A Peaceful Geoeconomic Approach

A Peaceful Geoeconomic Approach

Shepherd Iverson

In a book Henry Kissinger hopes will remind policymakers of the importance of geoeconomic tools, and retired General David Patraeus asserts “should be require reading for all presidential candidates and their foreign policy advisors,” former Ambassador Robert Blackwell and Jennifer Harris’s War by Other Means: Geoeconomics and Statecraft (2016) is both a strong indictment of current US foreign policy and a prescient recommendation of what must change. Blackwell and Harris contend the Vietnam War pushed geoeconomics off the policy stage, and then as now, the US too often reaches for the gun instead of the purse. Citing the influential Johns Hopkins foreign policy professor Michael Mandelbaum, Blackwell and Harris assert that since the quest for power is competitive and zero-sum, while the quest for wealth is positive-sum and unlimited, we should de-emphasize conventional power politics in favor of geoeconomic statecraft.

With this objective in mind, I have designed a model to peacefully relieve the Kim regime of power while creating positive-sum economic and security benefits for all concerned interests. This model is predicated on the assumption that economic instruments can advance geopolitical goals and that the provision of incentives is the best and perhaps the only peaceful solution to nuclear proliferation in North Korea. This strategic geoeconomic approach expands the set of policy options at a time when it is painfully obvious conventional policies are not working.

BACKGROUND

Although there have been differences, US and South Korean policies toward North Korea have been correspondingly schizophrenic. Inconsistent policies of accommodation, containment, coercion, engagement, and isolation has led to twenty-plus years of frustration and resulted in strategic deception, retaliatory brinkmanship, and the perpetual impasse of Six-Party Talks—dormant since 2008. In Seoul a decade of hopeful engagement (1998-2007) was disrupted by the neoconservative tactics of the Bush Administration and eventually by a change of faces in the Blue House—Korea’s Presidential Palace.

Hardliner policies of the Lee Myung-bak Administration angered Pyongyang elites and after several deadly naval skirmishes in preceding years, with North Korea incurring the most losses, in May 2010 a North Korean torpedo sunk a South Korean Navy ship, killing 46 seamen, and in November North Korea fired 170 artillery shells and rockets onto Yeonpyeong Island, killing four more people. Wisely refraining from knee-jerk retaliation and escalating the situation, Seoul nevertheless was compelled to level sanctions against Pyongyang. This forced the Kim regime to look to Beijing as a new source for trade and capital. This was a reactive period, not a time for policy innovation or the proactive management of relationships. Many Korean citizens hoped this would change with a new administration. However, President Park Geun-hye’s cautious initiatives failed to improve inter-Korean relations, and after the Kim regime vacated President Obama’s 2012 Leap Day agreement, diplomatic engagement was discontinued.

President Park is now in the final lame duck days of her presidency and the US has a new commander-in-chief. Campaign remarks and a growing consensus suggest strategic patience will be abandoned and more pressure will be imposed on China to resolve this increasingly dangerous security situation. East Asia expert Jonathan Pollack observes: “By sharpening the choices confronting Beijing, Washington shows it believes that equivocation or indecision by China is no longer acceptable.” Before introducing my geoeconomic model, let us consider evidence that supports the prevailing opinion that China could do more, and its obvious reluctance.

WILL CHINA STOP NORTH KOREA?

Conventional wisdom is that China prefers a divided peninsula in order to preserve a fraternally allied communist authoritarian state as a buffer between itself and the democratic South. While this rationale was reasonable thirty years ago, it is not today. With over two million men in boots and 2,000 fighter aircraft, it is understood no modern army would push toward Beijing over land through Korea, and after unification, THADD and a US military presence becomes unnecessary.

A common assumption is that although China disapproves of North Korea’s nuclear missile programs, it cannot stop them. Consensus is that Beijing has distanced itself from Pyongyang since the February 2013 nuclear test, while deepening ties with Seoul. It is frequently cited that since taking power in December 2011, Kim Jong-un has yet to meet Chinese President Xi, who has met South Korean President Park six times. However, rapprochement with Seoul need not impugn Beijing’s relationship with Pyongyang. Although there is circumstantial evidence for estrangement this does not discredit an alternative hypothesis that China is feigning displeasure and manipulating policy to disguise its real intent.

