economy, the fact that most Korean exports to China are tied to global demand limits the extent to which Beijing may influence economic ties on political grounds.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Photo from SeoulHappyLife’s photostream on flickr Creative Commons.

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Is the Hallyu Crisis with China Over?

By Jenna Gibson

Beijing has approved the broadcast of a new Korean drama that had been co-produced by a Korean and a Chinese company, according to a source in the Chinese entertainment industry, making it the first Korean show to get the green light since before the THAAD spat.

This move is good news for Korean entertainment companies, which have been lamenting the Chinese ban which had slowly pushed Korean stars out of the spotlight throughout last year and culminated in direct retaliation against tourist packages and Lotte Department stores. It also bodes well for drama co-productions, which had seen tremendous success in last year’s standout Descendants of the Sun. At the time, before THAAD derailed things, Korean-Chinese collaboration was seen as the new frontier in Hallyu, and key to the continued success of Korean creative content in the Chinese market.

What’s interesting is the impetus for China’s reversal on allowing Hallyu content. Beijing is likely trying to start off on a good foot with newly elected Korean President Moon Jae-In, himself a skeptic of the THAAD system, in an attempt to give Moon some leeway should he decide to review the deployment.

A recent op-ed in the People’s Daily-affiliated Global Times insisted that “It is likely that Moon will stop THAAD’s deployment,” saying, “The huge economic losses South Korea has suffered are a result of the Chinese public’s anger. South Korea, which relies heavily on China economically, needs to weigh its potential gains and losses carefully” and that “Both Beijing and Seoul should take Moon’s presidency as an opportunity to promote warmer bilateral relations.”

But in reality, Moon has little room to maneuver at this point. THAAD is already in place and operating at some capacity, and recent missile launches from North Korea (the second of which was detected by THAAD) have highlighted its necessity in the public eye.

Although there was a dip in approval last November, the Korean public has largely remained favorable toward the THAAD system, according to polling by the Asan Institute in Seoul.  As of March, 50.6 percent of Koreans approved of THAAD, with 37.9 percent opposed. Perhaps because of this, President Moon has softened his position from outright opposition during the early stages of the campaign to stating that he objects to the way the decision was made, not the system itself.

As Asan Vice President Choi Kang pointed out in a KEI podcast after the election, President Moon may be constrained both by domestic politics and public opinion. Moon’s Minjoo Party only has 120 seats out of 300 seats in the National Assembly, and he failed to breach 50 percent of the vote during his election.

“How he can make a coalition or compromise with opposition parties is going to be a very, very critical issue for him to handle in the early phase of his presidency,” Choi said.

This could be particularly difficult when it comes to China, which has seen a steep decline in popularity among the Korean public since they stepped up their economic pressure over THAAD. Beijing’s economic retaliation has included the ban on selling tourist packages to Korea as well as cancelled concerts and a block on Korean entertainment content being uploaded to streaming sites.

According to a new report from the Korea Institute for Industrial Economics and Trade (KIET), “China’s ban on South Korean cultural imports will amount to 5.6 trillion won (US$5.02 billion) and 15.2 trillion won (US$13.6 billion) in direct and indirect damage in the consumer goods distribution sector” if it continues for six months. New numbers from the Korea Tourism Organization show a 66 percent year-on-year drop in Chinese visitors in April, driving much of the estimated losses for industries such as clothing and cosmetics.

“It’s quite difficult for South Korea to improve its relations with China because public understanding of China has deteriorated over several months,” Choi said. “So unless there is a positive sign coming from China on this economic pressure, it is very unlikely for the South Korean government to improve drastically its relations with China.”

Now that China seems to be offering an olive branch, public opinion may begin to shift back in Beijing’s favor. But after months of panicked headlines over China’s latest crackdown, it’s unlikely that one fantasy romance drama will be enough to turn things around entirely.

At this point, Beijing may continue to roll back its content and tourism bans in the hopes of wooing President Moon to their point of view, or as a face-saving measure. Either way, though, Chinese leadership would be ill-advised to hold their breath for a THAAD removal.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Image from LG전자’s photostream on flickr Creative Commons.

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The Challenge of Managing Relations with North Korea for the Moon Administration

This is the eighth in a series of blogs looking at South Korea’s foreign relations for the new Korean administration. The series also includes blogs on relations with China , the United States, Japan, Russia, the European UnionASEANAfrica, the Middle East, and Latin America

By Troy Stangarone

As the new Moon Jae-in administration begins to put its personnel in place, one of the more challenging international relations to manage will be North Korea. In the strictest sense, with the closure of the Kaesong Industrial Complex, South Korea no longer has relations with North Korea, though this is something that the Moon administration hopes to change. However, even if dialogue or engagement with North Korea restarts under the Moon administration, handling relations with Pyongyang will be complicated by the need to manage relations with other powers in the region as well.

