Tag Archive | "china"

North Korea Tests Missile Over Japan Again: Stronger Action Needed

By Troy Stangarone

For the second time in a little more than two weeks, North Korea has launched a missile over Japan. The easy temptation in the aftermath of the latest UN sanctions would be to simply view the most recent test as North Korea expressing its displeasure at additional economic pressure. But because the regime has on multiple occasions stated that sanctions would not hurt North Korea, perhaps it’s best to view the test as what it is — a continuation of North Korea’s provocative steps to develop a wide array of nuclear weapons and delivery systems.

However, if past tests have been provocative, this one comes with a greater sense of dread than prior tests. In the past, Pyongyang has threatened to turn Seoul into a sea of fire or conduct a nuclear strike on Washington, DC. Of course, most North Korean threats have an air of bombast to them, and should not be viewed literally. However, with the North testing a hydrogen bomb and coupling the recent test over Japan with the threat that the country “should be sunken into the sea,” North Korea’s actions are beginning to hit too close to home.

If North Korea is beginning to be able to marry threats with capabilities, and to couple them with tests that demonstrate the havoc it could cause, the question becomes: what should the international community do about it? For one thing, at the UN, the advancement of North Korea’s nuclear program has historically received more attention than the development of the delivery systems needed to utilize those weapons. This needs to change.

There is one simple step that China could take to mitigate this growing threat. While China was reluctant to cut North Korea’s supply of oil in the new UN sanctions resolution, Beijing should seriously consider a temporary halt in oil shipments to send a clear signal to Pyongyang that it needs to back off from its constant string of tests. Cutting off oil supplies to North Korea will take time and force Pyongyang to explore alternatives such as coal liquefaction, but this is at least something that China can do to demonstrate its resolve.

In the long-term, however, there also needs to be a fundamental rethink of how the international community handles North Korea’s missile tests. As I previously noted:

Given the frequency of North Korea’s missile tests and the traditional slow pace of the UN Security Council’s response, it’s time to consider a different method. To do this, the United States should consider working with China and Russia to develop a new set of sanctions that would go into place incrementally for each additional test that North Korea conducts, while also leaving room to address other issues with the regime in Pyongyang. Without raising the level of sanctions after each North Korean missile test, there is little deterrent to stop the regime from continuing to move its program forward.”

While this is something that China and Russia would likely be reluctant to consider, what we do know is this – North Korea will conduct another missile test in the near future. The question is what the international community will do to try and prevent the regime in Pyongyang from perfecting its missile technology.

If China is reluctant to push North Korea further, it should also consider the costs of choosing not to utilize all of the leverage it may have with the regime in Pyongyang. In the past, China has said that it will not allow anyone to undermine its interests and start a war on the Korean peninsula. But the longer it holds back on fully using its leverage, the more China’s inaction risks ceding that possibility to North Korea by providing Kim Jong-un more opportunities to miscalculate.

Troy Stangarone is the Senior Director for Congressional Affairs at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Stefan Krasowski’s photostream on flickr Creative Commons.

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New North Korea Sanctions: The Best that Could be Expected

By Troy Stangarone

After North Korea’s sixth nuclear test, there were expectations that the United Nations would pass a new round of sanctions that would potentially be debilitating for North Korea. Early discussions included bans on exports of oil to North Korea and cutting off North Korea’s use of overseas laborers to earn hard currency. Steps that far were always unlikely, but based on initial reporting of the expected measures in the new sanctions resolution and a review of a recent draft of the new sanctions resolution, the United States likely achieved the best result it could have hoped for in a new round of UN sanctions.

With the last round of UN sanctions having been passed only on August 5 and barely implemented, there was likely always going to be resistance to harsh new sanctions before member states had a chance to determine if the last round of sanctions were having an effect. It takes time for sanctions to take effect and states such as China and Russia most likely would not want to pile on a significant amount without knowing how the new sanctions would impact North Korea.

