April 2017

It was a hot spring on the Korean Peninsula.

North Korea’s dictator Kim Jong-un, who American Senator John McCain has called a “crazy fat kid,” was preparing more nuclear weapons tests. The rotund dictator had just finished overseeing a parade celebrating “The Day of the Sun,” a holiday marking the birthday of Kim Il-sung, founder of North Korea and grandfather of Kim Jong-un.

During the parade, North Korea’s military displayed missile canisters bigger and longer than ever before. The broadcast bravado left Pentagon analysts buzzing, wondering if the impressive canisters were an empty Potemkin village or if North Korea had truly made great strides in creating new solid fuel missiles like the KN-15 or a modified BM-25 Musudan to attack America. Either way, the signal was clear: North Korea under Kim sought to achieve nuclear capabilities just as his father the late Kim Jong-il had striven for when lording over the country. U.S. President Donald J. Trump’s bellicose Tweets and threats of stronger economic sanctions would not force young dictator Kim to back down in his quest.

In fact, the opposite seemed to occur. In the face of President Trump and U.S. Secretary of Defense James “Mad Dog” Mattis’ attacks on North Korea’s maneuvers, Kim became ever more oppositional, taking a hard line on the United States. For several months, it appeared North Korea was launching a new missile test every few weeks while official media continued to attack American hegemony. North Korea’s Central News Agency (KCNA) even lashed out directly at ally China for cooperating with the United States over increasing economic sanctions. Censuring North Korea’s long-time ally and essential trading partner, KCNA called China’s economic sanctions a “senseless act that axes the pillar of bilateral relations.”5i

Rumors swirled that in February, only two months prior, Kim had ordered his older half-brother Kim Jong-nam poisoned to death at an airport in Kuala Lumpur, Malaysia. Other rumors suggested the assassination was apparently prompted by Kim Jong-nam’s talks with agents of the U.S. Central Intelligence Agency (CIA) about replacing his incumbent half-brother as head of North Korea in a potential American-led coup. Gossip in spy circles suggested the elder Kim had hundreds of thousands in American cash on his body when murdered. Adding a bit of Hollywood drama to the poisoning, Siti Aisyah and Doan Thi Huong—the two young women from Indonesia and Vietnam caught swiping poison on Kim Jong-nam’s face—claimed they had no idea they were handling real poison, instead under the impression it was all for a prank television show.

The questions worrying analysts: What would Kim do next, and worse, was war imminent?

***

Hundreds of miles to the south, tensions in Seoul were palpable. Every subsequent North Korean missile test saw the KOSPI6 drop a few percentage points, and the clarion call by American pundits to take out Kim grow louder.

Several candidates vied for the South Korean presidency after their previous leader, Park Geun-hye, jailed for a multi-million dollar bribery scandal that shook South Korea to the core. Lee Jae-yong, the 48-year-old heir to Samsung Group—South Korea’s largest conglomerate, accounting for over 17 percent of the country’s gross domestic product with divisions spanning from mobile phones to real estate—was also caught up in the scandal, now hunkering in a 6.3-square-meter jail cell in Seoul Detention Center.

Perhaps the biggest issue facing the candidates was whether to continue deployment of Terminal High Altitude Area Defense (THAAD), an anti-ballistic missile defense system developed by the Americans. Aside from using diplomatic channels and the state-owned media to criticize South Korea,ii the Chinese governmentiii also used extensive economic punishment, including blocking K-Pop and South Korean movie stars from touring China. By as early as March 2017, tour groups from China to South Korea had dropped 40 percent year over year, decimating retail sales and the leisure sector. But the economic punishments were only just beginning. South Korean Soprano Jo Sumi had to cancel her China tour, as did pianist Park Kun-woo.iv The Shanghai Ballet replaced a Korean, Kim Jiyoung, as the lead role in a performance of Swan Lake. China even blocked South Korean trade minister Joo Hyung-hwan from visiting the annual Boao Forum in Hainan, China, where businessmen and government elite mingle.v As one senior executive of a large real estate developer told me in September 2017, “We had to cancel all performances and exhibitions by South Korean artists and musicians that we had planned for our malls.”

All the while, the Chinese state-owned Global Times called for more economic weapons to be directed at South Korea: “We also propose that Chinese society should coordinate voluntarily in expanding restrictions on South Korean cultural goods and entertainment exports to China, and block them when necessary,” reported an editorial.vi Chinese consumers quickly heeded the call and started buying Japanese and German auto brands like Toyota and Volkswagen over Korean brands like Hyundai and KIA. Clearly effective, these measures witnessed a year over year halving of KIA’s March 2017 sales in China.vii The assault on Korea’s economy was serious—after all, although China is known as an export machine, South Korea actually exports more to China than the other way around. In 2016, for example, South Korea ran a $72.2 billion USD surplus.

