China’s Belt and Road Initiative: The South Korean Perspective

Sukjoon Yoon

China’s Belt and Road Initiative: The South Korean Perspective

Sukjoon Yoon

China’s new grand strategy, the Belt and Road (B&R) Initiative, has two primary components: Chinese President Xi Jinping announced the Silk Road Economic Belt (SREB) in September 2013 during a visit to Kazakhstan, and the 21st Century Maritime Silk Route Economic Belt (MSR) in a speech to the Indonesian parliament the following month.1For a discussion of the pros and cons of the B&R, see: Karl Lee, “What does China’s new maritime silk road mean for ASEAN?” The Sun Daily, 15 October 2013; http://www.thesundaily.my/print/227039 (accessed January 9, 2015); Ma Junjie, “The New Silk Road and the Power of Ideas,” The Diplomat, February 17, 2015; and Lucio Blauco III, “China’s One Belt, One Road To Where,” The Diplomat, February 17, 2015.The B&R is intended to supply China with energy and new markets,2Wendell Minnick, “China’s One Belt, One Road Strategy,” Defense News, April 13, 2015, p. 18.and also to integrate the countries of Central Asia, the Association of Southeast Asia Nations (ASEAN), and the Indian Ocean Region – though not Northeast Asia – into the Chinese Dream.3Joel Lee, “China’s Dream to keep N.K. threats at bay,”The Korea Herald, February 9, 2015, p. 7; Jeffrey Wasserstrom, “Xi Jinping says his Chinese Dream is like the American one. It’s not,” Times, November 9, 2015, p. 29.The project will be supported by the Asian Infrastructure Investment Bank (AIIB), due to open in 2016 with 57 founding members from all around the world, and China has already promised US$ 50 billion in seed funding.4“New Chinese Bank Becomes major Headache For US,” http://www.globlsecurity.org/wmd/library/ news/china/2015/china-150329-rfer101.htm(accessed March 31, 2015).

China’s vision includes networks of energy pipelines, railways, sea port facilities and logistics hubs; these will have obvious commercial benefits, but also huge geopolitical significance. For China’s neighbors, therefore, there are both opportunities and potential challenges, though the main targets of

the B&R are developing Asian countries which are already dependent upon Chinese products and Chinese investments.

South Korea has its own unique perspective on the B&R, and President Park Geun-hye has already announced several projects, including the Northeast Asia Peace and Cooperation Initiative (NAPCI) and the Eurasia Initiative, which are intended to link up with the B&R, though to some extent this will depend upon cooperation from North Korea.5See Ministry of Foreign Affairs, Northeast Asia Peace and Cooperation Initiative: Moving beyond the Asian Paradox toward Peace and Cooperation in Northeast Asia: Moving beyond the Asian Paradox toward Peace and Cooperation in Northeast Asia (Seoul: Ministry of Foreign Affairs, 2015)& Ministry of Foreign Affairs, Eurasia Initiative (Seoul: Ministry of Foreign Affairs, 2015).Since South Korea is geographically isolated and heavily reliant upon resources from overseas, enhancing connectivity is a critical objective for securing South Korea’s economic and political interests in Northeast Asia. The prospective economic benefits of the B&R were cited in South Korea’s official announcement of its participation in the AIIB. Debate continues about the wisdom of involvement in the B&R, however, given the technological, financial and management differences which separate South Korea from China.

The New Silk Road and its Reception

With the B&R, China is seeking to expand interconnectivity between China and other countries, via both roads and sea routes, and is thus reducing its traditional continental focus and seeking to become a “True Maritime Power,” as exhorted by Xi Jinping.6Sukjoon Yoon, “Implications of Xi Jinping’s True Maritime Power: Its Context, Significance, and Impact on the Region,”U.S. Naval War College Review, Vol. 68, No. 3, Summer 2015, pp. 40-63.Historically, China’s involvement with the Silk Road was passive: merchants became rich by coming to China for silk, ceramics and tea, but with the B&R, China is actively reaching out to the rest of the world.7Marzia De Giuli, “News Analysis: China’s Belt and Road Initiative to be growth driver for Europe: Italian experts,” http://news.xinhuanet,com/english/europe/europe/2014-12/23/c_13387488.htm (accessed January 8, 2015); “China to promote maritime connectivity with ASEAN, says vice FM,” http://www.gov. cn/misc/2012-08/05/content_2198775.htm (accessed January 9, 2015).China seems to have two distinct aims: externally, to restore its historical sphere of influence; and internally, to cope with income inequalities by creating middle-class jobs through enhanced trade and the

broader development of its economy, which is an essential part of Xi Jinping’s grand national strategy.8China’s economic growth has been slowing for several years: ambitious economic reforms are underway to transition from being the “World’s Factory” to a more sustainable consumer-driven economic model. See Ian Bremmer, “Sea of Troubles,” Time, January 19, 2015, pp. 10-11.

