By Brittany N. Cox, Associate Advisor at Nestlerode & Loy, Inc.
For years, sanctions on North Korea levied by both the United Nations and the United States have done little to slow their nuclear-weapons program. Their missiles now threaten the continental U.S. Still, the idea persists that sanctions are the best way to slow down Kim Jong Un’s nuclear program.
Many believe that the most recent sanctions imposed by President Donald Trump on Sept. 21 have a better chance at working than any before. A statement from one observer said, “Trump’s executive order effectively allows the U.S. to impose a full trade and financial embargo through the use of secondary sanctions, which target non-U.S. banks, companies and people who do business with North Korea. These sanctions may have real teeth.”
So what does this order do, and how does it differ from previous orders? The new sanctions give the U.S. Treasury Department the authority to block from the U.S. financial system all banks and companies that do business with North Korea. It places a ban on ships or aircraft that have made stops in North Korea from coming to the U.S. for six months.
Until now, the U.S. has mainly relied on sanctions coordinated by the UN. Trump’s order differs by not only restricting the supply of oil and petroleum, but also goods like coal, iron, seafood, and textiles. A sanction by Barack Obama in 2016 focused on cutting funding for North Korea’s missile and nuclear program rather than targeting North Korea’s entire economy.
The next question is, what adverse effect, if any, might the U.S. face? That depends largely on China’s cooperation. China is North Korea’s biggest trading partner, supplying 90 percent of its energy. China has said that it is opposed to sanctions imposed outside the UN’s consensus-approved measures. China has concerns about the sanctions hurting ordinary North Koreans, further leading to the collapse of the economy and regime. They believe this will result in a disaster that could spill over the North Korean border.
However, China has complied with the UN sanctions of Aug. 5, instructing institutions to suspend accounts of clients doing business with North Korea. Trump’s recent order could penalize Chinese individuals or entities involved with North Korea. This exposes the U.S. to risks of a trade and financial war with the world’s second biggest economy.
It is hard to tell at this point if the most recent round of sanctions will slow Kim Jong Un’s progress. A majority of the banks and companies that North Korea primarily deals with have little exposure to the U.S. financial system. Also, North Korea has an exceptional ability to absorb economic trials and downturns. The North Korean government and economy in general have many ways of getting money and supplies. North Korea is not a socialist economy where the economic system is run by the government.
Many North Koreans make their living running private businesses in the “grey economies” which are becoming more prominent in North Korea. This private sector now accounts – unofficially, of course – for about half of North Korea’s GDP. Essentially, these businesses are illegal in the country but owners purchase their legitimacy with payoffs so that the whole operation functions like a food chain, with Kim Jong Un at the top of the chain. To look the other way from these private businesses, state officials collect bribes, fees and some profits. They then, in turn, provide income to their superiors who deliver money to their bosses and so on up the line until it reaches the top.
North Korean businesses have flourished in hostility before, and as such have become quite good at it. As any changes in who could export from the country and other trade restrictions were imposed in the past, traders on both sides of the North Korean border gradually developed strong networks that could support cross-border trade under these adverse conditions.
One trader in China estimated that a staggering 70 percent of the trade moving through Dandong, the largest Chinese city bordering North Korea, was actually smuggled. It is believed that most of the seafood exported from North Korea was being smuggled even before the ban was placed. This is the biggest reason the U.S. would need complete cooperation from China for any sanction to have a considerable impact on the North Korean economy.
