Is China the Key to Getting North Korea to Give Up Its Nukes?

The Bangkok Post reported that in 2018 the total China trade surplus fell 16.2% on a global basis. The specter of increased tariffs by the United States spurred Chinese companies to ship as many goods as they could, in essence, stealing future sales.  CNBC reported that the trade deficit between China and the United States grew 17%, taking the deficit to $323.23 billion or almost one billion dollars a day.   

What is important is how 2018 ended - the trend line was not good. Exports from China to the United States fell 4.4% in one month. This year hasn’t started that well for China. The Statistics Portal pointed out that the trade balance in December 2018 with China was $57.6 billion, while in January 2019, the deficit was $39.16 billion, or over a 30% drop in one month.  

The BBC reported that the trade talks deadline between the US and China may be extended, and pressure in China is growing to avoid a trade war with the United States.  It has been suggested that the US market is more important to China than the China market is to the United States. According to the US Census Bureau, the imports from China in 2018 were $539 billion, while exports to China from the United States were only $120 billion, causing a deficit of $419 billion.

According to OEC, China’s total exports to the world now are approximately $2.4 trillion, while imports are $1.54 trillion. However, if the US gets into a trade war and significantly increases the tariffs on imported goods from China, the bottom line is China’s economy will suffer and suffer badly. Regardless, the United States is the most significant trading partner with China. According to WTEx, the US accounts for almost 20% of all exports from China.

China’s export market is the fourth largest in the world, behind the EU, Canada, and Mexico. What is relevant is that while Mexico is third at $243 billion, China at fourth is only a little more than half of Mexico’s at $129 billion.

With this as background, the US-China trade talks could be just the weapon that brings North Korea back to the negotiating table.  North Korean trade is worth about $3.8 billion in annual exports to China, and a peaceful Chinese trade deal with the United States is worth it to China to put pressure on Kim to cooperate.

The South China Post says by 2030, that the middle class in China will represent one-third of the population by 2030. Many of the 720 million workers in China, the emerging middle class, have been amassing wealth based on the companies they either own or work for, thus helping to expand China’s export business. The more money they bring in, the more significant the purchasing power of the Chinese middle class. A trade war with the US certainly will impact the income and in turn the discretionary income of the middle class.

With the rapid expansion of income within the Chinese population, and especially the middle class, a trade war, especially an extended one, will put significant pressure on the government to settle its differences with the United States. The American administration could bring to the China trade talks a condition, by which the Chinese government will persuade Kim to return to the nuclear disarmament table. The Chinese have significant leverage with North Korea since China brings in over 83% of North Korean exports and also is their nuclear neighbor. If China were to stop trading with the North Koreans, they easily could buy elsewhere everything brought in from North Korea.

The risk that China takes by not getting involved is that President Trump has re-negotiated so many trade agreements with other countries that he can bring pressure to these other Chinese trading partners to reduce their purchases.  If this were done, those other countries could look for other sources of supply, putting further pressure on the Chinese economy.

China is facing a very hard decision, but I believe that the middle class in China likes their lifestyle and wants to keep it, and because of their numbers, the government will want to appease them.

Look for two breakthroughs in the coming months.

China and America will finalize a new trade agreement that will be the first of many concessions both sides will make over the coming years.

North Korea will begrudgingly find its way back to the disarmament table and will see a significant economic opportunity for its government and its people.