Back home in Shanghai, around the time my friend JJ contacted me (see Preface), I prepared to do an hour-long radio debate on WAMU for National Public Radio (NPR) along with Gideon Rachman, the Financial Times Chief Foreign Correspondent, and Sheila Smith, a Senior Fellow on the Council on Foreign Relations. While the debate centered around how President Trump and his Chinese counterpart, President Xi Jinping, viewed THAAD and the tensions on the Korean peninsula, I was also going to argue controversially that China does not control North Korea as many American political analysts and President Trump believe despite it being such a large trading partner. North Korea might fall into the Hot Partner category, but that did not mean China has complete sway—it still has to use carrots and sticks to keep North Korea in line. Kim Jong-un has no personal relationship with China’s leadership. In fact, North Korea and China’s historical closeness has been more a marriage of convenience than one due to mutual respect or Communist linkages as many American analysts believe. Kim Il Sung, Kim’s grandfather, had a tense, bitter relationship with China’s leaders. Peng Dehuai, a leading Chinese general, for example called Kim “extremely childish” for how he ran the Korean War (1950–1953). He also bridled when China criticized him for being “feudal” by anointing his son as successor. The following links further address the issues surrounding the China-North Korea relationship:

https://www.washingtonpost.com/opinions/why-kim-jong-un-is-alienating-china/2017/10/01/20d99adc-a541-11e7-ade1-

76d061d56efa_story.html?utm_term=.23bd22dbac48

http://www.38north.org/2017/09/jperson092617/

In recent months, the South Korean economy had floundered as a result of Beijing’s anger at President Park’s agreement to accelerate the installation of THAAD, which occurred just months before her arrest. Her decision ended the warming of ties between South Korea and China that began in summer 2013 when President Xi hosted President Park for a state summit. It was around the same time that President Obama’s ill-fated China Pivot seemed to be failing as countries gravitated more closely towards China’s orbit. If even South Korea, one of America’s closest allies, distanced itself from America in favor of China’s warm economic embrace, other nations were soon to fall into line.

President Park’s decision stunned the region in July 2016, announcing closer military cooperation with the United States and the installation of THAAD—in direct opposition to China. The Chineseviii felt President Park had betrayed them, slapping them in the face. As mentioned before, Chinese consumers promptly heeded calls by state media, boycotting South Korean products like KIA cars and Amore Pacific cosmetics, and elected to visit destinations such as Japan, Indonesia, and Thailand over South Korea. The boycotts devastated South Korea’s economy. China was South Korea’s largest trade partner, with which it shared $124.4 billion USD of trade in 2016—almost double the trade with the U.S. at $66.8 billion that same year. Even a 10 percent drop had a dramatic impact on the everyday lives of South Koreans.

In a new form of statecraft to pressure South Korea’s business community, China’s government even appeared to target and single out Lotte—another chaebol7 conglomerate that rivals Samsung for influence and size—in its barrage of economic punishment. China’s divvying out of such pressures to different countries and sectors is not unprecedented. Having previously targeted states and sectors (such as social media where it has blocked Facebook and Twitter from being seen in China without a Virtual Private Network VPN), China has also punished companies like Google and GlaxoSmithKline (GSK) for breaking Chinese law. However, the government’s targeting of Lotte was the first time China seemed to execute such an all-encompassing attack on a specific company operating in China for actions undertaken outside its borders.

In the months leading up to April 2017—after JJ had been denied a meeting between President Xi and his presidential candidate—87 of Lotte’s 99 retail outlets across China were shut down by officials citing fire code infractions. Construction on its multi-billion dollar theme park, which was poised to compete with Shanghai’s Disneyland and Beijing’s soon-to-open Universal Studios, was halted. A joint venture between Lotte Shanghai Foods and American chocolate maker Hershey’s was ordered to stop production. Local tax bureaus across the country audited Lotte’s diverse operations, and online consumers started calling for the boycott of all Lotte snack products through WeChat8 messaging groups and other media platforms. Chen Ou, the founder of Jumei Youpin, a large groupbuying platform similar to Groupon, announced, “we have completely scrubbed the name of Lotte from our Web site,” further expressing, “we would rather die than carry its goods in the future.”

What brought about such ire from China toward Lotte specifically? Lotte had ceded the golf course that was now being used for THAAD deployment in the Seongju region, southeast of Seoul. Despite Lotte’s investment of over $5 billion USD in China, not to mention its employment of tens of thousands of Chinese (rendering it a friend to China), the conglomerate bore the brunt of government and consumer anger toward THAAD. Lotte’s protests, claiming it had no hand in THAAD’s deployment and was merely following its home government’s demands, had little effect in absolving the chaebol of public blame in China. Ultimately, Lotte announced that it was looking to sell most of its retail outlets in China as it did not expect to see a turnaround in their business anytime soon.

