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Reality Check on North Korean Sanctions

By
21 January 2016


Reality Check on North Korean SanctionsA recent op-ed by Sung-Yoon Lee and Joshua Stanton highlights what should happen in dealing with North Korea. Unfortunately, for this long-time practitioner in the field of nonproliferation sanctions, it also highlights what cannot happen—or at least what cannot happen at an acceptable level of risk with the limited knowledge and the complex agendas that policymakers face.

At the highest level of analysis, Lee and Stanton get some key points right. The effort of multiple US administrations to negotiate away the threat of North Korean nuclear weapons has been a truly bipartisan failure. Four US presidents—two of each party—have tried and yet it seems the story of failure repeats itself in very familiar ways. However, the authors certainly over-simplify the story of those efforts. It is worthy of note that the four administrations came at the problem from very different perspectives and initially tried tactics that ranged from highly confrontational to being predisposed to engagement. Yet, all ended up more or less in the same policy dead-end. This might lead one to suspect that the problem with North Korean policy might not rest primarily with naiveté in Washington but rather with a single-minded Pyongyang that has a very limited diplomatic repertoire.

Lee and Stanton are correct that it is extremely unlikely that any set of negotiated incentives will ever induce the DPRK to give up its nuclear weapons. They are probably also correct that—if North Korea were to be coerced into giving up its weapons—it would require regime-threatening measures to be put into play. But, that does not mean that such measures can be created at this time. Moreover, it does not mean they should be implemented unless a careful calculation of the costs and benefits can be made.

For example, in their column, Lee and Stanton propose that the US and others, “block the Kim Jong Un regime’s offshore hard currency reserves and income with financial sanctions, including secondary sanctions against its foreign enablers. This would significantly diminish, if not altogether deny, Kim the means to pay his military, security forces and elites that repress the North Korean public.” For the practitioner, this statement is a laudable goal, but the devil is very much in the details.

First, the statement assumes there is a vast flow of funds and foreign reserves to be seized. This is not the case, or at least there is no confirmed knowledge of such flows. North Korea has great difficulty moving money in the international financial system due to existing US and UN sanctions. Lee and Stanton cite reports of a North Korean slush fund that might amount to $1 billion. This is hardly enough to endanger a regime—even one with the paltry foreign exchange flows of the DPRK. Pyongyang can always squeeze what it needs out of the DPRK’s economy to take care of its most important supporters even if the rest of the population starves. While previous seizures of relatively modest sums in cases like the Banco Delta Asia case did affect and infuriate the DPRK leadership, it is an urban myth that these financial measures were about to topple the regime. But, the main problem is that there is precious little knowledge of North Korean foreign exchange holdings. We can’t target effectively the regime’s finances because our knowledge is insufficient to do so. In part, this is an unfortunate side effect of successfully driving North Korea out of the formal international financial system through past sanctions.

Second, the largest flow of funds available to the regime does not come from illicit weapons sales or other sanctioned activities; it comes from aid, trade and investment from Beijing (and to a smaller extent, the ROK). The activities receiving funding have no direct relation to proliferation. One could design unilateral US sanctions that could create a trade and investment embargo on North Korea through secondary sanctions. One could, for example, ban any entity from the US banking system if it invested in key areas of the North Korean economy such as mining or light manufacturing. The same could be done for the supply of petroleum to the DPRK. This would indeed create the sort of regime-threatening pressure that Lee and Stanton suggest. But, enforcing such sanctions and achieving the effect we would want at a cost the American people could afford is not a given.

The first problem would be to deal with work-arounds. The Chinese are quite adept at identifying entities that have little or no exposure to the US or global financial system and designating them to take on activities in zones with risk of US sanctions. Unilateral sanctions could end up delivering far less than we hoped, forcing sanctions implementers to continuously up the ante with China to get the desired impact. If there were a way to multilateralize sanctions via the UN, this problem could be solved, but that seems unachievable.

The second and more serious problem is if the Chinese chose not to use work-arounds but rather refused to comply with unilateral US sanctions. While the Chinese do comply with the letter of UN sanctions, they have always made clear unilateral US sanctions are not legitimate in Beijing’s eyes. Sometimes the Chinese find creative ways of dealing with unilateral sanctions when they see their own interests as parallel to the US. This might not be the case if Washington tried to force a major change in Chinese policy on Korea.

If major players in the Chinese financial system are exposed to US sanctions, people have to consider what happens to the US, Chinese and global economies if sanctions are applied. Over the past two weeks, the Chinese and US investment markets have demonstrated a rather strong psychological link. Panic in China has been contagious—perhaps more than pure economic fact could justify. Our financial markets have an even stronger and more real link. At a time when those markets appear to be very skittish and the probability of a US recession is the highest it has been in five years, it might not be the wisest course to start an economic war without thinking things through.

This is not to say it is not time to make clear to Beijing that on both the security and economic fronts Pyongyang’s nuclear program is creating more costs than benefits for the PRC. But, it is a plea for the use of tools a bit more subtle than legislated unilateral US sanctions can be. “Regime threatening sanctions” are very blunt and powerful instruments. Think, for example, of the sanctions placed on Iraq after Saddam Hussein’s invasion of Kuwait. They are final cards to be played before diplomacy ends and other bloodier means are employed to solve problems. It may not be wrong to let others know that such a card could be played, but it would be wise not to play it frivolously.

