By Leon V. Sigal
02 May 2010
To North Korea, sanctions are clear evidence of U.S. hostile intent. Not only has it found ways to evade them, but it has also retaliated for their imposition by conducting missile and nuclear tests, which improved its deterrent and enhanced its negotiating leverage. If the Obama’s administration’s policy of “strategic patience” means waiting for North Korea to knuckle under to sanctions, the wait may last an eternity.
Sanctions have failed to remedy North Korea’s bad behavior. They have also become an impediment to a negotiated resolution of the nuclear issue, which requires Washington to offer Pyongyang a tangible path toward an end to enmity and mutual reconciliation that might induce it to change course.
Exhibit A is the Bush administration’s ill-fated Illicit Activities Initiative (IAI). To those in the State Department who wanted to negotiate with Pyongyang, IAI was a shield against hard-line attack and a potential source of leverage. The initiative’s aim, as one senior administration official said later, was to “squeeze them but keep the negotiations going. But to the irreconcilables in the administration who opposed engagement with North Korea, it was a way to slam the door on talks. Another State Department senior official put it this way: IAI would turn the Six Party Talks into nothing more than “a surrender mechanism.” In 2005, shortly after being named secretary of state, Condoleezza Rice was briefed on the initiative and reacted with such enthusiasm that other officials present cautioned her it could backfire. Yet the combustible combination of pressure and talks became administration policy.
The notion that sanctions could crimp the North Korean elite’s lifestyle or keep Pyongyang from arming underestimated its ability to extract the resources it needed from legitimate trade. Evidence suggests that the North was becoming less dependent on illicit activities as its legitimate trade with China and South Korea ramped up. While all data on North Korean trade should be treated with caution, trade with China rose to $1.58 billion in 2005, up 15 percent from the previous year, and increased by another 7 percent in 2006. Total trade volume increased by similar percentages. 
Congressional testimony by responsible U.S. officials supports the conclusion that IAI enthusiasts also inflated North Korea’s profit from illicit activities, and hence the leverage that could be obtained from curtailing them. Take counterfeiting, for example. While proponents were fond of citing the face value of “super-notes” seized, most of the proceeds from counterfeiting went to middlemen who passed the bills. North Korea’s cut was probably less than 40 cents on the dollar—minus production costs. The total take was small enough for Michael Merritt of the U.S. Secret Service to say in a prepared statement to the Senate Committee on Homeland Security and Government Affairs in April 2006, “The high quality of the notes, and not the quantity circulated, is the primary concern of the Secret Service.” Of course, any amount, however small, is illegal and should be punished, but that begs the question of whether the United States got any negotiating leverage from trying to stop North Korean counterfeiting.
Similarly, IAI proponents often justified the program by citing estimates of North Korea’s heroin output based on defector reports of how much land it had set aside for opium production. But Peter Prahar of the State Department’s Bureau of Narcotics and Law Enforcement Affairs testified in April 2006, “We eventually stopped using these estimates … because the United States was unable to confirm these estimates in the way it is able to confirm illicit drug production estimates elsewhere, either through United Nations or U.S. Government ground or satellite surveys and statistical analysis.” The obvious conclusion is that however much the North earns by transporting heroin grown elsewhere, impeding that trafficking is not likely to yield much negotiating leverage.
The North’s profit from counterfeit cigarettes was puffed up as well. As Prahar testified, “According to cigarette company investigators, beginning in 2002, China closed many factories manufacturing counterfeit cigarettes. Some of the manufacturing equipment and Chinese technicians relocated to North Korea to continue the illicit cigarette production free from the threat of legal action.” How much of these operations benefited the Chinese entrepreneurs rather than the North Korean regime? Prahar’s conclusion is that “any estimates are necessarily highly speculative.” Again, the issue is not whether illicit activities are going on in North Korea, but how much the state is profiting from them and whether stopping them would give Washington negotiating leverage.
The centerpiece of IAI was the financial sanctions imposed on Banco Delta Asia (BDA) in 2005, which in fact, proved both economically ineffective and politically counterproductive. On September 17, 2005, as negotiators put the finishing touches on a Six Party Joint Statement that committed the United States, Japan, and South Korea to reconcile with the DPRK in return for denuclearization, the Treasury Department declared Banco Delta Asia in Macao “a primary money-laundering concern” under the USA Patriot Act. That action threatened to preclude BDA from doing any business with American financial institutions, triggering a run on the bank and a freeze on North Korean accounts by Macao authorities. It also prompted skittish bankers around the world to freeze North Korea’s hard currency accounts, some with ill-gotten gains from illicit activities, but many with proceeds from legitimate trade.
