The situation is North Korea is tense. While the U.S. assumes its «maximum pressure» approach will spark change, another world power will play the key role, Alex Wolf writes in an essay for finews.first.

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There has been a lot of speculation around North Korea’s change in policy since the last nuclear test in September 2017 – some claim the North has achieved its goals around its nuclear and ballistic missile program and now wants a meeting with a sitting U.S. president to negotiate recognition as a nuclear power, those in the Trump White House speculate it’s their policy of «maximum pressure», while still others think the North wants detente with the South to erode the US alliance structure.

However, if Chinese customs data is to be believed, it’s Chinese «maximum pressure» that may be bringing a change in North Korean policy. China has effectively turned off the petroleum taps flowing into North Korea far exceeding what is required by the UN. From the data available, which admittedly is scarce, it appears that the North Korean economy is under a great deal of pressure and this has undoubtedly contributed to North Korea’s change in policy.

«The clear signal is that the economy is under a great deal of stress»

Over the past five months, China’s exports of refined petroleum have collapsed. The average over the past five months on an annualised basis equals roughly 3.7 percent of last year’s exported amount, and the pace is on a downward trend suggesting total exports could fall further. Monthly exports averaged 282 tons of refined petroleum exports over the past five months, annualizing to approximately 3,393 tons, which is far below the 90,870 exported last year.

The pressure can also be seen through other products: North Korean steel imports from China have collapsed in 2018, the same can be said with cars. While it’s unclear if China is blocking such exports or North Korea can no longer afford them, the clear signal is that the economy is under a great deal of stress. China wants to play a central role in «resolving» this crisis, but wants to do it on its own terms.

«China will play a central role in any future talks»

While China’s role over the past few months has often been overlooked or little understood, it appears a strategy could be emerging: China wants to play a central role in «resolving» this crisis, but wants to do it on its own terms. Perhaps China decided to put immense pressure on Kim Jong-un, overcoming its fear of instability and potential regime change, to convince Kim of China’s massive economic influence.

China’s strategy and desired outcome are still unclear at the moment, but it’s increasingly clear Chinese pressure is a driving force and China will play a central role in any future talks. What this means for the US is also unclear; but the current state of affairs – high level talks between North and South Korea, rapprochement between China and the North, normalization of relations between China and South Korea following the THAAD dispute – presents new challenges to the US. The diplomatic situation in East Asia is dynamic at the moment, and indeed many questions remain.

Alex Wolff is emerging markets economist at British asset manager Aberdeen Standard Investments.

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