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Editor's Note: Below is an excerpt from a research note written by Hedgeye National Security analyst General Dan Christman. To read this entire note email sales@hedgeye.com.

North Korea: The U.S.-China Reset Was A Mirage - kju
Source: Zennie Abraham

When Donald Trump was inaugurated in January, the docket of contentious U.S.-China issues was long and worrisome – from national security disagreements over the South China Sea to commercial disputes heightened by an aggressive China industrial policy.

But the dispute docket was temporarily set aside in April, following the “chocolate cake” summit between Presidents Trump and Xi; the two leaders at Mar-a-Lago, encouragingly, seemed to agree on harmonized efforts to reign in North Korea’s nuclear program.

Some analysts had called this the “North Korean Eclipse” – apparent joint worry by Washington and Beijing over Pyongyang’s aggressive testing program overshadowing U.S.-China disagreements. 

  • Not surprisingly, however, the “eclipse” is now ending; long-standing friction between the U.S. and the People’s Republic is once again cast in sharp, bright sunlight.
  • As most expected, China pulled its punches with the North Koreans.  Beijing has always been reluctant to apply the existential pressure on the North that would be necessary to force the Kim dynasty to negotiate over its nuclear program. 
  • Despite some encouraging rhetoric from Beijing following Mar-a-Lago, and initial intelligence that suggested the Chinese were serious this time around, it’s now clear that the aggressive cooperation that Mr. Trump sought from the Chinese leadership over North Korea was a mirage.

The Administration’s latest actions reflect the frustration:

  • The State Department last week issued a scathing report on China’s efforts to curb human trafficking, downgrading the country to “Tier 3” status, the lowest ranking possible.
  • At the same time, sanctions were just imposed on a Chinese global shipping company, and the Bank of Dandong on the Chinese mainland was singled out for its financial laundering of North Korean money. 
  • IF the U.S. wants to end (or at least freeze) Pyongyang's testing program, these are the actions that can get Kim's attention. But clearly, given the intransigence of the Kim regime, there must be more. 

If implemented, however, it's not hard to envision what all this will likely mean for the future of U.S.-PRC ties:

  1. Military confrontation after ships or planes "bump in the night;"
  2. Further PRC restrictions on U.S. firms doing business on the mainland (especially in the high tech sector);
  3. More pressure on U.S. allies South Korean and Japan.

So, we are “Back to Future” with China...

... Restoring the PRC to the top of the list of national security concerns, along with North Korea. Nothing that was said at the recently concluded Hamburg G-20 summit changes this assessment.

This reality also explains the “Bear Hug” between Indian PM Narendra Modi and Trump during their summit just before the July 4th holiday: the two are both feeling the heat of Chinese security and economic threats, with India pressed on its northern border by a Chinese military build-up and the PRC once again militarizing additional islets in the South China Sea. 

Thanks to Beijing's predictable assertiveness, the Bear Hug was HUGE: it was scripted, it was emotional, and it had geopolitical significance – for both sides.