Analysts are quick to point out acrimony between Beijing and Pyongyang, but neglect to identify the surrogate role—a substitute who acts for another—North Korea plays in China’s foreign policy. The history of Chinese interventions in the Middle East and multiple incidents of North Korea weapons export through Chinese ports to Iran, Syria, Hezbollah, and Hamas suggest collusion. Beijing’s lackluster response to Pyongyang’s nuclear and ballistic missile tests and its failure to enforce UN sanctions suggest its support may not be a benign legacy of the Cold War, but part of a larger geopolitical strategy. After establishing Pakistan as a nuclear power on one flank, China may prefer an ally with nuclear muscle on its other flank. China may not want to stop North Korea. To determine if it could we must consider leverage.

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COULD CHINA STOP NORTH KOREA?

As part of its annual trade and aid package, Beijing purchases 90 percent of North Korea’s commercial exports and provides the Kim regime with 80 percent of its consumer goods, 90 percent of its energy, over $100 million in UN banned luxury goods, and enough food to feed over a million people. The $1.2 billion trade deficit with China is considered foreign aid since it is inconceivable it will be paid back, as with the unpaid $10 billion Russian debt that was finally forgiven in 2012 after decades in arrears. However, the most profit is derived from the trade itself, which, despite Beijing’s alleged discomfort with provocations, has quietly increased four fold since North Korea’s first nuclear test in 2006 (see figure 1).

Figure 1: China-North Korea Trade Volume (billions)

bbbbbbbb-162Source: Korea Trade-Investment Promotion Agency (KOTRA)

For example, in 2015 China’s exports to North Korea were $4.5 billion and its imports $3.3 billion. As China props up the Kim regime without bringing attention to itself—or anyone losing face—it may undervalue its exports by at least one-third—strategic discount—while the bulk of North Korea exports of mineral products and textiles—utilizing work camp labor—may return a 90 percent profit. Given these assumptions, North Korea’s export profits were $3 billion and its import savings $1.5 billion; this plus $1.2 billion in aid suggests an overall profit from trade and aid with China of $5.7 billion, or almost all of its $6 billion total military budget. From this data it seems indisputable that fungible trade and aid with China is paying for North Korea’s nuclear missile program and keeping the Kim’s in power.

Indeed, if Beijing were to abide by UN sanctions, suspend trade, and retract aid, the Kim regime would likely fail. Without luxury goods for elites, oil for the military, and essential commodities for its people, it is improbable the regime would last long, even if food aid was maintained at survival levels. According to the highest ranking émigré and senior member of the Korean Workers Party: “Without Chinese capital goods, it would be impossible for the North Korean government to operate, and ordinary people would not be able to carry on with their daily lives.” Referring to its “spectacular economic decline” since 1970, the economist Nicholas Eberstadt describes North Korea as more dependent on aid than the poorest countries in Africa.

Under such conditions, leaders of surrogate states need not like their overseers in order to do as expected when money—or its equivalent—is on the table, especially if these activities are consistent with their geopolitical designs. Nor is it incumbent of the Kim regime to publically show gratitude, since increased awareness of the nature of this relationship might put it in jeopardy. The degree of animus or friendship between Beijing and the Kim regime is immaterial to this geoeconomic client-proxy relationship, which would dissolve if North Korea’s nuclear missile program, and missile exports and nuclear technology transfers to the Middle East were unacceptable to China’s larger strategic objectives. Indeed, Beijing would surely withhold trade and aid if Pyongyang started selling weapons to Xinjiang rebels or the Dali Lama.

If this assessment is accurate, China has considerably more leverage over North Korea and is more responsible for its nuclear missile program than most analysts presume. UN resolutions and sanctions will be ineffective as long as Beijing underwrites Kim’s survival. Therefore, we must enlist China’s cooperation for any policy to be successful.