Even rival South Korean confectioner, Orion, saw its Choco Pie sales suffer as consumers mistook it for part of the Lotte group and boycotted the company’s (formerly) popular snack cakes. Orion announced earlier in April that it was lowering production in its six China plants. Meanwhile, the company’s public relations team sought to convince Chinese consumers through online messaging that Orion was not part of Lotte Group, but to no avail. While China’s foreign ministry denied targeting Lotte—a move of plausible deniability—the coincidence of Lotte’s fire code violations, tax troubles, and the role it played in THAAD’s installation left no doubt as to the reasons for Lotte’s losses.

Now understood by South Korea’s business community, and global businesses by extension, Beijing’s message was clear: if you want access to China’s wallet, you must adhere to our political demands. If you do not, you will be punished as South Korea has been. Even more alarmingly, companies realized that they too were subject to punishment as Lotte had been. Apart from governing bodies, companies would also be required to bend to China’s political will, even if that meant going against the decisions of home governments. This sent chills through the global business community. Boardrooms scrambled to develop contingency plans lest their companies unwittingly get caught up in a political fight. Relying on press releases and typical government lobbying firms would no longer suffice in crisis situations. Companies needed to install leaders and strategies more akin to those required for the title of Secretary of State than of public relations head.

It was at the height of Lotte’s and South Korea’s economic strain when I received JJ’s inquiry to see if I could arrange a meeting with President Xi and JJ’s presidential candidate.

***

An understanding of Beijing’s resolute position requires consideration of its perspective in the face of THAAD and what the “defense system” represents. Many South Koreans and Americans alike underestimated the fear that THAAD has generated among Chinese. Their miscalculation results from a lack of awareness about the paradoxical role America plays in the region (and in most of the world for that matter)—both stabilizing and destabilizing. Smaller countries that do not have long-term historical ties with China, such as Australia, are comforted by a greater American presence. Yet the sentiment is less benign in countries like Cambodia or Laos, which suffered under American military aggression during the Vietnam War. Other regimes see how America helped replace Muammar Gaddafi in Libya or Saddam Hussein in Iraq and remain wary of America’s long-term intentions and willingness to push for regime change.

The Chinese have a right, in truth, to be worried about THAAD and America’s overall military presence in the Asia-Pacific region. China views America’s presence more as an ongoing military threat than as that of a friendly police officer, despite U.S. efforts to present itself as the latter. With 35,000 American troops based in South Korea and a little over 39,000 in Japan,ix the invasion of China is no logistical difficulty. Were Kim’s regime to topple in North Korea, American troops could drive into China in a matter of hours, relatively unhindered. To put it into perspective, imagine how Americans would feel if China had 35,000 troops in Mexico, and another 39,000 in Cuba.

Until America reduces its military presence in Asia, especially in South Korea, it will continue to be looked upon by the Chinese as a long-term threat, regardless of the short-term Sino-US warming of relations as we have seen between President Trump and President Xi. China is indeed beginning to find Kim Jong-un’s regime more troublesome, recognizing its potential threat to regional stability if North Korea achieves its nuclear aspirations. Yet it is unlikely that China will take initiatives toward a regime change or look to neuter Kim unless America first reduces its military presence in the region.

Kim’s father (Kim Jong-il) had been a useful buffer against the Americans for China—a role still played by the DPRK (Democratic People’s Republic of Korea) to an extent—but Dictator Kim is looked upon with more scorn in China, having demonstrated unhinged volatility and over aggressiveness to seek nuclear weapon capability. No Chinese senior officials have welcomed the young dictator to China on a state visit, nor have any visited him in North Korea’s capital Pyongyang after he had his uncle, Jang Song-thaek, executed in 2013.9 President Trump and his successors thus have the potential to make a grand bargain with China to make the Peninsula safer. Yet the Chinese will not cross a certain red line in handling their unruly neighbor—such as imposing cutting-to-the-bone economic sanctions—unless they are first assured of China’s long-term safety, regardless of the American administration or political party in power. A massive U.S. troop reduction is therefore necessary for China’s peace of mind, enabling subsequent Beijing-led measures to put Kim’s regime in a vice.

***

A result of China’s need for assured regional security, THAAD’s threat to China received a commensurately threatening response, as we have already seen. This response played keenly on the minds of South Korean presidential candidates as they prepared for a heated election.

In the face of South Korea’s deteriorating economy, candidates used THAAD to differentiate themselves. Some like Moon Jae-in, previously a student activist and Chief of Staff to former President Roh Moo-hyun (2003–2008), promised to halt deployment of THAAD and rethink its importance. Others like Ahn Hee-jung, Governor of Chungcheongnam-do Province, advocated consideration of further deployment. All candidates, however, stated plans to renew relations with China, a goal transcending party divides.