Additionally, complete bans on exports of oil to North Korea and the use of North Korean laborers were always unlikely, despite the serious nature of North Korea’s most recent nuclear test. While the Global Times and others suggested that China should end its supply of oil to North Korea if it tested another nuclear weapon, Beijing also has concerns about the long-terms stability of the regime in Pyongyang, concerns it is unlikely to let go of in the near future.  China wasn’t the only one to back off of the suggestion of cutting off North Korea’s oil supply — Russia also quickly dismissed suggestions of an oil embargo. Without Russia’s support both in the UN and as a potential supplier of oil to North Korea, stringent sanctions on oil were unlikely.

Banning the use of North Korean labor was also always a longshot. China and Russia are the two largest consumers of North Korean labor, and Russia in particular was unlikely to support a complete ban, as North Korea supplies an important source of labor in the sparsely populated Russian Far East.

That being said, the new resolution does move the process forward in terms of restricting North Korea’s ability to earn hard currency and to limit its imports of oil. Much as initial caps on North Korean exports of coal, the new resolution would place a cap on North Korea’s imports of refined petroleum at 500,000 barrels for the rest of 2017 and 2 million for subsequent years. Also similar to the coal caps, it would require states to report their exports to the United Nations on a monthly basis.

It also places a softer cap on exports of crude oil to North Korea, which China provides to Pyongyang as aid. The soft cap limits exports to the amount exported in the prior year, but since China does not report its exports of crude to North Korea and there is no reporting requirement for crude, there is still the potential for China to export more than would be expected to North Korea.

The new restrictions on use of North Korean labor, while a step forward, are also potentially exploitable. While it would prohibit countries from issuing work permits for North Korean nationals except for humanitarian purposes or for objectives consistent with prior UN resolutions, it also allows contracts signed prior to the resolution to continue. This means that we are not likely to seen a reduction in North Korean workers abroad soon.

The resolution also contains a ban on the export of North Korean textiles, potentially reducing North Korea’s earnings of hard currency by $800 million. While this will remove one of North Korea’s major remaining export items, textiles are also a labor-intensive industry. By banning exports of textiles, this also removes one potential tool for reshaping North Korea over time — developing a larger consumer base that can eventually pressure the regime internally.

While this may have been the best that could be achieved at the United Nations, it is disappointing that China and Russia would not support more robust sanctions against North Korea. While the new sanctions continue to restrict North Korea’s ability to earn hard currency, more should have been done in response to North Korea’s test of a thermonuclear device. By holding back on more stringent sanctions, China and Russia risk sending a signal to North Korea that it should not be worried about strict consequences for their actions.

Despite China and Russia’s reluctance to go along with more stringent sanctions, it is important for the United States and its allies to continue to maintain Moscow and Beijing’s cooperation. This is not a problem that the United States can solve on its own.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from United Nations Photo’s photostream on flickr Creative Commons.

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Responding to North Korea’s Sixth Nuclear Test

By Mark Tokola

Now that North Korea has defied warnings from the international community not to conduct a sixth nuclear test, including from its friends China and Russia, the challenge is, how to respond?  North Korea knows it has made a hugely provocative step.  The September 3rd test was by orders of magnitude larger than any of its previous tests, indicating a thermonuclear capability.  It comes after a relatively long pause, the last test was in September 2016.  It collapsed a tunnel, showing either by design or by mistake, that it was even more ‘successful’ than intended.  And the test came hours after North Korea broadcast a picture showing Kim Jong-un admiring, up-close, a nuclear warhead (or model thereof) designed to fit into a missile nose-cone.  North Korea must be expecting an international response, or if need be a unilateral response from the U.S., in consultation with South Korea.  What should that response be?

Russia has called for “immediate talks” and talks would be desirable if North Korea was prepared to offer anything, which it has not signaled.  The September 3rd test would seem to indicate that North Korea is still on its path of acquiring a credible, reliable nuclear weapons capability capable of striking the U.S. and its allies, and perhaps to gain a second-strike capability, before it will be willing to talk – if Kim Jong-un is willing to talk at all.  The international community has assumed that North Korea would eventually want to talk to see sanctions lifted.  There is a possibility that Kim Jong-un is relying on the sanctions to internally justify his weapons program.  In that case, Kim Jong-un would only want to talk for the purpose of being welcomed to the international nuclear club.