 

BREAKING WITH THE PAST

Enlisting China’s cooperation may not be as prohibitive as observers might think. Dartmouth political scientist Jennifer Lind points out that when China and North Korea originally formed an alliance both countries were weak, resentful, isolated, and the target of Cold War containment by the US and its allies. China has since moved beyond isolation, joined international organizations, and is now the world’s largest trader. Although policies remains anchored to the past, influential factions in the PLA and the CCP regard North Korea as a threat to regional stability. Analysts are uneasy about an unruly state on their border that may provoke a US military response or prompt Japan to nuclearize. International relations expert Li Wei asserted in a state approved journal that North Korea is inappropriate as a strategic ally because it does not conform to the criteria of a “strategic hub country” that supports Chinese political, diplomatic and security goals. Richard Haass at the Council on Foreign Relations writes: “China needs years and more likely decades of relative stability in the region so that it can continue to address its many domestic challenges. North Korea is a threat to such stability.”

Although hardliner traditionalists still prevail over a new generation of policy pragmatists, their patience and authority is not unlimited. Beijing may not renew this relationship indefinitely, as more important geopolitical concerns loom on the horizon. Indeed, since the Mao era, Chinese leaders have exhibited an admirable faculty for high-level consultation and reform in response to changing real-world circumstances. As the security calculus changes, Beijing may seek a face-saving way out of this eroding security dilemma. The geoeconomic model (outlined below) may be their golden opportunity. Sixty-five years ago when its frontline value was beyond reproach, North Korea was a protected pawn in the chess match of great power rivalry. However, now that it has invited danger into the region for China, it may be sacrificed for a larger strategic vision.

The US has not imparted sufficient pressure or incentive to convince Beijing to stop the Kim regime from developing weapons of mass destruction. Policymakers simply shrug their shoulders and proclaim that some problems are insoluble. Indeed, some problems are insoluble given the operating paradigm in use to solve them. Columbia political historian and constitutional lawyer, Philip Bobbitt, whom Kissinger calls the most important political philosopher of our age, asserts: “We are at a moment in world affairs when the essential ideas that govern statecraft must change …the clinging to a paradigm that has lost its usefulness… We have lived in a state of war for so long that, paradoxically, we are unable to make appropriate security plans for peace.” In a world of unequal abundance and mass communication, where creating jobs and expanding markets is a primary goal, it is likely that over the course of the twenty-first century a gradual modernization of foreign policy will involve a substantially greater emphasis on geoeconomic statecraft and smart power economic solutions to promote and defend national interests and solve political problems. The following plan to stop North Korea was designed as a bridge to this future.

 

CREATING GEOECONOMIC INCENTIVES

If the causes of war can be reduced to a competition over money, and control over the land, people, and the resources that produce it, then it may be possible to pay in advance to prevent it. After twenty years of failed policies, a geoeconomic strategy that injects the persuasive power of money into the diplomatic process might be necessary in order to overcome path dependencies that too often terminate in conflict. In a world where almost everything is for sale, there must be some level of financial incentive that will impose insurmountable domestic pressure on the Kim regime to acquiesce to South Korean political control.

With this objective, I propose the institution of a seven year $175 billion Reunification Investment Fund that offers financial incentives for all North Koreans to unify with their wealthy relatives to the South. As in the final days of the Soviet era, the potential efficacy of this model is enhanced by a word-of-mouth rumor currently spreading across social networks that the outside world is a better place to live. North Korean citizens are ready for a change. In my plan, social and economic incentives will employ the soft power of culture and the hard power of capital to impose political results. A financial flow chart for this model is provided in figure 2 below.

FIGURE 2: REUNIFICATION INVESTMENT FUND FINANCIAL FLOW CHART

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*The Bank of Korea may also act as the lender of last resort

In this scenario the South Korean government would award private investors contracts for infrastructural improvements and portions of future markets, industries, and business enterprises worth trillions of dollars in profitable assets, including open markets in telecommunications and automotive products, ownership agreements for mines and seaports, and exclusive construction contracts for a gas pipeline, tar roads, railroads, energy generation, and a multitude of necessary projects. In exchange for resource awards and government assurances, investors will agree to pay a golden parachute of $3.9 billion each year for seven-years to the North Korean political and military elites. The sum of $21.2 billion per year for seven years is earmarked for government bureaucrats and impoverished citizens, money that must be spent anyway to jump-start a new economy. A significant portion of this capital may come from South Korea’s half-trillion dollar foreign reserve savings account. International business, banking, and multilateral underwriting, combined with G-20 leadership, will create confidence by indemnifying this fund with broad assurances from the global community.