I was therefore not really surprised after thinking about it, after initially being completely surprised, when approached by JJ to arrange a meeting between his candidate and China’s top leader. Yet the rejection by the Chinese to secure a back channel—the overture met with firm refusal—shed light on South Korea’s quandary. Regardless of what its government did at this point, South Korea risked infuriating China and irking America, the latter now run by a temperamental President Trump for whom military strikes against the DPRK were not out of the question.10 Caught in the middle, South Korea was unsure of how to proceed until presidential elections were concluded. Even then, South Korea saw no way to win.

Ultimately, Moon Jae-in, generally considered South Korea’s most pro-China candidate, won the presidency and assumed office on May 10, 2017. In addition to promoting diplomacy and discussion over military action against the North, President Moon’s platform challenged the nation’s stance on THAAD. He questioned the Ministry of Defense’s decision not merely to continue THAAD’s installation, but to accelerate it—a measure even more perplexing given the recent impeachment of former President Park, seen by many as THAAD’s champion. Throughout his campaign, Moon seemed to focus more on South Korean relations with China than on any pure domestic issues facing the country.

Yet despite President Moon’s more moderate approach to THAAD, China’s media outlets showed no sign of fatigue in their barrage of South Korea. Under sustained pressure from the South Korean business community, President Moon finally surrendered to China’s demands on June 7, calling for THAAD’s immediate suspension.

Messages of capitulation flooded South Korea’s official media. “We are not saying the two launchers and other equipment that have already been deployed should be withdrawn. But those that have yet to be deployed will have to wait,” said a senior official from Moon’s office, as reported by South Korea’s Yonhap news agency. Left unnamed by Yonhap, Moon’s senior official further stated that the assessment could take up to a year. By delaying rather than cancelling THAAD deployment completely, Moon attempted to placate China but also appease South Korean military hardliners who demanded that THAAD’s installation be continued.

Meanwhile, Chinese state media predictably embraced the news. The Global Times, for example, expounded on the benefits President Moon could reap from a closer relationship with China, encouraging the new president to move away from America’s patronage as Filipino president Rodrigo Duterte had done.x Again, in China’s modern form of statecraft it synchronizes messaging by the state, the media, and consumers.

After a battle of wills, victory was clear—China’s combination of traditional statecraft and economic punishment had caused President Moon to back down. Importantly, in getting what it wanted, China did not fire a single missile or send warships to patrol South Korean waters. Beijing had invented a new form of statecraft: instead of guns and ships, the government deployed economic carrots and cudgels, even against China’s erstwhile allies. Simultaneously using state-owned media to cajole, threaten, and rally everyday Chinese consumers, Beijing was able to secure its political goals.

Traditionally, major powers such as the United States will implement economic sanctions against enemies like Iran, Cuba, or North Korea, bullying problematic nations into submission, often over decades, before resorting to military action. But China has started to use economic weapons even against friendly nations, coercively orienting their governments towards China’s preferred direction. Contrary to the claims of many pundits who suggest that China prioritizes economic growth at all costs, China has demonstrated an unmistakable willingness to sacrifice short-term economic growth opportunities in order to bend other nations to its political will.

Neighboring countries are growing accustomed to China’s economic weapons. In November 2016, Mongolia hosted the Dalai Lama for four days at the invitation of a Mongolian monastery. Much to China’s chagrin, Mongolian senior officials welcomed the Tibetan spiritual leader, viewed by the Chinese government as a traitorous separatist rather than the peace-lover he is considered to be elsewhere. Within a month of the Dalai Lama’s brief tour, China ceased imports of Mongolian commodities and canceled a visit by Mongolia’s Deputy Prime Minister to Beijing. Only after Mongolia apologized a few weeks later did tensions cool and imports resume. Given that 75 percent of Mongolia’s exports rely on its trade with China—contrasted with a meager 0.57 percent involved in U.S. trade—Mongolia’s decision to back down and apologize was a foregone conclusion.xi

Similarly, the Nobel Peace Prize committee appointed by Norway’s Storting11 outraged China when it conferred the 2010 Nobel Peace Prize on Chinese dissident Liu Xiaobo. Calling for the overthrow of the Chinese Communist Party, Liu Xiaobo is looked upon dimly by most of his fellow citizens, and it therefore raised Chinese eyebrows when the Nobel committee bestowed the honorable title on Liu Xiaobo. Responsible for the Nobel committee’s appointment, Norway would surely not elude Chinese retaliation. Beijing immediately ended normal relations. Norwegian salmon imports to China dropped 61.8 percent within a month.

Just as they had done with South Korean Orion Choco Pie or KIA’s auto, Chinese consumers voted with their wallets, buying imports of Scottish and Tasmanian salmon and thereby indicating favor for governments in the UK and Australia that have taken a friendlier stance toward Chinese government policies. It took six years for Norway to normalize relations with China. Adding strain to patience, normalization was only complete once Norway released the following statement: “The Norwegian Government reiterates its commitment to the one China policy, fully respects China’s sovereignty and territorial integrity, attaches high importance to China’s core interests and major concerns, will not support actions that undermine them, and will do its best to avoid any future damage to the bilateral relations.” The result? Norwegian salmon swiftly repopulated China’s grocery shelves, cheered on by state-owned media and bought in droves by eager Chinese consumers.xii

The lesson to be learned? Nations and companies erring in the footsteps of Norway or Lotte will quickly find themselves in Beijing’s crosshairs, as trespassers against Chinese security concerns increasingly get brought into line. In a classic execution of coercive diplomacy, China will apply economic pressure to transgressors while rewarding those who acquiesce, as South Korea, Norway, and Mongolia ultimately deemed best.