Developing relations with North Korea is complicated, to say the least. Since Roh Moo-hyun left office in 2008, when Moon was his chief of staff, North Korea has conducted four additional nuclear tests and numerous missile tests as it works to advance its nuclear program. It also sank the South Korean naval ship Cheonan and shelled Yeonpyeong island resulting in the deaths of 48 South Korean military personnel and 2 civilians in total.

As a result of these actions the international community and South Korea have placed a range of sanctions on North Korea rolling back the economic interactions that were expanded under the Sunshine Policy. These include the May 24 measures which ended trade outside of the Kaesong Industrial Complex, limited expansion within Kaesong, halted aid, and forbid North Korean ships sailing in South Korean waters. More recent measures closed the Kaesong Industrial Complex and banned ships that docked in North Korea from traveling to South Korea for a year.

Expanding ties with North Korea would require rolling back these measures in part or finding ways to work around them, as well as ensuring that any new activities were in compliance with United Nations sanctions. Under the Park Geun-hye administration, South Korea faced these same challenges and encouraged firms to invest in Russian rail companies to help further the administration’s Eurasia Initiative.

As long as North Korea continues to conduct weapons tests, the scope for creative avenues to engage the North will continue to narrow. North Korea has become significantly more aggressive in its testing patterns under Kim Jong-un and seems to be committed to completing its development process.

Engaging with North Korea also requires a willing partner, something that it is unclear is available in Pyongyang. Park Geun-hye came into office with the policy of Trustpolitik, hoping to slowly build trust between North and South Korea on humanitarian issues such as family reunions, but was quickly met with a nuclear test, a “space launch,” and the North Korean withdrawal of its workers from Kaesong. Ultimately, North Korea’s behavior pushed her away from a policy of engagement. President Barack Obama was also originally willing to engage North Korea having expressed an openness in his 2009 inaugural address and shortly after Kim Jong-un came to power with the Leap Day Agreement, but was rebuffed on both occasions by North Korean provocations. Ultimately, the Obama administration settled for a nuclear deal with Iran and reopening relations Myanmar and Cuba instead of continuing to work on cutting a deal with North Korea.

It seems as though North Korea intends to provide little deference to Moon despite his stated desire to engage, having tested a ballistic missile capable of hitting Guam and Japan five days after Moon came into office. However, the test more likely was designed to send a message to China as Xi Jinping was set to give a major speech at his One Belt, One Road conference with 29 world leaders looking on only hours after the test. The proximity to Moon’s inauguration may merely have been coincidental in light of the larger Chinese target.

Further complicating efforts to manage relations with Pyongyang is Seoul’s need to manage relations with the United States, China, and other powers in the region and coordinate policies. While no international relationship is truly independent, South Korea’s approach towards North Korea is perhaps more constrained by the policies of other countries than other policy areas.

Poor relations with Washington or Beijing potentially hinder efforts by Seoul to directly engage Pyongyang, as China has the ability to undermine South Korean efforts directly and Pyongyang has consistently expressed a preference for bilateral talks with the United States. Seoul will need to avoid any outcome where it is estranged from Washington, which potentially encourages the United States to seek solutions not involving South Korea. Tacking too far away from Washington could result in outcomes such as a preemptive military strike on North Korean nuclear installations that Seoul would want to avoid.

Prior experience with the Sunshine policy also demonstrates that when Washington isn’t on board, the policy is less effective. If Seoul wants engagement to be viable, it will need to find a way to weave its strategy into the United States’ policy of maximum pressure and engagement, while also bringing China along on the broader strategy, which is also one that will require gaining Russian and Japanese support.

Managing relations with North Korea will require a delicate balance by South Korea. It will need to find space within the sanctions regime to develop engagement, but also need a willing partner in Pyongyang to make any strategy of engagement viable. At the same time, it will need to manage the interests of the other parties in the region. If a South Korean policy of engagement were to place China under greater pressure from the United States, Seoul may find an unwilling partner in Beijing as its economic and geostrategic interests are challenged. At the same time, Seoul will need to develop a policy that the United States can embrace rather than work against. Alliance management and North Korea policy has always worked best when Seoul and Washington are on the same page and that is unlikely to change in the near future.

Troy Stangarone is the Senior Director for Congressional Affairs at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Prachatai’s photostream on flickr Creative Commons.

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About The Peninsula

The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.