Of course, the B&R also offers great opportunities for China’s neighbors: China has pledged nearly US$2 billion to upgrade the Malaysian port of Kuantan, US$ 1.5 billion for port facilities at Colombo in Sri Lanka, and US$ 4 billion for infrastructure projects in Pakistan.9Nikhil Kumar, “Little Big Island,” Time, April 20, 2015, pp. 24-27; “Sri Lanka’s new president discusses port project with Xi,” International New York Times, March 27, 2015, p. 5; Denial Twining, “As the US pivots away, China bets on Pakistan,” PacNet, No. 26, April 23, 2015.Despite this, many are concerned about the geopolitical implications of China becoming a regional hegemon, having seen China’s recent stridently assertive behavior in the East and South China Seas, which are clearly part of the MSR.10“Korea’s choice,” The Korea Herald, October 8, 2015, p. 14; Jane Perlez, “Xi plays host to 56 nations for founding of Asia bank,” International New York Times, June 30, 2015, p. 1 & 3.

Some other countries are even less keen on the new Chinese Silk Road concepts, notably the United States and its strategic allies, such as Japan and Australia; and the list may also include India, Russia and some Central Asian countries.11Zhang Hongzhou and Arthur Guschin, “China’s Silk Road Economic Belt: Geopolitical Challenges in Central Asia,” RSIS Commentary, No. 099, 24 April 2015.The US is trying to resist the expansion of Chinese influence throughout Asia with a dual-track policy: the much-vaunted military rebalancing, and the Trans-Pacific Partnership (TPP).12“Free-trade pacts: America’s big bet,” The Economist, November 15, 2014, pp. 8-10; Jackie Calmes,“U.S. hopeful on reaching Pacific trade deal,” International New York Times, October 6, 2015, p. 16.This latter is an ambitious multilateral trade and investment treaty among 12 Pacific rim countries, but since Congress has denied US President Barack Obama the“fast track” authority required to complete negotiations, the TPP appears to be deadlocked.13Ian Bremmer, “Trading Block,” Time, May 11, 2015, p. 10.

India, Japan and Russia, are inclined to view the B&R as military expansionism. It is clearly linked with Xi Jinping’s aspiration for China to become a True Maritime Power: a series of ports are being modernized, stretching from the East and South China Seas to the Arabian Sea and the Indian Ocean, and China’s navy will surely have convenient access to these

ports.14“Maritime Power: Your rules or mine?” The Economist, November 15, 2014, pp. 10-12.India, in particular, fears being encircled, though the recent exchange of summit meetings between Xi Jinping and the Indian Prime Minister Narendra Modi seems to imply that the two Asian giants are working together to balance the implementation of the B&R.15Joseph E. Stiglitz and Adam S. Hersh, “Trans-Pacific free-trade charade,” The Korea Herald, October 6, 2015, p. 14.

Russia is concerned about losing its traditional privileges with the Central Asian countries, formerly part of the Soviet Union; and, given the huge scale of Chinese investment, even fears the growing influence of China within the Far Eastern Federal District of Russia. In fact, Russia is particularly sensitive to all kinds of territorial encroachment upon what it sees as its sphere of influence, as can be seen from the Ukraine crisis, as well as its earlier adventurism.

The View from South Korea

In South Korea, opinion on the B&R is sharply polarized.16Joongang Ilbo, March 30, p. 18; Ibid, April 16, p. 12.Most of the press and the academic world, together with economic and industrial leaders– notably including Federation of Korean Industries and Korea Chamber of Commerce and Industry – tend to be very much in favor of South Korean involvement in the B&R. Indeed, now that the South Korean economy is looking sluggish, the prospects of the B&R are being talked up even more enthusiastically.17Kim Hee-Jin, “AIIB head ‘optimistic’ about Korea,” The Korea Joongang Daily, September 10, 2015, p. 4.This strand of opinion supports closer economic interactions with China, and anticipates significant commercial benefits for South Korea arising from better connections to energy-rich Russia and the consumer markets of Europe and Central Asia.18Joongang Ilbo, May 15, p. 12.The B&R fits nicely with President Park’s NAPCI and Eurasia Initiative, and many see the advantages of stimulating regional trade: they agree with Xi Jinping that a community of common destiny can be created through a win-win approach.19Han Woo-duk, “Benefits of balancing trade deals,” The Korea Joongang Daily, October 13, 2015, p. 8.