Following the September 3rd test, the main question is whether there can be a response stronger than the one North Korea undoubtedly expects.  The last, impressively tough, round of sanctions was not enough to deter North Korea from conducting its sixth test.  What kind of response would get their attention?  Among the options are a diplomatic response, an economic response, and a show of deterrence.

A diplomatic response could be to expel North Korea from the United Nations.  This is possible under the U.N. charter and would be a serious blow to North Korea because it cares about international prestige.  This response would show Pyongyang that it lacked any international support, including from Russia and China who could veto the expulsion if they chose.  The grounds are clear enough.  North Korea has repeatedly defied U.N. Council resolutions through its weapons program.  The U.N.’s patience should have limits.  China and Russia would be reluctant to expel North Korea from the U.N., but their patience should have limits, too, and they may prepared to go along with a diplomatic step rather than the alternatives.

An economic response may be to move beyond sanctions and to impose an economic embargo on North Korea, as has been advocated by former South Korean national security official Chun Young-woo.  If no degree of stepped-up sanctions have applied sufficient economic pressure, an embargo would be the last step in the escalatory chain of economic measures.  Would this cause the North Korean people to suffer as well as the North Korean regime?  It would, at least in the short run, but not as much as it would have in the past because of North Korea’s market liberalization of recent years.  Domestically produced food and other necessities would still make their way to the markets.  An embargo might even accelerate the pace of de facto privatization of the North Korea economy.  An exception could be made for medicines and other strictly humanitarian requirements.  It may be worth giving economic measures one last chance to work.

A strong deterrent measure might be to overfly North Korea with short or intermediate range U.S. or South Korean missiles.  North Korea has not hesitated to launch missiles over Japanese territories, so it cannot argue that there is a taboo against such a step.  The North Korean air defense system probably is robust enough that overflying North Korea with military aircraft would be too risky.  They probably would not have the ability to intercept a missile over-flight, and even if they did, the interception of a missile within North Korean air space would still show that its weapons program was not making North Korea any safer.

The goal is still to bring North Korea to a negotiating table.  A strong response to the September 3rd test may be more likely to make that happen than no response at all.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo from Russ Allison Loar’s photostream on flickr Creative Commons.

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What Might a Conflict with North Korea Look Like?

By Troy Stangarone

In recent weeks tensions have risen on the Korean peninsula as North Korea becomes increasingly bold in its missile tests. In July it tested two intercontinental ballistic missiles (ICBM) and recently conducted an intermediate range ballistic missile test over Japan,the first North Korean missile to fly over Japan since 2009. At the same time, President Donald Trump has suggested that North Korea could see “fire and fury” for its actions and recently suggested that “talking is not the answer” for dealing with North Korea. The rise in rhetoric on both sides and the increasing daring of North Korea’s missile tests, and the possibility of North Korea deploying an ICBM, have raised concerns that the United States might engage in preventative actions against North Korea. But what would a conflict between the United States and North Korea look like?

If the United States were to engage in a preventative attack rather than a preemptive attack, the goal would to destroy or at least severely degrade North Korea’s nuclear weapons and missile programs. What would be unknown in any operation is how North Korea would respond. While North Korea’s actions cannot be known, we can break down the possibilities.

North Korea Doesn’t Respond to a U.S. Attack

If the United States attacks North Korea’s nuclear and missile facilities, there is the possibility that the regime may not respond. If North Korea’s nuclear weapons and delivery systems were successfully taken out by the U.S. attack, North Korea would find itself at a significant strategic disadvantage in regard to the United States and South Korea. Despite China’s suggestion that it would support North Korea if the United States attacked, the regime could judge that China’s support is unreliable and that retaliation could lead to a wider conflict that ends the regime. In this scenario, there would be no response by North Korea. While the likelihood of outcome is very low, it is one potential outcome of a U.S. preventative attack on North Korea.  North Korea would never admit a defeat, of course, but could spin its lack of retaliation by saying, “We’ve withstood the worst the United States could do to us and we have not been defeated.”

