Image 20161128 22761 gocl1r.jpg?ixlib=rb 1.1

Sanctions haven’t transformed North Korea – but trade with China might

EPA/Larry W Smith

Sanctions haven’t transformed North Korea – but trade with China might

North Korea is widely regarded as one of the key foreign policy challenges facing the incoming Trump administration – but what the new president will actually do about it is far from clear. His comments on the issue have been rather incoherent and mutually contradictory, ranging from advocating a Chinese invasion to suggesting the US talk to Kim Jong-Un. What’s much more likely is that the US will stick with its usual approach to pressurising Pyongyang: economic sanctions.

New multilateral sanctions were imposed earlier in 2016 after Pyongyang’s fourth and fifth nuclear tests, and more are reportedly being negotiated.

Compared to some of Trump’s proposals, this seems like a reasonable and rational approach. The new round of sanctions passed in spring 2016 was a big step forward. With the crucial support of Beijing, UN Security Council Resolution 2270 significantly extended the regime already in place: it mandates inspections of cargo shipments entering and leaving North Korea, prohibits the sale of all conventional weapons and jet fuel to the country, and bans North Korean exports of coal, iron ore, gold, and other mineral products.

Strong stuff – but whether sanctions have actually worked on the North Korean economy is another matter.

China boom

Pyongyang doesn’t release its own trade statistics, but because around 90% of North Korea’s trade is with China, Chinese customs statistics give a more or less comprehensive picture of North Korea’s external trade relations.

Sino-North Korean trade has grown from around US$488m in 2000 to US$6.545 billion in 2013. In 2014, the overall figure slipped to US$6.364 billion, though this “decline” is in part explained by the fact that Chinese customs statistics simply stopped recording crude oil exports to North Korea.

In line with many countries across the developing world, North Korea’s economy has benefited as the country supplied natural resources to the booming Chinese economy. By extension, it also gained from importing Chinese consumer goods and daily necessities. North Korean coal exports to China grew from just US$90,000 in 2000 to US$1.38 billion in 2013; however, that figure fell to US$1.05 billion in 2015. Iron ore exports have followed a similar pattern, rising from US$529,000 in 2000 to US$324m in 2011 but then sinking to US$72.8m in 2015.

This decline is largely an effect of a Chinese economic slowdown, which in turn set off a global decline in commodity prices. Steel is being overproduced worldwide, so demand for iron ore has fallen. And as China has imposed stricter environmental standards and closed coal-based power plants, coal prices have dropped sharply.

North Korea’s nuclear program has led to trade sanctions. EPA/Jeon Heon-Kyun

One area where North Korea has kept its exports healthy is in clothing. Materials and machinery are imported into North Korea by a Chinese company and a North Korean trading company supplies the labour, with the finished product then re-exported to China. Such exports have grown from a minimal level in 2000 to a value of US$414.5m in 2011 – and unlike mineral resources, they’ve kept growing, reaching a value of US$799.3m in 2015.

All this means that Sino-North Korean trade is a good measure for the impact of the new UN sanctions passed in March 2016. Those sanctions were introduced in the midst of what was already a decline in the value of mineral exports to China, and yet total trade between April and September 2016 was recorded at a level of US$2.899 billion – marginally lower than the same period in 2015, recorded at US$2.901 billion. Indeed, a much sharper decline can be seen between 2015 and 2014, the latter of which was recorded at US$3.417 billion.

As such, the sanctions do not appear to have had any discernible impact on overall Sino-North Korean trade levels. The decline that has taken place over the past two years can largely be traced to changes in market conditions associated with the Chinese economy. This underlines the fact that in contrast to the more politicised trade prior to the 1990s, contemporary Sino-North Korea trade is largely driven by profit, not to benefit the state, and it mostly involves private small and medium enterprises in China’s northeastern provinces.

Buffer state

It’s clearly not in China’s interests to push the North Korean economy to the point of possible collapse. The country is an increasingly important geopolitical buffer against US allies in the region.

Plus, China’s northeastern provincial and municipal governments view economic co-operation with North Korea as essential to overcoming their own relative economic backwardness and isolation. The key actors in these economic exchanges are relatively impervious to multilateral sanctions, many of them being small, profit-seeking enterprises that operate in the largely informal cash-based border economy.

Trains ferry goods across the Sino-North Korean border. EPA/Yonhap

China was instrumental in ensuring that the wording of the UN Security Council resolution included the clause that exports of minerals could take place if “for livelihood purposes”. This vague phrasing and the impossibility of tracing financial flows within North Korea forms a significant loophole in the sanctions.

Engagement strategy

Instead of viewing China as a stumbling block in its North Korean policy, the incoming US administration would do well to take a more positive view of China’s policy of engagement with North Korea.

Sino-North Korean trade has underpinned the marketisation of North Korean society. China is the key source of daily necessities and goods sold in North Korea’s burgeoning consumer markets, which have helped to raise the living standards of ordinary North Koreans in recent years. Chinese firms provide jobs and train North Koreans in entrepreneurial skills.

In this respect, China’s engagement strategy looks likely to succeed where South Korea’s 1990s-era “sunshine policy” failed. Where this was limited to enclave-style investments that failed to have a broader impact on North Korea’s economy and society, China has taken a more grassroots-oriented approach. This has helped a broader recovery of the economy. There are signs that North Korean society is becoming more pluralistic, and that an entrepreneurial class may be emerging: if so, a profound transformation is underway.

Of course, just because we can detect encouraging trends doesn’t mean North Korea is any closer to denuclearisation. But, as has become increasingly clear, there simply are no viable solutions for inducing North Korea to give up its nuclear weapons any time soon – and that includes sanctions. When the Trump administration takes the reins and starts to reassess US policy, it would do well to take stock of what China has managed to achieve.