China punishes North Korea for nuclear tests as US asks for more

China is trying to punish ally North Korea for its nuclear and missile tests, stepping up inspections of North Korean-bound cargo in a calibrated effort to send a message of Chinese pique without further provoking a testy Pyongyang government.

Freight handlers and trading companies at ports and cities near the North Korean border complain of more rigorous inspections and surprise checks that are raising the costs to doing business with an often unpredictable North Korea. Machinery, luxury goods and daily necessities such as rice and cooking oil are among the targeted products, the companies said, and business is suffering.

"Some business orders we don't dare take. We don't dare do that business because we fear that after the orders are taken, we will end up unable to ship them," said a Mr. Hu, an executive with Dalian Fast International Logistics Co. in the northeastern port city of Dalian, across the Yellow Sea from the North Korean port of Nampo. Hu said the company's business is off by as much as 20 percent this year.

North Korea's economic lifeline, China is showing signs of getting tough with an impoverished neighbor it has long supported with trade, aid and diplomatic protection for fear of setting off a collapse.

The moves to crimp, but not cut off trade with North Korea come as Beijing falls under increased scrutiny to enforce new U.N. sanctions passed after last month's nuclear test, Pyongyang's third. Targeted in the sanctions are the bank financing and bulk smuggling of cash that could assist North Korea's nuclear and missile programs as well as the luxury goods that sustain the ruling elite around leader Kim Jong Un. Pyongyang has reacted with fury and threatening rhetoric against South Korea and the U.S.

U.S. officials in Beijing for two days of talks to lobby China on enforcement said Friday that they were heartened by Chinese expressions of resolve. Spurring Beijing to cooperate, the U.S. officials said, is a concern that North Korean behavior had begun threatening China's interests in a region vital to its economic and security.

"There's reason to believe the Chinese are looking at the threat in a real way," Treasury Undersecretary David Cohen told reporters.

China's change of tack with North Korea unlikely foreshadows a total end to Beijing's support. For Beijing, North Korea remains a pivotal strategic buffer between China and a U.S.-allied South Korea, and Chinese leaders worry that too much pressure could upend an already fragile North Korean economy and cause the Kim government to collapse, leaving Beijing with a security headache and possible refugee crisis.

But North Korea watchers said between blind support and complete abandonment there's much Beijing is doing and can do to try to rein in Pyongyang.

"We have to get away from the binary thinking that either they support North Korea or they pull the plug. That's not the way the world works," said Jonathan Pollack of the Brookings Institution, a Washington think-tank. "The interesting thing is not what happens at the UN but what happens beneath the radar in terms of what Chinese provide in economic aid and energy assistance."

Over the past decade, as previous nuclear and long-range missile tests and other provocations saw the UN, the U.S., South Korea and Japan impose sanctions and reduce trade and assistance to North Korea, China has stepped into the breach. By 2011, China provided nearly all of North Korea's fuel and more than 83 percent of its imports, everything from heavy machinery to grain and electronics and other consumer goods, according to statistics from the International Trade Center, a research arm of the United Nations and World Trade Organization.

Though Pyongyang could look to other trading partners like Russia, Iran or Kuwait for fuel and some other goods, China's proximity — their shared 1,400-kilometer (880-mile) border — makes it indispensable. Chinese companies, often with backed by the government, are enlarging North Korean ports and building roads, helping to underpin growth after more than a decade of famine and economic decay.

Such was the Chinese support that U.S. politicians and UN experts complained that Beijing was failing to enforce previous rounds of sanctions, particularly on luxury goods. The $169,000 worth of pleasure boats imported by North Korea last year all came from China, the ITC data show, as did most of the liquor and cigarettes.

As China upped its investment, it became disillusioned with Kim Jong Un. Since coming to power after the sudden death of his dictator father, Kim has refused to heed Beijing's prodding to engage in economic reform and return to negotiations over its nuclear program.

Beijing's unhappiness began to show in December, around the time of North Korea's latest long-range rocket launch but before the nuclear test. It was then, traders and cargo companies said, that orders for tightened inspections appeared.

At Complant International Transportation in the port of Dalian, customs inspectors began opening containers and packages with equipment or luxury goods or anything they deemed sensitive rather than just scan them, said a company executive who identified himself only by his surname, Zhang.

"That was since the end of last year. Now they're even stricter," Zhang said.

Companies in the border city of Dandong on the Yalu River said North Korean-bound goods have to be stored in bonded logistics centers for inspection by customs authorities. Banking restrictions mean North Korean traders have a hard time getting hard currency.

"Due to the lack of cash, North Korean companies tend to pay with minerals or coal, but we only trade with those able to pay in cash," said Yu Tao, vice general manager of the Dandong Import and Export Co. Yu said the company trades daily consumer goods and has been reducing its trade with North Korea because of the risks.

Banking is one area where China has been tightening controls, but the U.S. would like Beijing to do more. "China remains the name of the game when it comes to financial sanctions against North Korea," said Jo Dong-ho, an expert on the North Korean economy at Seoul's Ewha Womans University.

In late 2011, Beijing forced the China Construction Bank to close accounts opened by the Korea Kwangson Banking Corp. in Dandong and the Golden Triangle Bank in Hunchun, another border city, to comply with previous U.N. sanctions. Still, with tens of thousands of North Koreans having fled to China, many just for short-term work, plus traders, the yuan is used inside North Korea, and smuggling of large amounts of the Chinese currency across the border has become common.

Cohen, the U.S. Treasury official, said he urged China to follow the U.S. lead and impose sanctions on North Korea's Foreign Trade Bank. The bank serves as the main foreign exchange bank for North Korea, wiring and receiving funds to facilitate trade, most of which goes through China, so sanctions would in effect further force more North Koreans to turn to cash.

"North Koreans will have no choice but to carry a large amount of cash by themselves," said Kim Joongho, a senior research fellow at South Korea's Export-Import Bank. That will cause "inconvenience on the Pyongyang elites' economic lives."