This will be an important question in the run-up to Kim Jong Un’s planned summits with the South Korean and U.S. presidents. While North Korea’s young leader has played a brilliant diplomatic hand, he may have miscalculated the bite that sanctions are about to take.
Coordinating on sanctions is always difficult
As Marcus Noland and I detail in “Hard Target: Sanctions, Inducements and the Case of North Korea,” all sanctions regimes face a big challenge: getting the countries that trade with the target to coordinate. This has been a huge obstacle since the United Nations moved to sanction North Korea, with the first multilateral sanctions resolution voted after the country’s first nuclear test in 2006.
In 2000 — before the long-lived nuclear crisis broke in 2002 — China, South Korea and Japan each accounted for about 20 percent of North Korea’s trade. The United States effectively had none, and Russia’s share had never recovered from the Soviet collapse. The rest of the world, including the Middle East, accounted for the remainder of North Korea’s trade.
In incremental steps, Japan drifted toward a near-total embargo after 2002. South Korea experimented with engagement under liberal presidents. Conservative governments gradually wound down cross-border trade, and in 2016 President Park Geun Hye shut the Seoul-backed Kaesong Industrial Complex in North Korea altogether.
Trade with the rest of the world steadily diminished, mostly because of North Korea’s unreliability and the associated political and commercial risk.
China today accounts for about 90 percent of North Korea’s trade. Yes, China is a close neighbor, but the reasons for this continued trade are also political.
China now plays a pivotal role in sanctions
Some doubted when Donald Trump said as candidate and president that China had “total control” over North Korea, but he was not altogether wrong. For a decade, U.N. sanctions targeted trade related to North Korea’s weapons program but did not prohibit commercial engagement. China experimented with its own engagement policy, opening up large-scale mining investments that became crucial sources of foreign exchange for Pyongyang.
Under Xi Jinping, and particularly since the fourth nuclear test in 2016, Beijing has significantly changed its approach. For the first time, China supported increased U.N. sanctions on North Korea’s commercial trade.
The Trump-Xi Mar-a-Lago summit a year ago seemed to bump up U.S.-China cooperation on North Korea. Trump paused his protectionist trade agenda last year, in return for a more forward posture from Beijing on North Korea.
In 2017, China agreed to ban a variety of North Korean exports — coal, iron ore, marine products, and goods from the country’s emergent textile and garment industry. These sectors account for almost half of North Korea’s known exports.
These measures came on top of other steps to make it increasingly difficult for North Korea to access the international financial system. And China put a significant cap on oil exports to Pyongyang, potentially the most damaging measure to date.
In these tacit negotiations with China, the United States held an important card. In early 2016, Congress granted President Obama significant authority to impose secondary sanctions against entities in violation of existing restraints. These measures exploit larger international companies’ needed access to the U.S. clearing system as leverage. If a company trades with North Korea in violation of sanctions, it could face exclusion from U.S. financial markets, or even asset freezes.
In September 2017, Trump signed a sweeping executive order that effectively allowed him to impose such sanctions on any entity doing commercial business with North Korea. These new measures no doubt influenced Beijing’s calculations as well.
While the surprise Kim-Xi summit last month came with a lot of pomp, the pressure from Beijing seems real. China will not allow North Korea to be pushed to collapse, however, as that would be a security threat for Beijing.
Can North Korea continue to evade?
Tough commercial sanctions, perversely, can make it more lucrative to trade with the sanctioned party. The United States and Japan have produced compelling images of sanctions-busting ship-to-ship transfers of oil.
Sanctions analysts see this as a “whack-a-mole” problem: Despite its nominally socialist economy, North Korea has in fact become a most enterprising country with respect to sanctions evasion.
Yet there are limits. Smuggling operations are not going to replace the foreign exchange losses associated with major export bans. In his New Year’s speech, Kim openly signaled that harder times were coming. If China, his largest trading partner, holds firm, Kim faces looming constraints in the form of declining access to much-needed foreign exchange.
Pyongyang’s current-account deficit with China is another sign that sanctions hurt North Korea’s economy. China has restricted North Korean imports but does not face the same constraints on most exports. As a result, North Korea’s deficit is ballooning.
North Korea is probably financing this deficit out of reserves, but its reserves are not unlimited. The recent rounds of sanctions may not work through a slow squeeze, but instead create a balance-of-payments crisis — and a loss of confidence in the informal markets that are keeping the economy afloat.
Sanctions complement the diplomatic track
South Korean President Moon Jae-in and Trump thus are in a good bargaining position going into the two summits. Moon has said that sanctions relief and assistance to the North are out of the question until the nuclear issue is addressed, a significant departure from his pro-engagement preferences. The risks of Washington and Seoul being at odds over strategy have fallen.
The concerns now rest with a U.S. administration prone to grand gestures but with a foreign policy bench depleted to some extent by turnover. The United States faces the challenge of coordinating at the multilateral level and with China to maintain the sanctions pressure that will lead to talks.
But this also means committing to negotiations beyond these initial summits. If the United States throws away the diplomatic channel altogether — as incoming national security adviser John Bolton has suggested — the United States could find that China’s patience for maintaining the sanctions regime will erode.
Stephan Haggard teaches at the University of California San Diego; his North Korea blog can be found @nkwitness.