NORTH KOREA: Reluctant Partners; Increased trade is giving China and South Korea more pull with North Korea. But they don't want to use it.

Byline: Christian Caryl (With B. J. Lee in Seoul, Sarah Schafer in Beijing, Eve Conant in Washington and Hideko Takayama in Tokyo)

The White House emissary was packing heat. As Michael Green, senior director of Asian affairs on the U.S. National Security Council, made the rounds in Tokyo, Beijing and Seoul last week, he confronted his counterparts with the diplomatic equivalent of heavy weaponry--a handwritten note from U.S. President George W. Bush. It was Washington's latest effort to convince governments in the region that North Korea has been peddling nuclear materials to nefarious customers. U.S. officials last week claimed Pyongyang appeared to have supplied uranium hexafluoride to Libya, which gave up its own nuclear-weapons program at the West's urging.

Increasingly, however, the calculations of Pyongyang's neighbors may differ from Washington's. All the heated headlines about North Korean nukes have obscured a more subtle shift in the local dynamic, in particular the country's blossoming economic relationship with China and South Korea. In July 2002 North Korean leader Kim Jong Il signaled the end of decades of Stalinist economics with a package of market-oriented economic reforms--including freeing up some prices and allowing private markets. The measures have had mixed effects, creating skyrocketing inflation along with limited economic opportunity. But they've also interwoven the North's economy more closely with its neighbors to the west and the south. That means both have more leverage, yet less reason to wield it.

Since the 2002 reforms, trade between North Korea and China has skyrocketed. In 2003 trade over the previous year shot up by 39 percent to around $1 billion; official figures for 2004 are still out, but growth estimates range from 25 to 40 percent. Before 2002 most of what crossed the border were raw materials, such as fishery, clothing, steel and coal exchanged as barter for Chinese fuel and basic machinery. These days, by contrast, more than 80 percent of the consumer goods in North Korea's markets come from China, says Lee Young Hoon, a Bank of Korea analyst.

Compare that with Japan, whose trade with the North recently fell to a 28-year low of $260 million. The Japanese government has been cracking down on North Korean traders by enforcing regulations and tightening monitoring. Japan-based executives have figured out that it's hard to turn a profit dealing with such unreliable business partners. Hundreds of Chinese joint-venture companies, on the other hand, now employ tens of thousands of Northern workers in garment factories and other labor-intensive businesses on the North Korean side of the border.

The Chinese border town of Dandong, which endures traffic jams daily at the narrow crossing into North Korea, is thriving. On the North Korean side of the border, Chinese cell phones are ubiquitous, though their use is technically restricted. Indeed, everything from Chinese beer and refrigerators to VCRs and DVD players are, by some accounts, becoming increasingly common among North Koreans who have the money to pay.

To the south, Seoul's Sunshine Policy has fueled increasing economic integration. The North is less dependent on the South in terms of overall trade (from 1990 to 2003, in fact, North Korea had a total trade surplus of $1.6 billion with South Korea, driven mostly by Northern exports to the South of fish, farm products and steel.) ...