(FORTUNE Magazine) – "Let me talk about North Korea," George W. Bush said to the Washington Post's Bob Woodward in an interview at the President's ranch in Crawford, Texas, last August. The veteran Post reporter had just asked about Bush's plans for Saddam Hussein's Iraq--target No. 1 on the President's famous list of three nations making up the "axis of evil." But the President, for reasons that would become apparent to Woodward and the rest of the world only months later, had North Korea and its mysterious leader, Kim Jong Il, on his mind. Woodward, in his book Bush at War, then recounts an extraordinary scene: "The President sat forward in his chair. I thought he might jump up he became so emotional about the North Korean leader. 'I loathe Kim Jong Il!' Bush shouted, waving his finger in the air. 'I've got a visceral reaction to this guy, because he is starving his people.' "

Starving his people and, Bush did not add (though he knew), continuing to develop nuclear weapons, in direct contravention of a 1994 agreement with the Clinton administration to drop his nuclear ambitions. The President knew last summer, just when his administration had begun serious planning (both diplomatic and military) to separate Iraq's leader from his own weapons of mass destruction, that Kim Jong Il was going to complicate his life immensely.

And so--as everyone now knows--he has. In October assistant secretary of state James Kelly revealed that on a secret trip to Pyongyang, North Korea's capital, Kim Jong Il's government had admitted, in response to evidence Kelly had brought with him, that it was enriching uranium for use in nuclear weapons. Since then North Korea has defiantly and skillfully played a game of nuclear blackmail. On Dec. 12 the North announced it would restart a shuttered nuclear reactor at Yongbyon, the one covered by the so-called Agreed Framework deal of 1994. The facility has enough spent fuel on hand to make five to six nukes by the end of this year. (Restarting the reactor would also produce sufficient new spent fuel to make one additional weapon per year of operation.) Then, in late December, North Korea kicked out representatives of the International Atomic Energy Agency who were monitoring the Yongbyon facility. Kim also seemed prepared to renounce the nuclear nonproliferation treaty, or NPT, which North Korea had signed in 1985. His next step could well be to start moving spent fuel rods from the reactor at Yongbyon to a nearby facility, where the plutonium would be reprocessed and ready for use in weapons.

That, for the Bush administration, would be a disaster on several levels. First and most obviously, it would put more weapons in the hands of a hostile regime that already possesses long-range missiles and is working on developing some that can hit the U.S. Second, North Korea is, in the words of Robert Walpole, one of the CIA's top experts on weapons of mass destruction, the "worst" proliferator of missile technology on the planet and could easily go into the loose-nuke business once it starts churning out the plutonium. If Kim could then figure out where exactly one pays a sales call to Osama bin Laden these days, Bush's worst axis-of-evil nightmare would be realized.

That puts Bush in an excruciating dilemma, because he lacks the Saddam option--that is, he can't take out Kim Jong Il, or his nuclear-development infrastructure, militarily. The reason that is true, as daily press stories about the unfolding crisis make clear, is that North Korea has an enormous amount of artillery within easy striking distance of Seoul, the capital of South Korea. As notorious as Kim's regime is, there is simply no constituency anywhere among U.S. allies in East Asia for another Korean war. That is now truer than ever in the South, where the newly elected President, Roh Moo Hyun, rode a wave of anti-American sentiment to victory Dec. 19.

But the other, more important reason that no real military option exists is this: Since the mid-1990s the working assumption of the U.S. government (as well as governments in East Asia) is that North Korea already has one or two nuclear weapons. Couple that with its demonstrated missile capacity--in 1998 it stunned Tokyo by test-firing a multiple-stage Taepodong- type rocket in the Sea of Japan--and the risks of a military strike become even more daunting. Yes, if the North ever used the one or two nukes it had, it would be the end of the regime, but it would come only after God knows how many casualties--and not necessarily all on the Korean peninsula.

That is why the administration, led by the President himself, has been so forthright about saying that North Korea is a diplomatic, not a military problem. They're not just trying to sound like reasonable guys to appease hostile Democrats and Europeans, some of whom persist in thinking Bush is a unilateralist yahoo from west Texas who wants to shoot now and take names later. The Bushies mean what they say. In turn, however, critics charge them with hypocrisy or strategic incoherence: Why, if North Korea is a card-carrying member of the AOE (axis of evil) and you think it has a couple of nukes and is about to make some more, are you worrying about Iraq?

It is a reasonable question, and the administration, for all the vaunted competence of its national security team, has been "inept," as Henry Sokolski, director of the Nonproliferation Policy Education Center in Washington, D.C., says, in providing a consistently coherent answer. And that's strange, because the answer isn't complicated. The reality of North Korea, run by a nuke-wielding dictator, doesn't detract from the case for going after Saddam--it enhances it. And the reason it does is that Saddam with nukes is precisely what you want to avoid at all costs. Even European opponents of a war with Iraq, like the Germans, concede that point. That is what the Israeli strike on Iraq's Osirak nuclear reactor in 1981 was all about: preventing Saddam, a megalomaniac with obvious regional ambitions, from acquiring the nukes to back up those ambitions. Twice since 1981, Saddam has shown that he's willing to go to war with his neighbors--something that Kim Jong Il, for all his eccentricities, has never done. As Amatzia Baram of Israel's University of Haifa puts it, "Saddam with nukes guarantees that someday there would be a nuclear exchange in the Middle East."

Figuring all that out has been the easy part for the administration. The hard part comes now: how, diplomatically, to deal with North Korea's nuclear blackmail in a way that avoids a scenario in which everyone in East Asia--including Japan--feels it needs a nuclear deterrent. The North wants two things more than anything else: direct dealings with the U.S., in the hope of negotiating a long-sought nonaggression pact with Washington, and economic assistance. The last time the North played this game, it won: The Clinton administration negotiated face to face and signed the Agreed Framework, which included fuel oil and food aid as well as a commitment to build two nuclear reactors that were less of a proliferation threat. Eventually Madeleine Albright even went to Pyongyang for talks with Kim.

Given that Pyongyang went right on making nukes, the Bushies insist that scenario will not under any circumstances be replicated. North Korea needs to stand down its weapons program or face what the administration calls "tailored containment," a policy of enhanced sanctions against what is already one of the most economically isolated regimes in the world. It's not at all clear that such a policy would have the desired impact, and it has no chance whatever without the participation of China.

That's where things get even knottier. Without question, the road to any kind of diplomatic resolution runs through Beijing. It is the only country in the region that has halfway-decent relations with the North. And more important, China is the primary source of food and fuel for a famished and frigid nation. It, more than South Korea and Japan, has leverage over the North. But it is still not clear its leaders are willing to use that clout. Relations between China and the U.S. are good right now, and on Dec. 31, Bush pointedly noted that he and Jiang Zemin, Beijing's outgoing leader, had talked specifically about working together on North Korea when Jiang visited the Bush ranch last October. Bush intends to see just how serious Jiang was.

He may not like the answer. Beijing doesn't want a North with nukes, but it is also deeply wary of an economic-strangulation strategy. Already North Korean refugees by the thousands have poured into northeastern China--a region of high and rising unemployment and increasing worker unrest. The last thing Beijing wants is more bodies in Liaoning province looking for jobs that aren't there. That's why China's authorities forcibly repatriate any North Koreans they find.

If Beijing balks at Washington's proposed isolation strategy, it will be ineffective. And that means that eventually, no matter how much he may loathe Kim Jong Il, someone from Bush's administration is probably going to have to negotiate with him.

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