*****

Dialogue:
Jacques deLisle, Stephen A. Cozen Professor of Law and Professor of Political Science, University of Pennsylvania

I first met Jacques deLisle in 2003 when he invited me to speak about the shifts in China’s economy to a group of his graduate students at the University of Pennsylvania. I try to have dinner with him every year or two either in Philadelphia or Shanghai. I always enjoy hearing his views of changes in the legal and political science worlds dealing with China. Aside from being a professor, he is also Deputy Director, Center for the Study of Contemporary China; Director, Center for East Asian Studies; Co-Director, Center for Asian Law, University of Pennsylvania; and Director, Asia Program, Foreign Policy Research Institute. His research focuses on contemporary Chinese law and politics, including: legal reform and its relationship to economic reform and political change in China, the international status of Taiwan and cross-Strait relations, China’s engagement with the international order, and U.S.-China relations.

His writing appears in Journal of Contemporary China, Orbis, and other foreign affairs and area studies journals, law reviews, edited volumes, and Internet and print media. He is co-editor of China’s Global Engagement (with Avery Goldstein, 2017), The Internet, Social Media, and a Changing China (with Avery Goldstein and Guobin Yang, 2016), Political Changes in Taiwan Under Ma Ying-jeou (with Jean-Pierre Cabestan, 2014), China’s Challenges (with Avery Goldstein, 2014), and China Under Hu Jintao (with T. J. Cheng and Deborah Brown, 2005). He frequently serves as an expert witness on Chinese law, consultant to U.S. government, Chinese, and international NGO projects relating to law and reform in China.xiii

Rein: Are American economic sanctions sufficient to dissuade Kim from his nuclear ambitions? Or does President Trump need to launch a strike on North Korea as he did with Syria? If he were to do so, how do you think China and South Korea would react? Would a wide-ranging war be inevitable?

deLisle: Many iterations of U.S. economic sanctions over many years have not effectively dissuaded North Korea from pursuing its nuclear weapons program, or its ballistic missile program. To the limited extent that U.S. sanctions could be made tougher (and it is a quite limited extent), it would be very optimistic to expect them finally to have the effect of getting Pyongyang to give up its arms programs.

Truly potent economic sanctions would require full cooperation from China. That has not been forthcoming, and is unlikely to occur. Moreover, although Kim’s thinking is not exactly transparent to outsiders, there appears to be good reason to think that he considers his nuclear weapons program to be essential to regime survival. That is, having nuclear weapons is what deters the U.S. (and everyone else) from treating him like Gaddafi—from taking steps that could topple Kim and potentially end the DPRK regime, and, perhaps, an independent North Korea. If that is indeed Kim’s assessment, then it is hard to see how any policy measures could induce him to give up nuclear arms.

Trump has talked of resorting to force, but the idea has generated near-unanimous opposition among experts and analysts in the U.S., and also among U.S. allies in the region, for obvious reasons. A strike akin to the one Trump launched over “beautiful chocolate cake” with Xi Jinping at Mar-a-Lago would not be nearly enough. The goal presumably would be, at minimum, to destroy Pyongyang’s nuclear capabilities. The challenge would be somewhat akin to the Israeli attack on the Osiris reactor in Iraq in the early 1980s. But the task would be much more difficult to accomplish here, given the more advanced stage and greater scale of North Korea’s nuclear program, and given that some of the targets are hidden or hardened to survive a U.S. strike. An attempt to take out all of Pyongyang’s nuclear facilities, thus, would require large-scale action and very well might not be fully successful.

And, of course, there is the very high risk of devastating retaliation by North Korea and subsequent escalation of conflict. If any part of the North’s nuclear arsenal survived an attack, a weapon could be used against Seoul, or perhaps Japan, or perhaps U.S. military assets in the region. Even without deploying a nuclear device, Kim could use his military’s considerable capacity to lay waste to Seoul (and other places) with conventional weaponry. Attempting to cripple North Korea’s capacity to retaliate with conventional arms would require very extensive U.S. strikes, with very limited prospects for success.

South Korea—more so under Moon but also under his predecessor Park (and for past, and likely future, South Korean leaders more generally)—would hardly welcome such a risky and likely catastrophic (for South Korea) course of action by the United States, under any but the most dire circumstances.