North Korea Conducts a Cyberattack

Similar to the prior scenario, the leadership in Pyongyang calculates that the risks of engaging in a kinetic response are too great to risk the regime’s survival and decides to seek asymmetrical methods for retaliation. Having previously engaged in cyberattacks on Sony Pictures, South Korean private and governmental entities, and on the international financial system, responding in the cyber domain may be appealing to the regime. North Korea could attack infrastructure, financial, or other institutions in the United States and South Korea. Attribution can be difficult in the cyber domain, and even with a general consensus that North Korea was behind any attacks, it might be difficult for the United States to respond kinetically since cyberattacks might be viewed as a proportional response to a U.S. strike.  We do not know the extent of North Korea’s cyber capabilities, but it would be prudent to assume that they could cause a major disruption.

North Korea Responds with a Limited Attack on South Korea

In the event of an attack, North Korea may decide that it needs to respond with a kinetic attack. With concerns weighing on the regime about China’s reliability and about the regime’s ability to withstand escalation in any conflict, it could choose a limited attack on South Korea. The northern end of Seoul is well within North Korean artillery range and other parts of South Korea are within the range of North Korean ballistic missiles. Since it is unlikely that a preventive U.S. attack would take out all of North Korea’s ballistic missiles, North Korea would most likely be able to select targets from around South Korea. North Korean might attack ROK naval vessels, invade one of ROK’s nearby islands, or attack ROK forces close to the DMZ.  Pyongyang’s rhetoric in this case might be to claim that their victorious forces have halted an attack on North Korea.

North Korea Responds with a Limited Attack on South Korea and Japan

In previous North Korean rhetoric, Japan has often been a potential target for North Korean retaliation. With U.S. and UN rear forces for any conflict on the Korean peninsula based in Japan, responding with missile strikes on both South Korea and Japan is another possibility. North Korea may choose to include Japan in any response to try and divide the allies in the future by reminding the Japanese public that they could be caught up in a wider war with North Korea.  Another North Korean approach towards Japan might be to threaten Japan with a nuclear attack unless Japan declares neutrality.

North Korea Responds with a Nuclear Weapon

One of the dangers of a preventative attack on North Korea’s nuclear and missile sites is that imperfect intelligence could preclude the United States from being able to take out all of North Korea’s nuclear warheads or delivery systems. If the regime in Pyongyang feels that it must respond and that any conventional escalation could endanger the regime, it could launch a nuclear strike on either Japan or South Korea coupled with the threat of additional nuclear strikes with the hope that the uncertainty of North Korea’s remaining nuclear capacity could deter additional U.S. strikes and be able to declare victory in the confrontation.

China is Drawn into the Conflict

During the recent tensions, China has suggested that if North Korea attacked the United States it would not support Pyongyang, but that should the United States attack, it would defend North Korea.. China could support North Korea in any conflict with the United States in two ways. If Beijing was determined to try and stay out of any fighting should escalation occur, it could decide to supply Pyongyang with the supplies it would need for any sustained conflict. Alternatively, it could choose to provide troops, naval, and air support, though both the United States and China would likely try to avoid any direct conflict. China might attempt to deter the U.S. from further attacking North Korea by placing Chinese assets in the way of U.S. attacks, assuming that the U.S. would not attack them to try and avoid a direct confrontation.

Once the United States engaged in a preventative attack on North Korea, there is a risk that North Korea would be able to choose its means of retaliation, perhaps counting on China’s support and that any retaliation could lead to a wider conflict in Northeast Asia. In a best case scenario, North Korea would choose to not respond to U.S. attacks, but would likely try to reconstitute its nuclear program in secret. Should a conflict break out, it would likely consist of a combination of conventional and cyber weapons.  However, in a worst case scenario, all of the major powers in the region – the United States, South Korea, Japan, and China, as well as perhaps Russia – could be drawn into a conflagration.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Morning Calm Weekly Newspaper Installation Management Command, U.S. Army’s photostream on flickr Creative Commons.

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Missiles Over Japan – What are the North Koreans up to?

By Mark Tokola

At 5:58 a.m. on August 28, North Korea launched what was probably an intermediate range missile that passed over Japan and landed in the Pacific after a flight of 1,700 miles.  Japanese Prime Minister Shinzo Abe said, “North Korea’s reckless action of launching a missile that passed over Japan is an unprecedented, serious and grave threat.”  Abe also said that he had spoken by telephone with President Trump and the U.S. and Japanese stances “are completely matched.”  Was this North Korean launch indeed unprecedented and what kind of threat does it pose?