There are, however, also some ardently pro-US pundits who worry

that the political risks of the B&R are too high for South Korea.20Sukhan Kim, “Korea should join the TPP,” The Korea Joongang Daily, October 16, 2015, p. 13.Various institutes and think-tanks have expressed a dislike of the B&R, but not because they see any incompatibility between it and the South Korean Eurasia Initiative. Their argument is basically that China cannot be trusted, so the B&R should be interpreted as a devious Chinese foreign policy tactic designed to project soft power. They cast doubt on the feasibility of implementing the B&R, pointing out that consumer demand in Central Asia and inland China remains weak, and warns that whereas the B&R has been portrayed primarily in economic terms, it actually represents a crucial geopolitical strategy by the Chinese. They are fearful of China’s growing regional dominance, and worried that the B&R is ultimately a means to supplant the prevailing US-led regional security structure and restore the Middle Kingdom order, with China as the only power that matters in the region.21Wendell Minnick, “China’s One Belt, One Road Strategy”; Zhang Hongzhou and Arthur Guschin,“China’s Silk Road Economic Belt: Geopolitical Challenges in Central Asia,” RSIS Commentary, No. 099, 24 April, 2015; Daniel Twining, “As the US pivots away, China bets on Pakistan.”According to this view, once China has complete control of the regional logistics hubs and sea ports, then the interests of China’s majority Han ethnic group will be privileged and the Renminbi (RMB) will become the dominant currency.22Joongang Ilbo, May 13, p. 8.This will severely limit the autonomy of China’s neighbors, including South Korea, who will have to toe the Chinese line, both economically and politically, or risk their own peace and prosperity.

Thus, any South Korean involvement in the B&R must depend on a comprehensive assessment of the balance between opportunities and risks. Insofar as the B&R leads to the reduction or elimination of trade barriers between China and South Korea and to improved transport infrastructure facilities, it is obviously most welcome; and on balance the political risks appear manageable.

B&R Advantages for South Korea

Trust-based cooperation

Although trust is never enough, by itself, to define international

relations, it certainly has a useful role to play. As things stand, the current South Korean administration is doing a good job in balancing the economic relationship with China against its security alliance with the US; and in South Korea, trust is seen as an increasingly useful tool to adjust to the faltering role of the United States in the Asia-Pacific while simultaneously adapting to China’s growing influence.23Ministry of Foreign Affairs, Trustpolitik January-June 2015 (Seoul: Ministry of Foreign Affairs, August 2015).Given China’s central economic role, trust-based policies are especially favored by the South Korean industrial and financial communities, and this has never been clearer than in their welcome for the B&R. President Park’s Trustpolitik and President Xi Jinping’s concept of renovating the Silk Road are seen as a natural match for one another, and as an unparalleled opportunity. From South Korea, Xi Jinping seems to be much more amenable than his predecessors who oversaw the early stages of China’s rise, and in fact most Asians are convinced by his general goodwill toward the region as a whole, and feel less threatened by China than Western commentators often suppose.24Sarah Kim and Choi Ik-Jae, “Korea caught in middle of China-U.S. dispute,” The Korea Joongang Daily, October 29, 2015, p. 1 & 2Thus, the predominant South Korean opinion holds that the best path for China to become a more normal power in Asia is through trustbuilding processes such as that currently being pursued between China and South Korea.25There are recent hot debates between pro and con with regard to South Korean President Park’s foreign policy toward China and US. For pessimistic views, SongSang-ho, “South China Sea dispute poses diplomatic challenge to Seoul,” The Korea Herald, November 6, 2015, p. 2; ChaeByung-Gun and Kim Hyun-Ki, “Russel describes thaw between Korea, Japan,” The Korea Joongang Daily, November 6, 2015, p. 1 & 2; Michael Green, “Ripple from the South China Sea,” The Korea Joongang Daily, November 9, 2015, p. 8; Victor Cha, “The China policy gap,” The Korea Joongang Daily, November 16, 2015, p. 8. And for precarious and optimistic views, Sarah Kim and Choi Ik-Jae, “Korea caught in middle of China-U.S. dispute”; Chung Duck-koo, “China needs a reality check,” The Korea Joongang Daily, November 12, 2015, p. 8; Kim Young-hie, “Silence is golden,” The Korea Joongang Daily, November 16, 2015, p. 8.Moreover, trust will be essential if China’s dream is to provide substantial benefits for its neighbors, by integrating the regional economies, via the B&R, to establish new economic channels to Central Asia and

Europe.