China would be vehemently opposed as well, for reasons that include opposition to U.S. military action on its doorstep, and concern that the result would be a disorderly collapse of the DPRK regime and all the cost and chaos that would entail for China.

Rein: Do you think China has been actively trying to contain North Korea’s nuclear ambitions with economic sanctions? Or has China been playing President Trump by asserting its commitment to sanctions yet keeping trade routes open with North Korea? Does China view Kim Jong-un as an ally and useful buffer against America, or is he becoming a thorn in their side?

deLisle: The U.S. understandably has been frustrated for a long time with the weakness of the pressure that Beijing has been willing to impose on Pyongyang (whether through economic sanctions or other means). Trump has sought to push China to do more, after retreating from an initial, implausible view that he might outsource the North Korea problem to China. Trump’s now more modest expectations of greatly increased cooperation from China are certain to be disappointing, as we have already begun to see. He already faced this during his first few months in office, and opted to give Beijing something of a pass (noting that “at least China tried”). There has been some talk of the Trump administration imposing secondary sanctions on Chinese firms that continue to do business with North Korea, but such action does not appear imminent. For U.S. policy, a key question is if—or when—Trump’s apparently growing frustration with China on this issue will have major policy consequences.

China’s approach well may be to promise a fair amount and deliver very little. U.S.-China relations with respect to North Korea face a fundamental problem in that Washington and Beijing have very different bad case scenarios. To be sure, a war on the peninsula is bad for both the U.S. and China, and neither favors a permanently nuclear armed North Korea. Beyond that, interests diverge. For China, a very bad outcome is a disorderly regime collapse in North Korea, refugee flows into China, and the prospect of a reunified Korean peninsula governed by a U.S.-allied government. For the U.S., a very bad outcome is North Korea becoming an even more potent rogue state, brandishing the threat of nuclear attack against U.S. allies in the region and, worse, the U.S. homeland, and possibly proliferating nuclear weapons or know-how to third parties with interests and agendas profoundly adverse to those of the United States.

This basic dynamic has been in place for some time. Recently, it has been shifting in two potentially significant ways. First, Pyongyang’s pursuit of a larger nuclear arsenal and the development of missiles to strike U.S. territory changes the U.S. calculus and shifts the policy debate. The perceived imperative to act and the risks of action are both rising. Second, Beijing has grown increasingly unhappy with Pyongyang under the current North Korean leadership. As Kim’s antics have become more outlandish, as other states have become more concerned about the threats he poses, and as he has begun to bite the Chinese hand that feeds him, Kim has become more of a liability and a risk for China. Supporting North Korea has become more awkward for a country that increasingly claims superpower or near-superpower status and that seeks to cast itself as largely supportive of the international status quo. And it is becoming more difficult for China not to accept that the Kim regime’s behavior genuinely threatens the legitimate national security concerns of other states.

Kim Jong-un’s North Korea remains a useful buffer against the U.S. (and, more specifically, the prospect of a unified, U.S.-allied Korea). But this benefit comes with increasing costs, and annoyance, for Beijing as the Kim regime’s behavior increasingly threatens neighboring states’ security and embarrasses Beijing. This surely accounts for China’s willingness to take such steps as banning the export of some dual-use (military-civilian) goods, supporting UN Security Council-authorized sanctions and trade restrictions in response to Pyongyang’s weapons programs, and suspending coal imports from North Korea. But the sanctions that Beijing has undertaken or supported have not always been fully implemented and have stopped well short of posing existential threats to the Kim regime (or even curbing China’s overall trade with North Korea).

Rein: What do you make of North Korea’s recent criticisms of China’s economic sanctions. Is there are a real break between the two countries, or is Kim merely posturing? Does China have as much political control over North Korea as President Trump believes?

deLisle: Kim’s criticisms of China’s economic sanctions are one marker of the notable deterioration in recent years of a relationship that the Chinese used to like to describe as being as close as “lips and teeth.” In reaction to the modest—but economically painful to the DPRK—measure of suspending Beijing’s coal imports from North Korea in early 2017, North Korean state media’s referring to China (albeit not by name) as “dancing to the U.S.’s tune” and, in effect, collaborating in an effort to bring down the DPRK regime, was a remarkable statement. But it is, at best, premature to discern a profound break. Absent a sustained, more radical turn in Kim’s behavior or a determination in Washington that Kim is becoming an imminent fundamental or near-existential threat to the U.S. (or, perhaps, U.S. allies), China still sees its interests as largely consistent with the status quo. Unless conditions change significantly, Beijing’s approach is likely to remain one of “hold your nose (increasingly tightly), and stick with Kim.”

It is hard to know how much control Trump thinks Beijing has over Pyongyang, but he appears to think it has a lot. And it is difficult to define how much control China does have over North Korea, but it is limited, and complex. Beijing is in a difficult position. It does not have the capacity simply to issue orders to Kim—unless it backs them with threats that it does not want to have to carry out. The DPRK is, of course, utterly dependent on Chinese support. In that sense, China has awesome potential leverage, but it can exercise that leverage only at considerable risk and cost. The consequences of trying to use it—in terms of Pyongyang’s reactions—are not entirely predictable, and the outcome might be at odds with China’s interests and preferences.