This was not the first time North Korea has launched a missile that flew over Japan.  The first time was in 1998, when North Korea attempted to launch a satellite.  They claimed success, but because no satellite could be tracked most observers believe the launch was a failure.  It may have been significant that the 1998 launch was only a few days in advance of the 50th anniversary of North Korea’s independence from Japan.  In 2009, North Korea again attempted to launch a satellite with a missile trajectory that passed over Japan.  That launch also failed, with the missile falling into the Pacific east of Japan.  Since then, there have been other North Korean missile launches that have passed over the Japanese Ryukyu island chain

There are three aspects of the August 28th launch that qualify it as “unprecedented.”  First, North Korea has abandoned any pretense that their missile program is non-military.  It had claimed that its 1998 and 2009 launches were peaceful satellite launches.  Its 2017 launches are overtly for the purpose of threatening other countries.  Secondly, in 1998 and 2009, North Korea announced its launches in advance, providing warning to shipping in the areas where the boosters would fall.  The August 28th launch was a surprise, reinforcing its non-peaceful nature.  Finally, the site of the August 28th launch appears to have been near Pyongyang, rather than in the remote launch sites previously used.  This may have been a signal from Kim Jong-un that in any attempt by the U.S. to carry out a preventative strike, it could not assume it would be able to operate only in non-populated areas of North Korea.  There would be nothing surprising about Kim Jong-un holding his own population hostage.

We know facts about the August 28th launch, but its meaning is open to speculation.  One interpretation would be that Kim Jong-un is pushing the envelope further.  The previous ICBM tests had avoided Japanese air space by falling into the sea west of Japan. One could interpret the August 28th test as highly belligerent and provocative, intended as a sharp, unyielding response to U.S., South Korean, Chinese and Japanese warnings.  It also could be taken as a rebuff to Secretary of State Tillerson’s public remarks that North Korea may be showing restraint, possibly creating an opening for negotiations.

Those looking hopefully for signs that North Korea may be signaling a tough negotiating posture rather than spoiling for a fight will point out that the missile’s path over Japan seemed intended to avoid populated areas passing over a northern stretch of Japan that is relatively sparsely populated.  They may also point out that this was an intermediate missile test, not that of another ICBM designed to reach the continental American homeland.  It also fulfills North Korea’s promise to react to U.S.-South Korean military exercises without threatening Guam, the most recent target of its rhetoric.

The August 28 test will upset Japan, but is likely to irritate China as well.  Giving Japan reasons to enhance military cooperation with the U.S., to strengthen its anti-missile defenses, and to work more closely with South Korea all run counter to Chinese interests.  North Korea’s actions not only roil the U.S.-Chinese relationship, but the Chinese-Japanese relationship.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo from NASA Goddard Space Flight Center’s photostream on flickr Creative Commons.

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As Chinese Tourists Continue to Drop, Korea Turns to the Middle East

By Jenna Gibson

As several KEI analyses have shown, South Korea’s tourism industry  has been one of the main casualties of China’s economic retaliation over deployment of the THAAD missile defense system. New estimates from the Korea Tourism Organization show that China’s retaliation could cost Korea up to 5 million tourists this year, five times as many as when the MERS outbreak significantly dampened tourism in early 2015.

In June 2017, Korea saw a 36 percent drop in tourist entries, due in large part to a 66.4 percent decrease in Chinese visitors compared to June 2016. At that time, Chinese tourists made up 48.8 percent of all entries into Korea – a figure that’s now down to 25.7 percent.

But the numbers also reveal some good news that illuminate an important avenue for future growth in Korea’s tourism industry. While Chinese visitors continued to drop, the number of tourists from the Middle East have jumped significantly, recording a 71 percent increase from June 2016 to June 2017.