In today’s multilayered global balance of power, private interests often serve as a formidable countervailing and unifying force in the competitive nation-state system of world governance. After decades of globalization profit and recent unprecedented QE, the world is awash in money. Billionaire tycoons, transnational corporations, and institutional investors have surplus capital and are looking for opportunities. This fund provides an investment vehicle for capital that would result in large sustained private profits if Seoul would extend the necessary ownership contracts and the Bank of Korea were to offer financial assurances—as the lender of last resort.

Once the money is secured, the fund can be announced to the world through a consortium of celebrities and respected international leaders. It will then be up to North Koreans to decide. With a full range of domestic pressures to reunify, the Kim regime will have little choice but to accept this offer. Indeed, the intent of this fund is to introduce economic incentives that will impose insurmountable domestic pressure on the Kim regime to acquiesce and reunite a nation. Although Kim Jong-un receives no money, that personal safety is more precious than power will encourage him to acquiesce. He will be granted immunity from criminal prosecution, be allowed to keep a portion of his fortune, and promised freedom to live and travel anywhere in the world; nothing is gained by his vilification, while promising security to the Kim family may prevent bloodshed.

The top thousand North Korean families will each get more than $5 million, 11,000 elites will be offered at least $1 million, more than 50,000 political elites and military officers will receive $100,000 to $500,000, and the incomes of 300,000 working class families in Pyongyang will increase by at least six fold if reunification succeeds. The mere existence of this fund sitting in escrow ready to pay out vast sums after reunification will change the incentive structure for every North Korean. Knowledge they could be wealthy beyond their wildest dreams would keep elites awake at night. And for the 24 million impoverished masses, promises of food security, modern health and dental care for their children, property ownership, a functioning water and energy infrastructure, free tablet computers, high-speed international communication links, and double their current income deposited in a personal bank account each year for seven years will stir hopes and expectations as reunification rumors circulate throughout the land.

More than forty years ago, Princeton political scientist David Baldwin proposed rewards be advanced in conflict resolution to balance the pervasiveness of punishment-oriented approaches. Personal rewards may be applied in North Korea because they are an affordable option due to its small population (25 million), low per capita GDP ($1,400), and its relatively impoverished elite. This new generation of North Korean elites should be viewed not as perpetrators, but as victims of an ignoble history. The provision of money is compensation for loss of place in the hierarchy, while amnesty from punishment proffers honor and opportunity rather than humiliation, poverty, and defeat. On the surface, these payments may seem unethical or even immoral, but most elites who will benefit are merely innocent inheritors of their fathers’ ill-begotten estate (position and power) and were not complicit in its original acquisition or in the malevolence that followed. We do not punish descendants of slaveholders or the children of thieves and murderers. Indeed, this payment would amount to a bailout for the misdeeds of their ancestors—without moral hazard—and they will be grateful.

CULTURE-READY FOR REUNIFICATION

After more than a generation of economic decline and fending for themselves following the dismantling of the public food distribution system in the early 1990s, almost everyone in North Korea has abandoned Leninist ideology and is aware of the South’s remarkable prosperity. A steady diffusion of news and information across the semi-permeable Chinese border has changed the cognitive landscape. Commodity-driven exchange-trust networks and a market-motivated underground word-of-mouth information highway has challenged the government’s monopoly on information and its’ meta-narrative about South Korea. Rumors of the inordinately better life just beyond its border has saturated cultural impressions and created a new social context for political change that has not existed before. After decades of silent transformation, this fund will instigate overwhelming enthusiasm and support for reunification.

Little is actually known about the sentiments of the Pyongyang poor, who comprise about two million citizens. Few have refrigerators and even fewer own washing machines; electricity and water are intermittent. They live along dirt roads in small brick-and-clay huts without toilets, heat their homes with charcoal, and bathe infrequently in public cold-water showers. One can imagine that once they hear promises of large payouts from this fund they will walk the streets looking for Kim Jong-un. The Kim regime will likely acquiesce before the situation devolves to this level of general insurrection. With $20-30 million promised to the 200 most prominent families, these elites may take matters into their own hands. Another possibility is a coup d’état sponsored by well-compensated political or military elites. In either case—violent overthrow or peaceful acquiescence—the transfer of power to South Korea would conclude more than half a century of abject tyranny. However, due to the coercive security state, until a reason for hope comes along, people must wait for an angel to appear. This fund is that angel.

