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Experts warn of danger to U.S. companies if Trump follows through on China threats

People walk by a TV news program showing Twitter of U.S. President Donald Trump while reporting North Korea's nuclear test, in Tokyo, Monday, Sept. 4, 2017. (AP Photo/Shizuo Kambayashi)

As the gulf between the U.S. and North Korea over Kim Jong Un’s nuclear weapons program grows, one of the few things that the two countries continue to have in common is that their biggest trading partner is China, a fact that complicates the Trump administration’s efforts to employ economic pressure in the standoff.

hChina is believed to account for about 90 percent of North Korea’s international trade, while its trade relationship with the U.S. is worth nearly $650 billion. Many major U.S. companies manufacture products in China, including ubiquitous and essential technologies like the iPhone, or work with Chinese suppliers and financiers.

President Donald Trump’s latest Twitter threat to cut off trade with countries that do business with North Korea was widely understood as a warning to China.

“The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea,” the president tweeted Sunday.

Other countries potentially impacted by such an edict include Pakistan, Russia, Thailand, and Burkina Faso.

Trump has often spoken of China’s ability to exert influence on North Korea, though he acknowledged after meeting with Xi Jinping earlier this year that the situation is more complex than he believed. He has since complained China is not doing enough, pointing to an increase in trade activity between the two countries in the first part of this year.

Experts say Trump’s threat is too extreme to be taken seriously.

“It’s hard to see all trade being shut off,” said Peter Harrell, an adjunct senior fellow at the Center for a New American Security and former Deputy Assistant Secretary for Counter Threat Finance and Sanctions in the State Department’s Bureau of Economic and Business Affairs. “Certainly doing something like that would have tremendous economic consequences on both sides.”

Joseph DeThomas, a professor of international affairs at Penn State and a former State Department official, predicted such a move would result in “economic catastrophe.”

“He’s saying I will blow up the world economy by creating a complete and total economic war between the two greatest economic powers in the world,” DeThomas said. “I cannot believe that is what is intended. I don’t think we can take the words literally, because that would be nuts, point blank.”

For most countries, choosing between trading with the world’s biggest economy or what the United Nations estimates is the 113th biggest would be an easy decision. However, China’s economic relationship with North Korea is driven by geopolitical considerations, not trade.

“What you’re really saying to China is, you will support our effort to crush the North Korean economy or else,” DeThomas said. “And this the Chinese may not be willing to do.”

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According to John Hannah, senior counselor at the Foundation for Defense of Democracies and a former deputy national security adviser to Vice President Dick Cheney, Trump’s tweet is “almost certainly hyperbole.”

“It’s the equivalent of holding a gun to your own head and saying you’ll blow your brains out if an enemy’s bad behavior doesn’t stop,” he said. “Ceasing all trade relations with China, the second largest economy in the world, much less the dozens of other nations that engage in some form of trade with the North, would almost certainly trigger a worldwide depression and financial panic that would prove absolutely devastating to the U.S. economy and living standard of the American people.”

Given the implausibility of shutting down all trade with China, Harrell suggested taking Trump’s tweet as an attempt to condense the concept of getting much tougher with China on trade into 140 characters rather than a literal demand.

“It is a threat that is sort of too large in many ways to be credible because you would see such an immediate shut off of goods that Americans depend on,” he said.

A heavier push to force China to act against North Korea could cause “significant blowback” on the U.S., Harrell warned.

Last month, the Treasury Department imposed sanctions on a mid-sized Chinese bank for handling North Korean transactions, a move that could be made without extensive collateral damage. Targeting bigger banks that do similar business would not be so easy.

“These very large Chinese banks handle a lot of business for U.S. companies that are in China,” he said.

DeThomas cautioned U.S. corporations like Boeing and Apple could end up paying a big price in retaliation for sanctions against big Chinese banks. The U.S. government would also be exposing itself to vulnerability by challenging the country that holds most of its debt.

“This is like going up against the bank that owns your mortgage,” he said.

Carefully-crafted secondary sanctions against individual banks and businesses were vital to bringing Iran to the negotiating table over its nuclear program, according to Hannah, but U.S. presidents have been hesitant to take similar steps against Chinese financial institutions over North Korea.

“We didn’t use the sledgehammer of ending all trade with entire European and Asian economies, but opted for the scalpel instead by punishing and deterring select financial institutions and businesses,” he said.