And, perhaps more importantly, tourists from the Middle East spend significantly more during their time in Korea than those from other areas, according to a study by the Korea Culture and Tourism Institute. Their recent survey of tourists in Korea showed that Middle Eastern visitors spent an average of $2,593 each during their trip, followed by Chinese tourists at $2,059 each. The average for all visitors to Korea is significantly lower, at $1,625.

In order to cash in on this growing market, the Korean government and the tourism industry are focusing on providing more services for Middle Eastern tourists, including a push to increase the number of halal certified restaurants around the country. Just this month, 117 more restaurants received their halal certification, bringing the total to 252. In addition, many popular tourist attractions have added prayer rooms for their Muslim visitors, including Nami Island, Lotte World, and Coex Mall, as well as Incheon International Airport and Busan’s Gimhae International Airport.

MENA tourism graphic-01

Part of the drive for more tourists from the Middle East choosing to visit Korea is the explosive popularity of Hallyu across the region. Take Iran, for example. There, fascination with Korean culture started back in the mid-2000s, when the historical drama ‘Dae Jang Geum’ was broadcast on state TV and garnered 86 percent ratings nationwide. In a 2017 report of the most popular shows on Netflix around the world, Iran was only one of two non-Asian countries to put a Korean drama (2012’s Love Rain) on the top of their queues.

In June, CJ E&M, Korea’s largest media company, said it will be opening a Turkish unit to increase its presence in Turkey, where locals can’t seem to get enough Korean cultural content. Considering that the filming sites of many popular Korean dramas have become popular tourist destinations, this increase in the popularity of Korean TV shows could lead to overseas fans travelling to Korea to see the spot where their favorite drama couple fell in love.

With the Korean tourism industry continuing to focus on enticing Middle Eastern visitors as well as tourists from all parts of the world, there is certainly an opening to offset some of the losses from the drop in Chinese tourism over the last year or so. But there is still a long way to go – even with the huge increase in visitors, Middle Eastern tourists still only make up around 1 percent of entries into Korea.

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from yadem.hayseed’s photostream on flickr Creative Commons.

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Pyongyang’s Deficit Soars: Won Steady But for How Long?

By William Brown

ICBMs are not the only things soaring in North Korean skies.  Comprehensive second quarter data released by China Customs last week shows a huge jump in North Korea’s trade deficit with China—sharply falling North Korean exports and flat imports, a double bad combination.  And, potentially troubling to the Kim regime, the composition of trade seems to be promoting market activity rather than the decrepit, but still enormous, command economy.

China North Korea Trade Balance
*  China stopped reporting crude oil shipments in first quarter 2014 but the trade is reliably said to be continuing, probably at the old aid agreement terms which provides about 150,000 tons of crude each quarter.  The charts, above and below, have added in the value of that volume at generally declining Chinese crude oil export prices–$50 million in the most recent quarter.

Pyongyang has been able to keep a clamp on the exchange rate—won can be traded informally for U.S. dollars in markets around the country—but likely at some cost to the government’s reserves and its ability to expand money supply without sparking inflation, and perhaps with a little help from the balloons. But food and other commodity prices, meanwhile, may be on an upswing as drought followed by flooding diminishes prospects for the critical fall rice crop, and as worries about Chinese supplies may have pushed up gasoline and diesel prices.  An informal inflation index produced by DailyNK has inflation rising to a 16 percent rate in July, suggesting Kim’s signal achievement of fighting inflation may be at risk.

Officially, the Chinese data show a $174 million North Korean deficit in June and $574 million for the quarter, both at record levels. Considering China has taken its crude oil exports “off the books,” the actual North Korean deficit is probably even larger — in the graphics below we have added between $115 to $50 million each quarter to North Korean imports since 2014 to account for the oil.

China North Korea Trade exports and imports

How North Korea finances this large deficit in the face of sanctions on its nuclear and missile activities is not well understood, making policy analysis of those sanctions next to useless. Even South Korea’s Bank of Korea, which bravely estimates North Korean GDP, says it can’t guess at the country’s balance of payments or its hard currency reserves.  But for the sake of argument, and given the trade deficit with China has averaged about $200 million a quarter for the better part of a decade, it would seem reasonable to expect that about this amount of hard currency is earned or borrowed in a combination of net trade with other countries; foreign aid to North Korea including the offset for the crude oil; UN and other international expenditures inside North Korea; small amounts of inward foreign investment and loans; remittances from overseas workers and refugees or Korean immigrant families in Japan, South Korea, China and Russia; and tourism.