The freezing of accounts did little to curtail North Korea’s foreign trade or restrain its nuclear arming but instead provoked retaliation from Pyongyang even as its trade was expanding. To a country accustomed to circumventing sanctions for years, paying hard currency for its imports without access to its frozen accounts proved little impediment. In the period immediately after the Treasury Department acted, North Korea’s imports increased by 6 percent and its exports rose nearly 10 percent. The North was managing to buy what it needed without access to its hard currency accounts.
Politically, Pyongyang took the Treasury’s action as a clear sign of U.S. hostility. For over a year it refused to resume the Six Party Talks while insisting that the BDA issue be resolved bilaterally. Since Washington refused to hold such discussions, Pyongyang began preparations for missile tests in May 2006. Beijing sent a high-level mission to press Pyongyang to call them off or else face sanctions, but the North went ahead with the tests anyway in spite of China’s request. Its July 4 fireworks display, test-launching seven missiles, including the long-range Taepodong-2, prompted Beijing to vote for a U.S.-backed resolution in the UN Security Council condemning the launches and threatening sanctions. Undaunted, North Korea immediately began preparations for a nuclear test and carried out a detonation on October 9, 2006. Pyongyang had demonstrated in no uncertain terms that it would never bow to sanctions pressure—from the United States or China. Only U.S. willingness to end enmity and reconcile could get the North to change course.
Moreover, North Korean trade increased in the two years following the 2006 UN sanctions. Inter-Korean trade totaled $1.8 billion in 2007—about a 33 percent jump from 2006—then rose again to $1.9 billion in 2008. China trade also grew to roughly the same level in 2007, then shot up to $2.78 billion in 2008. North Korea’s total trade increased by more in 2008 than in any other year over the past decade and its economy grew by 3.7 percent according to the Bank of Korea.
The most recent UN sanctions enacted in 2009 have had similar results. In response to the threat of sanctions, Pyongyang went ahead with a test-launch of a long-range rocket and a second, more successful, nuclear test. The UN Security Council, in response, enacted Resolution 1874 imposing sanctions on the DPRK. The prime target of the new sanctions was the bank accounts of North Korean entities involved in nuclear and missile trafficking. Given the many ways to circumvent the banking system, however, and the reluctance of governments to interpret Resolution 1874 as liberally as the United States did, it is still unclear how much of an impediment this will prove to be. As the Congressional Research Service concluded, “[F]inancial sanctions aimed solely at the DPRK’s prohibited activities are not likely to have a large monetary effect.” 
Luxury goods were also a focus of the most recent U.N. sanctions—in the dubious belief that consumerism is as rampant among privileged North Koreans as it is in Georgetown or that Kim Jong Il’s hold on the elite can be loosened by denying them Rolexes or Mercedes imported from China. A Congressional Research Service analysis of Chinese trade statistics for 2008 indicates that Beijing’s exports of luxury consumer goods to North Korea was between $100 million and $160 million, mostly financed by Chinese credit. That trade is not likely to have dropped enough to make any appreciable difference on the loyalty of elites long accustomed to tight belts and even tighter social controls.
Again, the overall economic impact of the sanctions appears to have been limited. Overall, according to U.S. estimates, North Korea’s economy again grew at a 3.7 percent rate in 2009, probably because of a more bountiful harvest. While North Korean exports to China are difficult to estimate because of the introduction of the new currency, imports from China in 2009 dropped sharply to below the 2007 level. Some of the drop was due to the global recession and price deflation. Trade with South Korea fell 8.5 percent in 2009 but still totaled $1.7 billion—five times what it was a decade ago. Trade with Japan was cut to a pittance, though it is difficult to ascertain the extent to which cash remittances from Koreans in Japan still manage to circumvent sanctions. For instance, Tokyo discovered that the DPRK was exporting sanctioned food items such as mushrooms to China and they were then sold to Japan at higher prices. The only losers may have been Japanese consumers.
As for international cooperation to curb the North’s arms sales, the net effect is probably overstated. In 2005, even before sanctions were imposed, the global market for missiles—the big-ticket item—had dried up, as buyers like Iran and Pakistan opened their own production lines, although technological assistance still generated revenue for Pyongyang. Since the UN arms embargo, at least four shipments of arms have been interdicted. Their total value, never mind net profit, fell far short of the estimated $500 million a year North Korean arms sales are supposed to generate. How many of its exports evaded capture is not known.