There are several ways the Obama administration might begin to open the door to much tougher sanctions on the DPRK without playing Russian roulette with the global economy or possibly with peace on the Korean peninsula. The best in theory would be a diplomatic campaign that would move Beijing towards much tougher UN sanctions. Without knowing the state of play of US-PRC diplomatic discussions on this topic, it is hard to say how promising this route might be. At best, it would take a long time and at worst it would end up with results as disappointing as past efforts in this area have been. In any case, it is certain this topic will be explored in New York and in capitals.

Another approach might be for the administration to use existing sanctions or those that will become available to it once HR 757 becomes law. Perhaps the sanctions experts in the US Treasury, Department of State or in the intelligence community are aware of a Chinese entity that is: a) violating US sanctions on North Korea, and b) is clearly generating significant amounts of foreign exchange for the regime. This might create the opportunity for a diplomatic test case. Rather than leaping into triggering sanctions, the administration could use the case as a means to see if it is possible to coordinate quietly with Beijing on a pressure campaign against Pyongyang. One would presume the Chinese would have their own expectations (possibly about reinvigorating a diplomatic track with Pyongyang and certainly about ensuring US sanctions do not make an already touchy macroeconomic environment in China any less stable). But this would not be the first time the US and PRC engaged in such delicate choreography in the context of nonproliferation sanctions.

Reader Feedback

5 Responses to “Reality Check on North Korean Sanctions”

  1. Joseph DeThomas says:

    My article was not designed to praise inaction but to suggest a mature and prudent consideration of the possible downsides of jumping blindly into a policy approach. I am not persuaded we can just brush aside with words like “impotent” the concerns of experts who suggest that misplaying North Korean policy can have very expensive consequences. Given those possible consequences the burden of proof is on the advocates of significant shifts in policy.

    It would be more productive not to get caught up in the inflated and over-emotional language of the blogosphere. There is no doubt that more can be done than is being done in the sanctions area against North Korea. There are also grounds to criticize the Obama Administration for its approach both from the hard line and soft line perspectives, although its failure just puts it in the same box as the four presidential administrations that came before it (all of whom I worked for at some point or another on the North Korea issue.) But given that experience I have to reiterate two key inconvenient truths for those who want to go all in on a sanctions based coercive strategy aimed at North Korea and Chinese economic support for it.

    1. Our level of knowledge about North Korean activities and vulnerabilities is several orders of magnitude less than that the US government has on other such sanctions targets. Too much of the debate on North Korea policy is based on anecdotal evidence or just plain gut feeling. NONE of us really know what we are talking about here. The data available to us – whether or not we have access to classified material — is not even close to the level needed to make such confident assertions about what sanctions can or cannot do against the Kim regime. There is a paucity of reliable usable information on targets and on broader macroeconomic issues which is necessary to assess impact. Ignorance is not bliss when weighing policy options of this import.

    It brings to mind how badly we miscalculated things in 2002 in Iraq where we had much more information but made some pretty bad guesses in places where we did not have information. (The two worst guesses were that we badly underestimated how much damage economic sanctions had done Iraq and that in any WMD area where there was a blank space in our knowledge we had to assume Saddam was further along than we thought. Those two errors combined with strategic arrogance cost the country 4000 lives and well over a trillion dollars not to mention the creation of a strategic black hole in the Middle East. (Those who down play that the sanctions issue with North Korea could in some circumstances have war and peace implications apparently did not see that movie.)

    2. A second and related problem is the context in which we consider whether to go all in on a sanctions push. If you think only about the Korea problem, it is pretty difficult not to conclude that it would be better to push harder. Nobody who has struggled with the problem has not wished at some point or another to put the heat on the Chinese government and the entities that support the North Korean nuclear and missile adventure.

    But every President since Nixon has understood that the first strategic issue for the United States in Asia is the strategic relationship with China. For the past twenty-five years that strategic equation has included a large economic component. So I am not saying there are no circumstances where the North Korean issue should not trump the US-China great power relationship. Indeed, it seems to me as North Korea’s programs advance, the chances that the USG will have to risk a worsening of relations with China (and our own economic health) are rising. I hope that is being made clear to the Chinese. But nobody should look down that path without concern. We may have to go that route but if we do we should not do so with macho blind optimism about the reactions of either China or North Korea.

  2. David Phillips Garretson says:

    Sanctions only work with universal application as in the Iran case.But even there persistence and other tools are needed. DPRK has shown great resilience to these pressures.

  3. David Phillips Garretson says:

    Sanctions need universal application as in Iran’s case and persistence to work. Even so DPRK has shown great staying power.The Republicans in their desire to show “leadership”in the current election climate what to appear forceful.

  4. T. Burnett says:

    “….there is precious little knowledge of North Korean foreign exchange holdings.”

    That isn’t correct. The ‘Five Eyes’ can absolutely identify every financial transaction and holding of every entity on the planet, and either make knowledgeable assessments, or act on precise knowledge and past history – such as the US plan to bankrupt Russia by destroying oil prices.

    Unfortuntely, as is the crux of the article, the US cannot see the future and cannot be sure what their actions may cause; in many cases, unilateral US actions have and continue to create problems that were unanticipated and cannot be controlled or even mitigated in many cases.

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Credit for photo of young North Korean girl: T.M. All rights reserved, used with permission.