  • Probably to re-build domestic confidence after the country experienced a disastrous currency redenomination in 2009, followed by hyperinflation in 2010, Pyongyang’s monetary authorities appear to have fixed the unofficial won’s value at just above 8,000 won per dollar, and began to ignore the official 135 won per dollar rate.  Monetary stability since then is impressive, probably owing to some combination of market price caps, restrictions on the use of foreign currency, conservativism in expanding won credit, direct intervention using the regime’s own reserves and, most interestingly, a willingness to allow legal trading and use of dollars in the market places. And now, with five years of stability, won holders appear satisfied not to chase the dollar.
  • Still, the mystery of the day is why smart money dealers in Pyongyang aren’t taking advantage of the deteriorating export situation by buying up U.S. dollars and forcing a panic.  Either something else is happening that we don’t know about or there is trouble ahead for the country’s always-tenuous finances. One easily can imagine another breakout in favor of the dollar and panic selling of won—hugely disruptive in North Korea’s newly forming half-market economy.

North Korean Won

  

North Korean Exports Labor Intensive and Mining Products

North Korean exports to China fell to only $361 million in the second quarter, the lowest level since 2010, and even this was suppported by generally higher prices for most items.  Major export commodities included:

  • Apparel and other textiles accounted for almost half of its exports—$149 million, up from $145 million in second quarter 2016.
  • Ferrous and non-ferrous ores rose to $78 million, up from $65 million.
  • Fish product exports at $67 million, were up sharply from $31 million.
  • In contrast, mineral products, including coal, was recorded at only $2 million, down from $236 million in the same period of 2016.

None of these items would appear to be big hard currency earners for the regime, although they help provide employment.  Labor intensive textiles exports have grown in recent years as the industry makes better use of its antiquated mills, allowing exporters to pay workers directly in some cases and thus improving productivity of labor and capital alike.  Ore exports would seem problematic, given the UN sanctions against them, but Chinese firms were said to have invested heavily in the huge Musan iron ore complex on the border with China some years ago and may now be recouping investment costs by trucking the ore over into China.  This mine previously served North Korea’s largest industrial complex, the Kimchaek iron and steel mill in Chongjin, which is now dilapidated and only marginally productive. So the iron ore earnings may be coming at the expense of higher value-added steel products once exported from that plant and are likely controversial, even in North Korea, as they are thought of as a giveaway of the nation’s natural resources. China has also invested in a copper mine, and likely in other non-ferrous metals, but results from these are spotty and now largely sanctioned.  Fish products are essentially traded by fishing boats, with flows going both ways depending on the season.

Textiles lead North Korea’s imports

Imports from China also appear to be increasingly driven by consumer rather than government or investment demand.  Textiles, cell phones and television imports are growing at the expense of some industrial inputs and agricultural inputs, and cereals. Petroleum product imports, plus gasoline and diesel fuels, remain sanctioned and low.

  • Textiles and apparel imports reached $258 million, up from $198 million in second quarter 2016.
  • TV and cell phone imports totalled $50 million, up from $38 million.
  • Food products of all kinds registered $123 million, up from $96 million.
  • Diesel, gasoline, and kerosene imports were $19 million, down from $31 million, again from second quarter of 2016.

 

Selected Imports from China

 

Visibility of Chinese-made consumer products among the general public is spreading the suggestion that the economy is doing fairly well—South Korea’s Bank of Korea estimated last week that North Korea’s proxy GDP rose 3.9 percent in 2016, the fastest in well over a decade and this despite the sanctions. But a large question is how far the regime will let this go, given what is clearly a big drain on limited foreign exchange.  Grain imports also rose slightly in the second quarter but remain much lower than in the recent past, and may need to rise much more if the fall harvest turns out to be weak.  Some grain is provided by foreign aid agencies, purchased in China and shipped to North Korea, thus counting as a North Korean import in the trade accounts, but with an offsetting credit in the (unpublished)  transfers account.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Illustration by Jenna Gibson, KEI.