Rein: Do you foresee a scenario where China could move to neuter Kim or push for a regime change? Do you think if America reduced its troop size in South Korea and Japan that China would agree to a grand bargain to push for reunification?

deLisle: So far, we have been talking mostly about marginal changes in a bad situation (on one hand) and the possibility of highly disruptive and possibly catastrophic change (on the other hand). An intriguing alternative is a “grand bargain,” which comes in a couple of possible varieties: one in which China acquiesces in regime change in North Korea in return for significant (or total) withdrawal of the U.S. military presence in South Korea—a military presence largely premised, after all, on the threat posed by the North; and another, more sweeping one in which Korea is reunified but as a neutral or near-neutral state (and presumably a non-nuclear one).

These are bold visions that, if achieved, could resolve many of the problems and remove many of the risks that we have been discussing. But they entail major risks and do not seem at all feasible under current conditions. Xi and Trump seem extremely unlikely to reach any such agreement. Attempting to impose such an arrangement on the Kim regime, or effectuating regime change in North Korea, as a precondition would be an obviously risky proposition, fraught with many of the perils associated with the bad case scenarios that might follow U.S. military action.

Rein: China has punished South Korea economically for deploying THAAD. Now that the newly elected President Moon has halted deployment, undertaking a review of the system, do you think Sino-Korean relations will be close again as they were between 2013–2016? Or is there now too much mutual distrust? What can South Korea do to regain China’s trust and thus access its markets and consumer base?

deLisle: It seems unlikely that THAAD deployment has deeply and permanently damaged what has been a pretty positive relationship between China and South Korea. Although Beijing of course did not welcome the deployment of THAAD and was concerned about the possible impact on China’s security (particularly the spying that THAAD’s radar could make possible), Beijing’s public posturing against THAAD was out of proportion to the threat it actually posed and, likely, to Beijing’s perception of that threat. Moreover, the replacement of Park by Moon as South Korea’s president, and South Korea’s ensuing pause in THAAD deployment, renewed (but wary) interest in engaging Pyongyang, and efforts to improve relations with Beijing (while also tending to ties with Washington) have given China reason to lower its level of concern and, thus, forego further measures that would gin up the Chinese public’s antipathy toward South Korea and, in turn, Chinese consumers’ and tourists’ aversion to South Korean products, retailers, pop culture, and vacations. The THAAD controversy does not seem likely, in the long run, to loom much larger in China-South Korea ties than other ups and downs that characterize many dense and generally positive bilateral relationships.

As to Chinese consumer reaction to THAAD, it was dramatic, with tourism to South Korea and purchases of South Korean branded goods dropping steeply (by 40% on some reports), and with the role of South Korea’s Lotte group in providing land for the THAAD deployment creating an unusually prominent link between a Korean commercial enterprise and offensive (to China) Korean government action. Chinese consumers’ choices are affected—although, of course, not determined—by the tone the government sets, as well as by policy directives (for example, reportedly telling travel agencies to suspend sales of group tours to South Korea or denying requests for charter flights to South Korea). So, if the government-to-government relationship rebounds some from its recent troubles, as seems likely, that will remove one impetus to Chinese consumers’ turn against South Korea. Popular Chinese attitudes toward South Korea are far less negative than attitudes toward Japan, which—despite occasional outbursts of strong anti-Japanese sentiments and boycotts—have not precluded robust Chinese demands for Japanese products, travel to Japan, and so on.

Case Study: Show That You Are a Friend to China

As we have seen, foreign companies face tremendous financial risk in cases of tensions between China and their home nations’ governments. Typically resulting from political hostility, boycotts and consumer protests waged against foreign companies are quite common. American, Japanese, South Korean, Filipino, and French companies alike have all come under attack by Chinese consumers heeding their government’s call. Usually in response to military threats or attacks on Chinese sovereignty, China’s government rapidly mobilizes criticisms against adversarial foreign policies, bringing along its billion plus consumers and their wallets to the battlefield. While protests tend to target Japanese firms most fervently because of lingering tensions borne from Japanese atrocities during World War II in China, no nation’s companies are exempt from the possibility of attack.

Take Starbucks, for example, when it was essentially forced to shut down a café inside the Forbidden City in 2007. Rousing furious protests from Chinese ultra-nationalists, Starbucks’ presence within one of China’s most historic sites was seen as a flagrant offense to Chinese culture and its respectful preservation. Incited by the placement of such an iconic American brand in the middle of Chinese heritage, online and in-person protests grew to such levels of ire that Starbucks finally decided to close up shop.

