WHEN President Bush and South Korean President Roh Tae Woo met for the first time, in Seoul in 1989, conversation ranged from the state of South Korean democracy (bad) to US-Korean trade relations (worse). Thirty miles north, the heavily fortified border between North and South Korea symbolized the old world order of the cold war.A meeting between the two leaders in Washington tomorrow, their fourth, takes place against a surprisingly different backdrop. Though vestiges of authoritarian rule persist, democracy has taken root in South Korea. Tensions over trade have diminished as South Korea has opened its markets and lowered its huge trade surplus with the United States. More surprising, policy changes have been made in North Korea that promise to ease regional tensions and provide the main topic of conversation at the US-South Korea summit. "There are changes in North Korea's foreign policy which have introduced a new dimension [to the US-South Korean dialogue]," says Alan Romberg of the Council on Foreign Relations. "We're at a kind of transition point where the pattern of international relations and security affairs in this part of the world is changing rapidly," a senior Bush administration official adds. With a total of 1.6 million heavily armed soldiers arrayed on both sides of the border, the threat of war in the Korean peninsula remains high. But after 45 years, tensions appear to be easing. During the past year North and South Korea have entered into their most serious dialogue since the peninsula was divided following World War II. Meanwhile, North Korea has taken unexpected steps to improve its relations with Washington. Just last week, the Pyongyang government turned over the remains of 11 American soldiers killed in action during the Korean War and agreed in principle to set up a commission to investigate the whereabouts of 8,000 other Americans still unaccounted for. North Korea has also announced that it will seek a seat in the United Nations, a move US policymakers say will contribute to inter-Korean dialogue and eventual unification. Meanwhile, under Soviet pressure, North Korea recently announced that it will open its nuclear facilities to international inspection. As it weighs a response to these gestures, the Bush administration faces this delicate problem: how to improve relations with the North without weakening its commitment to the South or removing the incentive for Pyongyang to respond positively to Seoul's own efforts to sustain a serious inter-Korean dialogue. "Some South Koreans are concerned that if the US were to move too quickly toward normalization of relations - which is not a great danger - it would undercut their own efforts to start a dialogue with the North," says Mr. Romberg, a former US diplomat. Pyongyang's offer to allow nuclear inspections has posed a specific dilemma for the US, which has viewed with growing concern reports that North Korea is expanding its nuclear establishment at Yongbyon. One way to convince Pyongyang to abandon its quest for nuclear weapons would be for Washington to accede to North Korea's demand that, as a quid pro quo for inspections, the US permit inspection of its own reputed nuclear weapons in South Korea. South Korea is opposed and US officials are wary of making concessions to induce the North to do what it is already required to do as a signatory of the Nuclear Nonproliferation Treaty. The question Washington ultimately will have to decide is whether the South's security will be better served by keeping the weapons in place as a deterrent or by removing them as a confidence-building gesture to accelerate the gradual warming trend now under way on the peninusla. North Korea's overtures are easily explained: With defense expenditures five times higher as a percentage of gross national product than the South's, the country is strapped economically. Better relations with the US and Japan could open the door to needed investment and technology. "North Korea is clearly trying to move toward normalization of relations with Japan and the US," says Selig Harrison of the Carnegie Endowment for International Peace. North Korea is also forced to seek new friends because the loyalties of old ones are weakening. South Korea has established relations with seven former Soviet-bloc nations, historic allies of North Korea. Seoul has also opened trade offices with China, which has agreed to drop its opposition to South Korea's bid for full UN membership. The greatest blow was dealt Pyongyang when Soviet leader Mikhail Gorbachev recognized South Korea, then made a historic visit to Seoul last spring. President Roh has presided over impressive economic growth that has given the US the confidence to begin a gradual shift from a lead role to a support role in defending the peninsula. And drawdown of the 43,000-man US force in South Korea began last year.