North Korea’s implicit sanctions bargain

Asia World

Author: Justin Hastings, University of Sydney

US–North Korea relations have been in an uneasy stasis since the failure of the February 2019 Hanoi summit between North Korean leader Kim Jong-un and US President Donald Trump. The surprise meeting between Trump and Kim at Panmunjom in the Demilitarized Zone (DMZ) in June set off efforts to restart talks, although progress remains unclear.

A clerk watches a set of TV's broadcasting a news report on the Hanoi summit between North Korean leader Kim Jong Un and U.S. President Donald Trump, in Seoul, South Korea, 28 February, 2019 (Photo: Reuters/Kim).

A clerk watches a set of TV's broadcasting a news report on the Hanoi summit between North Korean leader Kim Jong Un and U.S. President Donald Trump, in Seoul, South Korea, 28 February, 2019 (Photo: Reuters/Kim).

In the meantime, North Korea is continuing to do everything it can to circumvent sanctions. Ship movements through Nampo apparently continue unabated, as do ship-to-ship oil transfers. Japan and South Korea have accused each other of shipping chemicals and other items to North Korea in violation of export controls. The connection of such shipments to North Korea’s circumvention of sanctions is now less clear though, as the supposed shipments are often quite old (in some cases dating to the 1990s), or are known because authorities detected and may have stopped them.

While North Korea obviously wants sanctions lifted in the medium to long term, it has also been making contingency plans. It now has the capacity to deliver missile-mounted nuclear weapons to the United States, which it accomplished with a series of missile and nuclear tests in 2016 and 2017. And since January 2018, it has employed an on-again, off-again charm offensive to at least mitigate — although not eliminate — the effects of sanctions in the short term.

The implicit bargain that North Korea has with the United States, South Korea and China goes something like this. North Korea agrees not to engage in major provocations even as it continues (often illicit) efforts to bring in hard currency and sanctioned goods. In exchange, the United States continues to enforce but not escalate sanctions, such as by not implementing secondary sanctions on more Chinese or even South Korean companies. China agrees not to enforce sanctions very stringently, and South Korea agrees to push the limits on sanctions in order to engage with North Korea.

North Korea has not abandoned its traditional playbook entirely. It continues to fire missiles, issue over the top pronouncements and treat negotiations with South Korea as if bestowing a favour. But even recent missile launches in response to US and South Korean military exercises, and its general impatience with the pace of negotiations, have been relatively restrained. Pointedly, recent tests have been projectiles or short-range missiles, basically ignored by the United States.

In this bargain, North Korea gets to keep its nuclear weapons and missiles (for the time being) while probing weak points in the sanctions regime. What are these weak points? Based on our research, sanctions-busting smuggling into and out of North Korea goes via four major routes, all of which have trade-offs for North Korea.

First, smugglers can move goods from China through land-based official checkpoints. Transport costs are low and the certainty of getting through is high, but bribes are also high. Second, smugglers can move goods across the Yalu or Tumen Rivers from China or Russia. The border guards who need to be bribed are fewer, but the transport costs and risk of capture are higher. Third, smugglers can also move goods through legitimate seaports in China and North Korea. Large amounts of goods can be transferred at a time, but they are relatively easily interdicted if China so chooses. Fourth, ships can meet each other in the open ocean and engage in ship-to-ship transfers. This has a lower risk of interdiction, but has increased costs and relatively low maximum throughput.

The implicit bargain allows North Korea to move goods along all four routes, although smuggling by river and ship-to-ship transfers have risen in the past several years. This trend is in large part because of China’s attitude towards sanctions enforcement. China wants North Korea to feel pain when it is displeased, but it also wants to prevent North Korea from collapsing. When North Korea engages in major provocations, China temporarily ‘enforces’ UN sanctions by slowing all legitimate trade to and from North Korea until the economic pain is felt. If China wants to send an especially strong signal, it transfers officials complicit in smuggling away from the North Korea border, and instructs smugglers to hold off for a time.

From our research, this is exactly what happened in the second half of 2017 when, in the midst of North Korea’s missile and nuclear weapons testing, China’s actions drove the North Korean black and grey markets on the border nearly to breaking point. But China has not exercised its power to impose painful sanctions since the beginning of 2018. Cross-border smuggling networks have returned to a certain extent, and ship-to-ship transfers have ramped up to previously unseen levels.

This does not necessarily mean good times have returned — smuggling is rarely as efficient as formal trade. Even with poorly enforced sanctions, there is a ratchet effect that means North Korean markets continue to struggle. But this is all on top of South Korea’s strong desire to engage with North Korea while President Moon Jae-in is in office, which further benefits North Korea.

As long as North Korea does not push the envelope too far, China will continue to withhold rigorous sanctions enforcement. Meanwhile South Korea will try to find ways to help North Korea up to the limits of sanctions.

Justin Hastings is Professor at the Department of Government and International Relations, the University of Sydney.

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