Likewise, whenever Sino-Japanese tensions blow up, Japanese companies like Toyota, Uniqlo, and Canon are immediately boycotted. Some protests grow so violent that consumers themselves fear buying Japanese brands lest they become targets of mob anger. When friction erupted between the U.S. and China in 2016 over the South China Sea, protests similarly went after iconic American brands like KFC. Although hostility toward KFC blew over after a month or two—and KFC continues to thrive in the Chinese market—it is still critical for all brands, no matter how popular, to both project their national origin and demonstrate a thorough respect of China and its culture.xiv KFC was smart in how it has built a long-term close relationship with Chinese consumers which allowed it to move on from the protests quickly and continue its market-leading position in the Quick Service Restaurant (QSR) sector. Chinese consumers know that KFC respects China not only by creating 430,000 jobs but also by creating free lunch and other programs on an ongoing basis for needy Chinese.

For example, it has often provided free food during times of natural disasters to rescuers and those injured and donated over 100 million RMB to poor children’s lunch programs where it provides an egg and milk for poor school children. As Joey Wat, the President of Yum! China, parent company of KFC, told me, “Helping poorer kids or in disaster relief was the right thing to do—we have the food and they needed the help.” It is important to note that you cannot perform outreach programs purely as a public relations tool. Companies must do it because it is, in Wat’s words, “the right thing to do.” As Wat told me, “I always tell our 430,000 staff to do the right thing. Do what is right for the country and have a higher goal. It is not just about making money.”

At the same time, such benevolence also helps impart the brand as a friend to China. Reading and book programs geared towards children is also well received by parents—the program demonstrates that KFC respects the value of education that is placed in Chinese families. While protests about US-China tensions over the South China Sea flared up in the summer of 2016, it blew over quickly in large part because KFC has built such a closeness with the Chinese community and consumers appreciated the contributions KFC has made to Chinese society.

With an ever-present potential for politically driven hits to revenue, it is crucial that companies actively demonstrate friendship to China, respecting its people and government. Being a friend to China certainly does not consist of bowing down to all of the Chinese government’s demands. Nonetheless, companies must make sure to be respectful when pushing back against Chinese political forces and indicate clear interest in China’s long-term success.

How does a company achieve this? One must first note that it is insufficient to merely state one’s status as a friend to China or donate perfunctorily to charities. In order to truly gain the loyalty of Chinese consumers and demonstrate friendship, companies must show a perceptive understanding of and respect for Chinese culture.

Revisiting our previous example, Starbucks has actually succeeded rather well in this endeavor—an important stronghold in the weathering of Chinese protests over issues such as their café’s Forbidden City location. Making waves in early 2017, Starbucks announced that it would be granting medical insurance to more than 10,000 elderly parents of Chinese employees under its new Starbucks China Parent Care Program. Employees that have worked for Starbucks for over two years will receive coverage for parents under the age of 75 for 30 critical illnesses. Now Starbucks’ second largest market worldwide after the U.S., China continues to be courted by the company. Conscientious about frequently reinforcing its popularity in China, Starbucks enjoys around 30 percent margins—some of its highest in the world.

Starbucks’ Parent Care Program is much more than a desirable benefit used to lure in recruited candidates and retain talent, however. Capturing and keeping employees is certainly difficult for any company in China, given the nation’s strong labor market, and especially for Starbucks as it seeks to double its current number of 2,300 outlets by 2021. But more than anything, Starbucks’ coverage of employees’ parents serves as a strong demonstration that it understands the pressure on so many young workers to take care of their families.xv

As we will see later in Chapter 6, China’s medical system is woefully inadequate. Gathered through surveys conducted by my firm, lack of access to good medical care is one of the five biggest concerns shared by contemporary Chinese. Given the combination of the state system’s weak medical insurance and a deeply ingrained Confucian tenet of filial piety, immense pressure is placed on China’s only children to take care of aging parents. Starbucks’ initiative was therefore a brilliant display of both empathy to its workers and Chinese cultural understanding, despite the company’s American roots.

In a conversation with Belinda Wong, the President of Starbucks China, she claimed to me that Starbucks’ provision of insurance was neither intended for public relations purposes nor to curry favor with the government, assuring me that it was simply the right thing to do for employees. Nevertheless, the Parent Care Program has served as a remarkably well-executed public relations move. Wong might naïvely assume that investors and everyday Chinese view Starbucks’ initiative simply as a good deed, but the reality has been a significant increase in Chinese consumer respect for the company. As was exclaimed to me by one 24-year old woman from Jiangxi Province, “What an amazing benefit! Starbucks really understands Chinese culture, respects it and is doing a great thing.”

Initiatives by companies akin to that of Starbucks will prove incalculably beneficial in mitigating political risk. While no demonstration of cultural sensitivity and friendship will fully immunize foreign brands to political crackdown and consumer protests, proving oneself a friend to China will radically reduce such risks and thereby improve one’s standing in case of a political showdown.

Key Action Items