CHINA: COMPETITION OR STRATEGIC COOPERATION

Considering old ideological and new economic ties, it is presumptuous to assume Beijing’s intentions and Pyongyang’s actions can be separated. Indeed, what transpires in North Korea may be a harbinger of what to expect elsewhere in the Asia-Pacific. Although this geoeconomic solution pacifies a potential flashpoint for confrontation and offers security benefits, the prospect of a democratically united Korea may offend Cold War curmudgeons in Beijing, who question whether compromise maximizes China’s leverage and comports with its hegemonic geopolitical goals in Asia.

However, once this fund gains momentum, China will have little choice but to cooperate, since its alternatives are less promising. Geoeconomic minded analysts in Beijing may realize security competition is zero-sum, and although China’s military modernization is impressive, the leverage of US (and Western) economic power remains decisive. Competition leading to military conflict would result in sanctions not war, and if the US and its allies stopped importing Chinese goods, financial panic might unbind the glue that keeps the CCP in power and holds modern China together. South Korea would suffer too since the vast majority of its exports to China are intermediate goods whose import would cease. For this and many other reasons it is in Seoul’s interest to champion this fund and broker a deal for Beijing and Washington to work together to unify Korea.

US-China security competition is counterproductive, while a new great-power relationship could be beneficial, as the China Dream is realized over several decades and the US reassesses its role in the world. A return to Deng Xiaoping’s humble internationalism and support for this fund could lead to a reciprocal security exchange—the removal of US forces in exchange for a unified nuclear free Korea—and could mark the geopolitical moment when the US and China decide to cooperate to pacify the planet and bring technological advancement and economic prosperity to its people. Indeed, China and the US could be natural allies in developing a more productive and peaceful future for our species if we can learn to grow and succeed together.

Instead of facilitating the destructive forces of nationalism, progressive Chinese leaders must realize military conflict would jeopardize four decades of economic growth in which 400 million Chinese citizens were rescued from desperate poverty. If western trade sanctions were applied in response to conflict, in addition to losing 40 percent of its foreign exports, Chinese corporations would go belly-up, property markets—which hold the largest store of household wealth—would collapse, and $2.2 trillion in foreign investment would evaporate, as an unsuccessful stampede to withdraw a portion of $15 trillion in household and consumer deposits from under-capitalized state-controlled banks would result in financial meltdown and panic across China. According to geopolitical expert Peter Zeihan, “Should American trade access be revoked it would be as if China suffered from an equivalent of three American Great Recessions all at once.”

While there may be dangerous political instability in China, citizens in America would rally behind the president and the US would mobilize its military from the far reaches of the globe. The US will be less affected than one might expect after exaggerated reports of Chimerican interdependence. It would suffer the temporary collapse of its’ stock market, some inflation (at least at Walmart), and shortages of select electronic and machine products, but enjoy long-term trade balance and employment gains as commodities once shipped from China are manufactured at home. Few realize the US economy is more self-contained and less integrated in the Bretton Woods system than most other nations. The US remains the world’s largest and most efficient manufacturer, producing 75 percent of what it consumes and now all of its energy needs. Galina Hale and Bart Hobijn at the Federal Reserve Bank of San Francisco calculated that goods and services from China account for only 3 percent of US personal consumption expenditures. David Dollar at the Brookings notes that: “Only 1 percent of the stock of US direct investment abroad is in China.”

The global contraction may be tantamount to that in 2009, and the damage to US investors and exposed corporations will be severe, but temporary. Americans and Europeans have healthy public support systems and can adjust to slow-downs, shortages, and price hikes, while most Chinese citizens cannot survive without a steady income, and would turn against a government that cannot provide them with one. Massive unemployment compounded by a weak social safety net may redirect the exuberant energies of a surging lower- and middle-class nationalism against the CCP, that is widely perceived as interminably corrupt after decades of official graft and land grabbing. A reckless foreign policy that impacts livelihoods might be the last straw.