The B&R complements the Eurasia Initiative.

Geographically Korea is a peninsula, with natural continental connections, but the divisions arising from World War II have, in effect, turned South Korea into an island nation. This has obliged the development of impressive marine capacities, so that it now has a global shipbuilding industry, and is among the top ten naval powers, despite its scarcity of resources. Nevertheless, there are still some intrinsic physical constraints which limit its commercial expansion to Southeast Asia, Central Asia, and even to the European Union.

In September 2013, President Park announced her controversial “Look North” policy, of which the most salient aspect is the Eurasia Initiative.26President Park’s “Trust-based Diplomacy Initiative,” aka Trustpolitik, encompasses the “Korean Peninsula Process,” the “Northeast Asia Peace and Cooperation Initiative” and the “Eurasia Initiative.” See Northeast Asia Peace and Cooperation Initiative: Moving beyond the Asian Paradox toward Peace and Cooperation in Northeast Asia (Seoul: Ministry of Foreign Affairs, 2015).This comprises various proposals designed to overcome existing constraints by developing new markets and creating new economic partners in continental areas from which South Korea has been alienated since the end of World War II. The successful strategic cooperative partnership between China, as an emerging maritime power, and South Korea, with its obligate maritime orientation, will play a major part in this shift.

Concomitantly, China’s growth is slowing, and shifting away from its continental circumstances and toward its maritime capabilities. Thus, Xi Jinping has declared that China should aspire to become a True Maritime Power, allowing the interconnection of its continental Silk Road, now the SREB, with its maritime counterpart, the MSR. China is forging links between its east coast and the littoral areas of Africa and the Middle East, via the Indian Ocean. This projection of Chinese influence recalls the Ming Dynasty, and Admiral Chung He’s expeditionary voyages during the 15th century.27Sukjoon Yoon, “Implications of Xi Jinping’s True Maritime Power,” pp. 40-63.

South Korea and China already have many geographical and economic factors in common: they both operate port facilities on the largest scale and

are world-class shipbuilders with successful economic models incorporating flourishing marine trades; they are both reaching out to identify potential overseas markets to deploy their committed and productive workforces; they are both encouraging digital and virtual innovations in our emerging global information society.

Against this backdrop, President Park has called for increased terrestrial and maritime connectivity among South Korea, China, Russia, and North Korea. In academic circles, the concepts of the Silk Road Rail Express (SRX) and the East Sea Rim Maritime Community (ESRMC) have also been discussed, and although these are not official policy, the South Korean government is thought to be supportive.28Shin Hyon-hea, “Train finishes Eurasia journey,”The Korea Herald, August 1-2, 2015, p. 4.SRX is at present a purely symbolic railroad project intended to encourage individual, cultural, trade and diplomatic exchanges.29On May 19, 2015, KORAIL and the Ministry of Foreign Affairs launched the “Eurasia Friendship Express,” a railway project running from July 14 to August 2 which connected a number of important cities in China, Mongolia and Russia. One route went from Vladivostok to Khabarovsk, Irkutsk, Novosibirsk, Yekaterinburg and Moscow, covering approximately 11,900 kilometers; and another ran from Beijing to Irkutsk covering about 2,500 kilometers. Almost 400 people traveled on the trains, including government officials, lawmakers, academics, businessmen and journalists. See Sarah Kim, “Korail set to launch Eurasia route,” The Korea Times, May 20, 2015, p. 2; Lee Joohyeong, “Eurasia Friendship Express” 20-day Long March,” Kookbang Ilbo, May 20, p. 11.ESRMC is a model for establishing an ad hoc community to promote regional economic cooperation around the East Sea.30See Ministry of Foreign Affairs, Eurasia Initiative.All of this dovetails nicely with China’s B&R, intended to promote China’s economic and diplomatic integration with Central Asian countries, ASEAN members and the coastal countries of the Indian Ocean. President Park’s Eurasia Initiative will provide South Korean investment for the Northeast to complement Russian plans, like the Northern Energy Road being built by Gazprom, and Chinese plans, like the Chang-Ji-Tu Development Plan for the North Korean port of Rajin.31Lee Sungwoo, “South Korean Eurasia Initiative: A Starting Point,” in Kang Taeho, ed., Northern Route Report (Seoul: Dolbeagea, 2014), pp. 58–63.

