TSG IntelBrief: The Challenge of Sanctioning North Korea
August 17, 2017

The Challenge of Sanctioning North Korea

 

Bottom Line Up Front:

• Sanctions represent a readily available tool that straddles a middle ground between acquiescing to North Korea’s threatening behavior and the far riskier step of undertaking military action.

• International sanctions have much less effect on North Korea’s nuclear decision-making than they did on Iran’s. 

• Whereas Iran is a major oil exporter with a relatively large and global economy, North Korea is difficult to sanction because its exports are small, and the effectiveness of sanctions depends heavily on implementation by China.

• Secondary sanctions on China’s trade with North Korea would have limited effectiveness because of Beijing’s political and economic prominence and its consideration of North Korea as a strategic buffer.

 

The accelerating threat posed by North Korea’s nuclear and ballistic missile programs has led U.S. and allied officials to significantly increase the scope of international sanctions on that country. Sanctions represent a readily available tool that straddles a middle ground between acquiescing to North Korea’s threatening behavior and the far riskier step of undertaking military action. Expectations that increased sanctions might succeed against North Korea are predicated on the success of international sanctions in pressuring Iran to agree to a landmark multilateral nuclear deal in July 2015 that significantly set back the country’s progress toward a nuclear weapons capability. There appears to be an underlying assumption among international diplomats that imposing secondary sanctions—meaning sanctions on third-country firms that do business with North Korea—will cause a crippling economic downturn in North Korea, as happened in Iran during 2011-2016. However, this hope for the efficacy of sanctions on North Korea misses the key differences between the two cases, and greatly overestimates the degree to which international sanctions can be used to alter North Korean leader Kim Jong Un’s decision-making. 

First and foremost, Iran is a major oil exporter that, by the very nature of the energy industry, must operate in the global banking system in order to be paid for its oil. Because Iran must deal with a wide range of foreign companies, importers, and banks—many of whom are in countries whose governments agree with the United States about the Iran threat—it is a more vulnerable target for international sanctions than is North Korea. Iran’s gross domestic product (GDP) is about $500 billion, and it earns about $50 billion per year from oil sales alone, even at the relatively low current oil price. 

By contrast, North Korea’s is a relatively miniscule $30 billion economy that is almost completely beholden to that of its key ally and neighbor, China, a major global economic and political actor. North Korea’s total exports, mostly minerals such as coal and iron ore bought by China, amount to only $3 billion. Sanctions imposed by the United Nations in early August can reduce North Korea’s exports significantly, if China fully and consistently implements the agreed sanctions. However, China’s record of doing so is poor, in large part because Beijing views North Korea as a strategic buffer. North Korea also relies heavily on remittances from workers that it compels to work abroad, primarily but not exclusively in Asia, to generate hard currency for the regime. Because these workers are a source of cheap labor worldwide, it is difficult to obtain broad international compliance for any measure, such as that imposed in the latest round of U.N. sanctions, that would limit the hosting of North Korean workers. 

The centrality of China to the North Korea issue complicates U.S. and allied efforts to sanction Pyongyang. Secondary sanctions worked in the case of Iran by forcing foreign companies to choose between doing business in the United States and doing business with the regime in Tehran. This is not a difficult choice for most multinational companies, and European and Asian companies pulled out of Iran in response to secondary sanctions. Secondary sanctions targeting China are more problematic because of China’s global influence, the relatively small presence of Chinese firms in the U.S. economy, and the ability of the Chinese government to control company operations. Few, if any, Chinese banks operate in the United States and these banks would face little financial risk by continuing to conduct transactions with North Korea. Because of the heavy state presence in the economy, Chinese companies are unlikely to break off ties to North Korea unless directed to do so by the Chinese government. The importance of the growing China market to U.S. exporters also raises the potential for Chinese retaliation against U.S. businesses.   

The differences in the character of the regimes and societies in both countries draw further distinctions between North Korea and Iran’s susceptibility to sanctions. North Korea’s is a ‘one man regime’ that holds no recognized popular elections and brooks no public opposition. Its population is largely isolated from the global community. Iran, by contrast, is run by a repressive clerical regime but popular opinion does affect decision-making. The country holds elections for senior positions, including that of a president and a parliament—offices that have significant sway on Iran’s policies. The Iranian public has made clear to its leaders that it opposes government policies that cause Iran, long a trade crossroads, to become isolated. All of these factors combine to make North Korea a uniquely hard target for punitive sanctions, reducing their ability to influence Kim Jong Un’s aggressive nuclear behavior.

 

For tailored research and analysis, please contact: info@soufangroup.com

 

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