US moves for containing N. Korea

The good news for markets is that Saturday’s widely anticipated launch of an intercontinental ballistic missile from North Korea did not take place. But if and when it does happen, the U.S. will be under another round of pressure: Do nothing again, and it will look weak and indecisive on the international scene. Or retaliate and risk a catastrophic conventional or nuclear conflict.

U.S. President Donald Trump is a seriously considering adopting diplomatically provocative sanctions on Chinese banks doing business with Pyongyang, according to a report by NBC News, citing Trump administration officials.

The U.S. has already rolled out sanctions aimed at Chinese companies that conduct business and trade with North Korea. But it has not yet broadly targeted China’s banking system. China has told U.S. officials it would protest such a move diplomatically and retaliate.

China accounted for 92 percent of North Korea’s 2016 trade, according to the Korea Trade-Investment Promotion Agency’s data in July. It also provides hundreds of thousands of tons of oil and fuel to the impoverished regime.

But it has only entrenched its position, explaining repeatedly that it wants a peaceful de-escalation and that it would not ally with the U.S. in the event of a military conflict.

This is supposed to be evolving into the worst nuclear confrontation since the 1962 Cuban Missile Crisis, except for one major remaining leverage for the U.S.: escalating a financial attack on the Chinese banking system in order to force China to completely embargo North Korea.

The U.S. cannot take pre-emptive military action until it has exhausted all diplomatic and economic options. And like the Cuban Missile Crisis, the will to act decisively or precipitously will depend on how severe the U.S. considers this to be a “clear and present danger” and a national security crisis.

There is a precedent for trying to ban Chinese institutions from transacting in U.S. dollars.

In March 2007, Delta Asia Financial Group, a Macau-based bank, suffered a run on its deposits when the U.S. Treasury ordered U.S. companies and financial institutions to cut links with the bank on account of allegations about its business relationships with the government of North Korea. It was the first time Section 311 of the USA Patriot Act was used to deny the international financial system from rogue states and state sponsors of terrorism.

Under legislation passed shortly after the 9/11 attacks, the U.S. Treasury Secretary has the power to designate foreign banks as “institutions of primary money laundering concern.” The outcome is to impose severe limits — especially correspondent banking relationships with the U.S. financial system.

Delta remains under financial sanction today, and is unable to conduct business in U.S. dollars. It is currently appealing the sanction.

However, that application of the Patriot Act prompted such strong diplomatic protest by Beijing that the U.S. State Department instructed the Treasury to find other methods. An outright ban was far too disruptive to diplomatic relationships. But that has changed.

Today, Trump could ban U.S. and international institutions from dealing in U.S. dollars with all Chinese banks. Such an act is more effective than trade sanctions. It would be equivalent to unleashing a financial nuclear weapon. It would be catastrophic.

Although China has digitalized the conduct of a large part of the nation’s commerce, vast amounts of cash are still in circulation and depositors could demand it from banks. Cashless payment operators like Alipay and Tencent’s Wechat-Pay would certainly also come under immense pressure as massive yuan capital flows shift violently.

Threatening China with economic and social mayhem if they don’t completely embargo North Korea is America’s last choice. There are almost no moves left for the U.S. diplomatically.

Starving out North Korea as if it was a medieval siege is the only attrition tactic left, as the status quo is naked appeasement.