A China-South Korea Economic Corridor

China’s trade, as well as its energy and food supplies, pass through the Strait of Malacca and the Indian Ocean, and are thus vulnerable

to interdiction by India or the US. China is therefore trying to reduce its exposure to geopolitical risk by establishing a network of corridors between the Belt and the Road to provide alternative paths. The China-Pakistan Economic Corridor via Xinjiang to the port of Gwadar, and also the China-Myanmar Economic Corridor between Kunming and the port of Sittwe in Myanmar provide such connections, and South Korea hopes that SRX and ESRMC can become part of a China-South Korea Economic Corridor to provide coal and other energy resources. This concept could do much to revitalize the underdeveloped northern provinces of China and Russia’s Far East, not to mention North Korea. South Korea can act as a go-between to stimulate subregional industries and economies through new geographic interconnections. The historical precedent for this is the Tang and Han dynasties’ promotion of cultural and economic interactions.

President Park’s Trustpolitik and President Xi Jinping’s concept of renovating the Silk Road are seen as a natural match for one another, and as an unparalleled opportunity.

One of the South Korean English-language newspapers, The Korea Times, reported some progress toward establishing such a China-South Korea Economic Corridor: the Chinese freight vessel Yinhao, carrying 47,000 tons of coal, sailed from Rajin in North Korea to Dangjin in South Korea as the middle leg of a journey between Russia and China, an example of the ESRMC concept.32“A special shipment,” The Korea Times, April 25-26, 2015, p. 3.The SRX project also offers an opportunity for South Korea to escape its geographic limitations, by connecting to Chinese ports on the Yellow Sea, such as Qingdao, Shanghai, Darian and Lianyungang. Sea routes are useful, but the main advantages for South Korea will require connections by land through North Korea, which has so far proved uncooperative, though China’s considerable political and economic leverage can hopefully change this.

If China’s B&R programs can deliver the necessary physical interconnections, then projects like the SRX and ESRMC will be able to link up with the Trans-Siberian Railway (TSR), the Trans-China Railway (TCR),

the Trans-Mongolian Railway and the Trans-Korean Railway (TKR). It will then be possible to travel across more than 14,400 kilometers, connecting all these Asian countries to one another, and ultimately to Europe. The TSR includes the Vladivostok/Moscow route via Siberia, and the TCR connects Tashkent to port of Lianyungang in China via Lanzhou. An interim connection between China and South Korea using a rail-ferry has also been proposed.33Kang Taeho, ed., al., Northern Route Report ; Joongang Ilbo, March 30, p. 30; Joongang Ilbo, April 13, 2015, p. 28; Joongang Ilbo, May 18, 2015, p. 1 & 4 & 5.

Exploitation of energy resources will be the driving force to create interconnections in the neglected North, but the consequent development of roads, railways, sea ports and logistics hubs should generate prosperity for the entire East Asian region, not only for China and South Korea.

Potential B&R Difficulties for South Korea

The Chinese government portrays the B&R as a win-win opportunity which will hurt nobody’s interests, but some South Korean commentators have interpreted it as much more than just a trade and development deal: they focus on the geopolitical implications and the possibility that the balance of power in Asia will be disturbed.34Kang Jin-Kyu, “Park’s diplomatic strategy appears solid,” The Korea Joongang Daily, November 4, 2015, p. 2.

In striving to maintain a middle path between the two great powers, South Korea has so far expressed only lukewarm support for the B&R, even though it could offer huge economic opportunities which are desperately needed at a time when the South Korean economy is facing serious challenges. The problem is that the US has reacted rather negatively to China’s initiative, and so South Korea must tread carefully to avoid upsetting its strong military-security alliance with the US.35Joongang Ilbo, March 30, p. 30.These tensions were also revealed by the recent establishment of the AIIB, in which South Korea has become a founding member despite US displeasure. Likewise, for South Korea to become deeply involved with Chinese investment in the B&R implies a level of dependence which some fear will have grave geopolitical

consequences.

South Korea is struggling to balance its security interests against its economic interests: security depends upon US military support to deter North Korean threats, and yet South Korea cannot afford to be left out of the B&R project which could transform the economic and logistical linkage between Asia and Europe. The converse of the same struggle is represented by the controversy over the potential deployment of the Terminal High Altitude Area Defense (THAAD) anti-ballistic missile system on South Korean soil, to which China takes great exception.36Sukjoon Yoon, “Are China’s THAAD Fears Justified?” The Diplomat, February 20, 2015.