One reason for the reluctance to repeat that strategy, he noted, is likely the fear of damage to the U.S. economy and global financial markets.

“No one should expect that China’s first reaction will be to roll up the white flag of surrender,” Hannah said. “They will far more likely lash out by trying to show that two can play the sanctions game and that U.S. companies have as much to lose in China as vice versa.”

While sanctions imposed by the U.N. Security Council last month were among the toughest yet, experts say options for sanctions against North Korea and its trading partners are far from exhausted.

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The current sanctions target about one-third of North Korea’s exports. One option would be to cut off other exports like textiles or drill down on products being exported to China. Harrell also suggested new sanctions could block imports of oil and gasoline or machinery parts used for manufacturing.

Such policies would require China to halt the transit of those products across its border.

“I don’t want to make this sound easy…,” Harrell said. “If the U.S. actually wants to stop the flow of goods from China to North Korea, you need some sort of cooperation from China.”

One way to ensure China’s support for more serious action, according to DeThomas, is to single out a big Chinese target that has violated U.N. sanctions.

“Do it in ways where the Chinese basically have to accept the justice of your position,” he said.

China has resisted harsher sanctions in the past, in part out of fear that crippling the North Korean economy would lead to the collapse of Kim’s regime and a flood of refugees across its borders. Officials have also cautioned that a desperate Kim could take even more extreme action to preserve his power.

DeThomas observed that the Chinese have seen what happens when the U.S. topples a regime and leaves a failed state in its place in the Middle East, and they do not want another Iraq or Libya on their border.

“They don’t like our experiments with failed states,” he said, and they need to see there is a soft way to land this crisis with political engagement.

Similarly, the North Koreans saw what happened to Muammar Gaddafi in Libya after he acquiesced to negotiations with the U.S.

“You have to say there is a way out here where you’re not dead in the street, and that’s the piece of this I don’t see from this administration,” DeThomas said.

Trump’s seemingly empty threat against China illustrates the limited options the U.S. has for curtailing North Korea’s nuclear ambitions. Drastic actions would risk drastic consequences, and more conventional responses have done little to change the state of play for decades.

“The principle fault here is the North Koreans, who keep narrowing the possibilities for anything other than a very hard landing,” DeThomas said.

Although the Trump administration continues to warn of a massive military response to North Korean threats, the reality remains that neither side wants a military conflict that Kim would almost certainly lose—but not before launching attacks with conventional weapons that would decimate major South Korean and Japanese cities.

“What number of millions of civilian casualties due to North Korean response are you willing to risk?” Harrell said.

Unlike in Iran where nuclear sites were often hidden or well protected, targeted strikes against North Korean missile sites and nuclear facilities would not be difficult to accomplish. The problem is that the North Korean response is unpredictable and potentially disastrous.

China is not the only player in this fight with which experts fear Trump’s strategy is counterproductive. The president’s recent statements have also singled out South Korea for criticism for “appeasement” of North Korea and for a trade agreement that he feels is unfair.

“South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!” he tweeted Sunday.

Trump’s antagonism of a vital ally in the region raises questions for DeThomas.

“I have to admit, I’m gobsmacked at this,” he said.

He sees no logic in picking a fight over trade at a time like this, and neither does Hannah.

“There’s a pretty good rule of thumb that successful diplomats have been using for centuries,” Hannah said. “It goes something like this: If your entire strategy for successfully dealing with a dangerous foe is premised on lock-step cooperation with another country, don’t unnecessarily initiate a trade war with it. Enough said.”

According to Harrell, Trump’s sniping has no doubt complicated diplomatic relations, but the stakes are too high to allow it to sour them completely.

“Given the severity of the North Korean threat, I am confident that both sides are working to compartmentalize the dispute over the trade agreement from North Korean policy,” he said.

A statement issued by the U.S. and South Korea Monday does appear to reflect a willingness to set aside differences, establishing a framework for regular meetings of their foreign affairs and defense agencies to discuss deterrence and regional security.

“North Korea’s recent provocations and belligerent rhetoric only drives the United States and the ROK to work more closely to defend against and counter this grave threat,” the joint statement said.

That may be a promising sign, because discord between the major powers trying to keep North Korea from getting nuclear weapons has consistently given the regime an opening to advance their program, despite whatever sanctions are in place.

“The North Koreans are absolutely brilliant about playing off the U.S., South Korea, China, and Japan when they’re in a corner like this…,” DeThomas said. “This gives them a huge opportunity.”

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