This is the near-term paradox of the Chinese military threat. Few relish the possibility of this scenario in action. Indeed, the artist-political activist Ai Weiwei warns: the US should be careful what it wishes for because what may come after the CCP might be much worse. To countermand regressive security impulses we need new institutional platforms for peace and stability that elicit great power compromise and multilateral cooperation. This fund facilitates these objectives.

CONCLUSION

Since conventional geopolitics has failed to stop North Korea from developing weapons of mass destruction, we should consider new geoeconomic approaches. This Reunification Investment Fund wages geopolitics with capital, and is a new platform for great-power cooperation in the peaceful transition to a denuclearized Korea. Beijing must understand that Washington cannot allow a belligerent unstable autocratic nation, with a GDP the size of Swaziland, to have the capability to maim and murder millions of its citizens at the push of a button. And China does not want a nuclear-armed Japan. These security concerns compel compromise and cooperation. China could facilitate reunification by agreeing to suspend trade and aid to North Korea and by helping underwrite this fund, while the US may also contribute and would agree to withdraw its military from mainland Korea pending the removal of nuclear weapons.

Reunification will benefit everyone with something at stake in the region. The US would get the dissolution of a grave nuclear threat, an end to the possible transfer of nuclear materials and technology to rogue states or terrorists, and a chance to reassess its geopolitical interests in a less threatening Asia-Pacific; Japan gets safety from missile attack and weapons of mass destruction, along with large new labor, export, and investment markets; Russia gets secure rail and energy profits, and year-round passage to Pacific shipping; China gets a reprieve from the possibility of regional nuclear proliferation, free-market access to Korean minerals and ports, cooperation in developing its northeast provinces, the removal of US troops from mainland Korea and an easing of great power rivalry; and South Korea gets permanent peace, trillions of dollars in mineral resources, energy security and diversification, rail connection to China and continental Europe, 50 percent more people, 120 percent more territory, and according to a recent Goldman Sachs study, development synergies that may propel its GNP past France, Germany, and Japan in just one generation.

This fund should be attractive to humanitarian and business interests alike, since over two million malnourished children will be fed, 120,000 political prisoners freed, and financiers, multinationals, and governments will benefit. The information revolution has created modern aspirations for a better life in North Korea and the pre-conditions for political transformation that have not existed before. As the Kim regime denies its citizens access to a prosperous future, power elites and average people are reaching a final threshold of disaffection. This fund creates an impetus for organizing hopes and dreams, and channeling these thoughts and emotions into collective action.

But the realization of this fund’s potential will require the inspired vision of business and political leaders who can bring out the best in all of us; those who perceive the big picture and understand intuitively that ideas that move humanity forward are often initially considered crazy, disruptive, or impossible; those who can show us what we should want, while using pragmatic geoeconomic incentives to get us there. If the geoeconomic smart power dynamics of this plan were popularized in the media and discussed on a world stage, the private sector and heads-of-state may be compelled to underwrite this fund, and reunification could occur within months. Although the trajectory of geopolitics seems unstoppable, we need not continue down this rocky road leading into the abyss; instead we may think outside the box and create novel solutions to unique contemporary geopolitical problems.

In ten years another two billion people will use the Internet and join the global conversation. If allied in efforts to create a greater global unity, expand technological innovation, protect our planet, capture the energy of the sun, and open new markets and possibilities around the world, the US and China—with Russia and Japan—could forge new great power relationships based on geoeconomic necessities, and partner with South Korea to unify a divided people and bring forth a new era of peace and prosperity in East Asia. Let me conclude with this thoughtful assertion from Blackwell and Harris: “U.S. foreign policy must be reshaped to address a world in which economic concerns often outweigh traditional military imperatives and where geoeconomic approaches are often the surest means of advancing American national interests.”

 

 

[1] SHEPHERD IVERSON is a foreign professor at the Institute for Korean Studies at Inha University in South Korea. This essay is adapted from his most recent book, Stop North Korea! A Radical New Approach to Solving the North Korean Standoff (Tuttle 2017).

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