In addition to their arguments about undermining South Korea’s security, opponents of the B&R also doubt that its putative benefits can be realized, at least in the short term. The cost of the technology required means that creating interconnections between TCR and TSR and SRX may not be practical, as it simply cannot compete with established alternatives.37http://www.adn.com.print/article.20141231/china-s-silk-road-plans-could-challenge-htm(accessed January 30, 2015).This is supported by maritime logistics research studies: when the beam restrictions necessary to provide adequate visibility are taken into account, given the ice and other hazards, containership capacity is severely limited, and it is difficult to see how the interconnection between China and South Korea will constitute a cheaper transit option.38Based on interviews with experts from the Korea Maritime and Fisheries Institute held on April 29, 2015.

The Recalcitrance of North Korea

Chinese President is paying a state visit to Korea, July 3, 2014.

North Korea remains mired in distrust: it seems reluctant to join the B&R, despite being invited by China, and has been refused entry to the AIIB, which underpins the project, unless it provides greater fiscal transparency. But given its geographical position, this recalcitrance severely limits what might be achieved by cooperation among China and Russia and South Korea. Thus, the South Korean Eurasia Initiative has yet to make much progress. And rigid South Korean sanctions, the so-called May 24 Measures imposed after the 2010 sinking by North Korea of a South Korean navy corvette, currently proscribe any business with North Korea, except at the Kaesung Industrial Region in North Korea. This means that although South Korea intends to cooperate with the B&R, the commercial benefits from exploring new markets and accessing northern resources, such as food, oil and gas will necessarily be curtailed. Despite the difficulties, however, some industrial investment by South Korea is reaching North Korea via trilateral interactions with China, and with humanitarian support, so that railroad loading facilities for resource extraction are being built in North Korea.39Joongang Ilbo, May 18, 2015, p. 1 & 4 & 5.

Ideally, an integrated land transport system should be established across Northern China, Eastern Russia, South Korea and North Korea. The South Korean Foreign Affairs Ministry’s NAPCI and Eurasia Initiatives can then connect the whole of the Korean Peninsula to new markets in China and Russia and beyond. Linking the TSR and TCR with the TKR, a North-South rail connection between the two Koreas, is particularly important.40Shin Hyon-hee, “Railway project envisages Eurasia cooperation,” The Korea Herald, July 14, 2015, p. 4.

The low-hanging fruits from such developments are represented by the Chang-Ji-Tu Development Plan, which will transport coal from Rajin in North Korea to cities on the east coast of China. China has reportedly acquired two piers in Rajin and conducted shipping trials with South Korean cooperation.41Kang Taeho, ed., al., Northern Route Report (Seoul: Dolbeagea, 2014), pp. 81-87.As part of the project, a major highway is also being built between Rajin and Changchun in Northern China. So far, however, North Korea is continuing to block South Korea’s Eurasia Initiative, for example by effectively vetoing KORAIL’s joining the Organization for Cooperation between Railways.42Joongang Ilbo, April 2, 2015, p. 4.

Despite North Korean reluctance, it seems that China is doing everything possible to encourage their participation in the broader development of the region.43“China tells N.K. its Silk Road initiative will B&Rng chances,” The Korea Herald, May 6, 2015, p. 4.It is not inconceivable that the North Koreans can be persuaded to open up their economy, and ultimately their society, in much the same way that the former communist nations in East Europe were persuaded to reform in order to enjoy the benefits of the European Union’s single market. In fact, there is some recent good news on North-South development: it has been very recently reported that North Korea is inviting investment from several major South Korean conglomerates. Samsung, SK, POSCO and Daewoo Shipbuilding & Marine Engineering are considering economic cooperation with the North Korean regime, providing it demonstrates a firm commitment to security and political stability.44Special report team, “Pyongyang hopes for investment from South,” Korea Joongang Daily, May 19, 2015, p. 3.This could provide a competitive advantage for South Korea, against prospective investments in North Korea by China, Japan and Russia.

Toward a More Inclusive Economic Relationship between South Korea and China

It is in South Korea’s interest to facilitate the emergence of a new type of economic relationship with China. Presidents Park and Xi have had five summit meetings in the last two years, which gives some indication of the

importance attributed by both sides to this connection. China’s vast market potential is a natural match for South Korea’s innovative technological capabilities, and South Korea sees China’s market of 1.3 billion people as an important investment opportunity. Both countries seem to be sincere in their aspiration to deepen their economic cooperation, taking advantage of their analogous cultural and social structures. Significant progress has been made toward eliminating economic barriers with the signing, on June 1, 2015, of the China-South Korea Free Trade Agreement (FTA). The South Korean National Assembly ratified it on December 1, 2015, and once China does likewise, the FTA will come into force. It is expected to eliminate tariffs on about 90% of goods traded between the two countries, including some sensitive ones.45Ser Myo-Ja and Namkoong Wook, “After months, Assembly ratifies FTA with China,” The Korea Joongang Daily, December 1, 2015, p. 1 & 2.According to the South Korean Ministry of Trade, Industry and Commerce, tariffs on South Korean exports to China worth around US $8.7 billion will be eliminated in the first year, and on US $45.8 billion worth over the next 10 years.46Sohn Ji-young, “China FTA to streamline exports for small businesses,” The Korea Herald, December 1, 2015, p. 10.