Rather than put Pyongyang on the defensive, the most recent round of sanctions may have had the opposite effect. The North’s immediate response to UN Security Council Resolution 1874 was to reprocess and weaponize the spent fuel removed during disabling of its Yongbyon reactor at the end of the Bush administration—adding a bomb’s worth or more to its plutonium stocks—and to threaten to restart that facility. Having strengthened the North’s bargaining position, Kim Jong Il invited former President Clinton to meet him in August 2009 and used the occasion to renew an invitation to hold bilateral talks. Pyongyang also reached out to Seoul and Tokyo. Since then, eight months have passed without any sign that the North is in a hurry to return to the Six Party Talks. Instead of feeling under pressure to negotiate, the risk is that an overconfident Pyongyang may be tempted to overplay its hand when talks do resume.
North Korea has yet to restart its reactor to produce more plutonium or armed its missiles with nuclear warheads, which would require it to conduct another nuclear test or two, as well as more test-launches of its medium- and long-range missiles. The top near-term priority is to keep Pyongyang from taking these steps while trying to build momentum towards solving the nuclear issue.
Sanctions will not achieve that goal. Far from making Pyongyang more amenable to disarming, the record shows sanctions have provoked it to step up arming. While North Korea’s economic troubles are mostly self-inflicted, sanctions also allow the regime to deflect blame to others for the suffering of its people. It is a staple of North Korean propaganda that U.S. “hostile policy” is intended to “stifle” the North. There is some truth to the accusation—after all, in 2001-2002 when the North moved to embrace market reforms, the Bush administration tried, unsuccessfully, to impede North Korean trade. But the regime’s own economic policy failures bear considerable responsibility for the plight of its people—for example, its confiscatory currency revaluation late last year, which disrupted markets and triggered rapid inflation by depleting the capital of sellers and leaving them unable to meet rising demand from customers with new won to spend.
By contrast, the easing of sanctions, seen as a token of Washington’s willingness to end enmity, has prompted positive responses from Pyongyang. The Clinton’s administration’s promise of an end to sanctions under the Trading with the Enemy Act helped create a conducive atmosphere for the first-ever North-South summit meeting in 2000 and for Kim Jong Il’s offer that fall to end exports, production, and deployment of his medium- and longer-range missiles. The Bush administration’s declared end to those sanctions helped expedite the disabling of nuclear facilities at Yongbyon. Unfortunately neither U.S. promise was ever fully carried out so Washington never reaped the full benefit.
The Obama administration needs to test whether the North is prepared to live up to its commitment in the September 2005 Six-Party Joint Statement to “abandon all nuclear weapons and existing nuclear programs.” That will require negotiating in earnest and keeping its commitments. Among the many inducements Washington can offer in the course of those negotiations in return for steps by Pyongyang to denuclearize is an easing of sanctions. For instance, one approach would be to repeal UN Security Council Resolution 1847 on three conditions: the resumption of Six Party Talks; the return of IAEA inspectors to Yongbyon; and the completion of the disabling of the nuclear facility, including removal of replacement fresh fuel rods for the North’s five-megawatt reactor. U.S. unilateral sanctions could be relaxed as a quid pro quo for permanent disabling of the North’s nuclear facilities.
“Some will break the rules, but that is why we need a structure in place that ensures that when any nation does, they will face consequences,” President Obama said in a far-reaching speech on nuclear disarmament in Prague. “Rules must be binding. Violations must be punished. Words must mean something.” The nonproliferation regime does need to be preserved and strengthened, but criminalizing North Korea’s violations and imposing sanctions is no way to do it. The president may have more success in strengthening the NPT by negotiating with North Korea instead.
Joel Brinkley, “U.S. Squeezes North Korea’s Money Flows,” New York Times, March 10, 2006, p. A-12.
Total trade data from the Korean International Trade Association; trade with China from Chinese data.
U.S. Senate, Committee on Homeland Security and Governmental Affairs, Subcommittee on Financial Management, Government Information and International Security, April 25, 2006.
Dick K. Nanto, Mark E. Manyin, and Kerry Dumbaugh, “China-North Korea Relations,” Congressional Research Service, March 9, 2010.
CIA, The World Factbook.
The largest portion of the decline was in oil exports from China, which seems suspect, given the North’s 3.7 percent growth in GDP.
 Remarks by President Barack Obama in Prague, Czech Republic, April 5, 2009.http://www.whitehouse.gov/the_press_office/Remarks-By-President-Barack-Obama-In-Prague-As-Delivered/.
Recommended citation: Sigal, Leon V., “Looking for Leverage in All the Wrong Places,” 38 North, Washington, D.C.: U.S.-Korea Institute at SAIS, Johns Hopkins University, May 1, 2010. Online at: www.38north.org/?p=545.