Both countries seem to be sincere in their aspiration to deepen their economic cooperation, taking advantage of their analogous cultural and social structures.

Another factor which is expected to leverage the benefits of the Korea-China FTA agreement and South Korean involvement in China’s B&R is the recent addition of the Chinese RMB to the International Monetary Fund’s Special Drawing Rights basket. Essentially, this recognizes the RMB as a global currency, alongside the US dollar, the euro, the Japanese yen, and the pound sterling; a decision which was welcomed by the South Korean Ministry of Strategy and Finance. Trade between China and South Korea is continuing to expand, and will likely increase further as the Chinese RMB is used more frequently, both for on-line e-commerce and traditional forms of cross-border trade involving Yellow Sea transshipments. This should lessen the financial risks arising from fluctuations in US dollar exchange

rate, but the use of the RMB has drawn criticism from some pundits who argue that it represents a security risk, since it exacerbates South Korea’s already pronounced economic dependence upon China, thus potentially undermining the military and security alliance with the US. Although there is widespread support for deepening economic cooperation with China, opinion is more polarized upon just where to strike a strategic balance between these economic issues and the security cooperation with the US and Japan.47Lee Ho-Jeong, “Yuan’s status upgrade welcomed,” The Korea Joongang Daily, December 2, 2015, p. 4.The Chinese B&R has great potential to produce integration of the regional and global trade and financial systems, and South Korean involvement, given its large trade volume with China and its strong support for the internationalization of the RMB, is inevitable.

The Way Ahead

The current strategic cooperative partnership between South Korea and China will not suffice to deal with the potential risks and problems which will arise from South Korean involvement with the B&R: the terms of interaction must change. Some may consider this an impediment to closer cooperation, but it would be better to interpret it as an opportunity, and there is every reason to hope that new arrangements can be established.

First, South Korea has demonstrated an ability to separate economic decisions from political ones, and this approach needs to become more robust. Some have interpreted South Korea’s decision to join a China’s AIIB as a quid pro quo for THAAD deployment on South Korean soil, but this underestimates the subtleties of South Korean diplomacy. As already mentioned, South Korea cited clear economic benefits as motivating its AIIB entry, and the THAAD question remains a purely political matter.48Sukjoon Yoon, “Are China’s THAAD Fears Justified?” The Diplomat, February 20, 2015.Neither this issue, nor South Korea’s negotiating to join the TPP, which is sometimes characterized as a US attempt to isolate China, has caused a serious breach in relations with China.49Rajiv Kumar, “The Coming Trade Storm: Tides are shifting India must decide fast on a strategy to cope with post-TPP era,” The Times of India, November 20, 2015, p. 20.Indeed, South Korea shares a deep historical and

cultural background with China, and moreover the two countries have no maritime territorial disputes, and also conduct active military exchanges and cooperation, despite the problem of North Korea.

Second, economically, China is the indispensable partner for South Korea, but China also derives immense benefit from the relationship. China is South Korea’s most important market,50China is South Korea’s largest export destination and source of imports. In 2013, it received 26% of South Korea’soverall exports. See 2014 Trilateral Economic Report, (Seoul: Trilateral Cooperation Secretariat, September 2014).and with economic growth in South Korea expected to remain sluggish,51The Korea Development Institute, a major state-controlled think tank, recently revised its 2015 GDP estimate downward over concerns about unsuccessful economic structural reforms. Kim Yon-se, “Korea’s GDP growth may stay below 3%: KDI,” The Korea Herald, May 21, 2015, p. 1.the recent surge in Chinese direct investment in South Korea, which more than doubled last year,52http://www.koreatimes.co.kr/www/news/biz/2015/01/488_171167.html (accessed May 27th, 2015).is welcome. China’s wealth now permits it to play an important strategic financial role to supplement the functions of the World Bank and International Monetary Fund, not to mention new geo-economic template of the Northeast Asia. Moreover, the economic interdependence between China and South Korea can only increase when the free trade agreement between them comes into effect by the end of this year. The two national governments are also experimenting with integrating free economic zones, for example between Incheon in South Korea and eastern Chinese cities such as Weihai, Tianjin, Dalian, Yantai and Qingdao, and provincial governments and non-governmental organizations are also getting in on the act. For instance, South Korea’s Saemangeum Free Economic Zone Development Authority is already cooperating with Chinese companies and trade associations. Seen in this light, the B&R is simply another aspect of a natural trend for South Korea to cooperate with China.

Economically, China is the indispensable partner for South Korea, but China also derives immense benefit from the relationship.

Third, although North Korean obstructionism is a critical problem, since it is blocking the creation of a land corridor between China and South Korea, this difficulty can surely be resolved by coordinated action. Both

China and South Korea should show flexibility toward North Korea to provide them with obvious and definite economic benefits from joining the B&R and the AIIB. North Korea has significant untapped potential, with its cheap but well-educated workforce which is currently being underutilized, but since 2010, the South Korean government has prevented its industries from making use of this resource, except at the Kaesung Industrial Complex. Although North Korea is presumably upset being rebuffed by China when trying to join the AIIB, every effort must be made to persuade the secretive regime to see the advantages of making the necessary fiscal provisions, so that they can join both the AIIB and the B&R, and enjoy all the development benefits which will then ensue. The Trilateral Cooperation Secretariat, an organization recently established to promote peace and prosperity among between China, South Korea and Japan, may also have a useful role to play.53China, Japan and South Korea constitute the world’s third largest economic region,after the EU and North America, with more than 1.5 billion consumers.See 2014 Trilateral Economic Report (Seoul: Trilateral Cooperation Secretariat, September 2014).

Conclusion

South Korea’s Foreign Affairs Minister, Yun Byung-Se, has recently expressed the view that the country’s unique strategic position allows it to make an important contribution to regional peace and prosperity.54See Northeast Asia Peace and Cooperation Initiative.If, indeed, it is possible to continue the recent diplomatic finesse in balancing the influence of the two great regional powers, China and the US, then South Korea should be able to have its cake and eat it too.55Sukjoon Yoon, “Strategic dilemma or great blessing?”PacNet, No 23. April 13, 2015.

China insists that its investment in the B&R is economically motivated, and highlights the economic benefits for the other countries involved. A Community of Common Destiny is being built, if the Chinese slogans are to be believed. And there is a good case for taking China at its word: the commitments already made to port development projects in Malaysia, Sri Lanka and Pakistan are certainly impressive. And the expansion and integration of regional trade and logistics networks really does offer a winwin outcome, both for China and the rest.

Even if the B&R is an exclusively economic strategy, however, it still would have clear strategic implications, since China has proven its willingness to use economic coercion to pursue its geopolitical interests, making any economic investment a potential weapon; so China need not send its navy to the newly constructed ports to exert increased control over regional shipping lanes. Of course, from a Chinese perspective, the economic and geopolitical ramifications of the B&R run in parallel: both recall China’s historical dominance, fitting in nicely with Xi Jinping’s favorite theme of the Chinese Dream. Still, the notion that the B&R is primarily a device to project China’s geopolitical influence across Asia, in particular to the Indian Ocean, seems overblown on the evidence so far available. The Chinese Dream need not excessively disturb China’s neighbors, whatever scaremongering sinophobic views might be expressed in countries like the US, Japan and India.

In recent years, China and South Korea have become remarkably close. The connections between individuals, companies and institutions of the two nations constitute a shared modality that integrates tradition and history with complementary governance and the international legal regime. For this reason, South Korea’s involvement with the B&R offers opportunities which China cannot obtain from any other country. It therefore makes good sense for both countries that South Korea should cooperate closely with the B&R, despite the possibility that the US will take umbrage. Indeed, the B&R seems likely to play a central role in South Korea’s progress from being a weak and divided nation to become a genuine and acknowledged middle power. South Korea has recently shown its capacity to rise to the challenge of sustaining an autonomous position equidistant from the two great powers. It has upset China, by considering THAAD deployment and by taking part in the TPP negotiations; it has also upset the US, by joining the AIIB as a founder member and by cooperating with the B&R; and yet South Korea has remained on excellent terms with both countries. Doubtless South Korean involvement with the B&R will bring its own challenges, but South Korea will meet them skillfully and steadfastly – the potential economic benefits are too great to ignore.

Captain (ret) Sukjoon Yoon is Senior Fellow at the Korea Institute for Maritime Strategy.