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Target of New North Korea Sanctions Bill: Finances

By Phil Eskeland

(“That’s Where the Money Is.”[1])

Last week, the House of Representatives and the Senate overwhelming passed and sent to President Trump’s desk a new sanctions bill for his expected signature. The bill originally focused on Russia and Iran when it was first adopted by the Senate, but was expanded after bipartisan, bicameral negotiations to include sanctions provisions against North Korea as well.  With all the talk in Washington about the inability of different sides to work together, few issues unite more U.S. public policymakers on both sides of the political spectrum than getting tougher on North Korea.  Last May, the House of Representatives passed the Korea Interdiction and Modernization of Sanctions Act (H.R. 1644) by another overwhelming bipartisan vote of 419 to 1.  Essentially, this new sanctions bill – Countering America’s Adversaries through Sanctions Act (H.R. 3364) – takes almost every word from the House-passed North Korea sanctions bill to include it as part of Title III.

Much of the attention to this legislation has been directed at the first title of the bill affecting Russia.  The debate has primarily focused Congressional limitations on the flexibility given to the Executive Branch to implement the bill.  In the past, most sanctions-related legislation grants the President some discretion to waive or delay the imposition of sanctions, because the U.S. government may need flexibility in diplomacy and cannot wait for Congress to pass a bill to amend or end sanctions.  If there was any constraints on the Executive Branch, it was usually done when there was divided government (i.e., the Republican Congress passed the Helms-Burton Act in 1996, when Democrat President Bill Clinton was in office, that placed into statutory law many of the presidential Executive Orders affecting U.S. trade with Cuba, and thus cannot be unilaterally lifted or altered by the President without the consent of Congress).  It is interesting to observe a Republican Congress reasserting itself as a co-equal branch of government by imposing a series of constraints on the ability of a Republican president to unilaterally waive part of the sanctions against Russia.

However, any additional Congressional limitations on the President’s ability to waive or delay the imposition of these new sanctions do not affect the provisions of the bill dealing with North Korea, despite a last-minute effort by some Senate Republicans.  Nonetheless, the primary purpose of Title III of H.R. 3364 is to close loopholes and target new areas to deprive the North Korean regime of the money it needs to operate.  The fundamental philosophy behind the effort is to “cut off the Kim Jong Un regime’s access to hard cash” and “to restrict North Korea’s ability to engage in illicit trade.”

How does this bill accomplish these goals?  First, the legislation mandates sanctions against foreign persons who engage in five activities that have been identified as major revenue-generating activities for the North Korean regime – high-value metals or minerals, such as gold and “rare earths;” military-use fuel; vessel services; insurance for these vessels; and correspondent accounts, which are used in foreign currency exchanges to convert U.S. dollars into North Korean won.

Second, H.R. 3364 increases the discretionary authority of the U.S. government to impose sanctions on persons who engage in one or more of 11 different activities that generate revenue for North Korea, including those who import North Korean coal, iron, or iron ore above the limits set by the United Nations (U.N.) Security Council resolutions; who buys textiles or fishing rights from North Korea; who transfers bulk cash or precious metals or gemstones to North Korea; who facilitates the on-line commercial activities of North Korea, such as on-line gambling; who purchases agricultural products from North Korea; and who are engaged in the use of overseas North Korean laborers.

Third, there is a provision closing one loophole in the international financial system that would prohibit North Korea’s use of indirect correspondent accounts.  These accounts temporarily use U.S. dollars when converting one foreign currency into another, such as North Korean won.  The aim of this provision is to further cut off North Korea from the U.S. financial system and restrict the ability of the DPRK to conduct business with other nations.

Fourth, the legislation curtails certain types of foreign aid to countries that buy or sell North Korea military equipment in the effort to dry up another source of revenue to the regime.  Nations will have a choice: buy North Korean conventional weapons or receive U.S. foreign aid to help their people.

Fifth, H.R. 3364 augments sanctions that target revenue generated from North Korea overseas laborers who work under inhumane conditions.  It would ban the importation into the U.S. of any product made by these laborers.  The bill would also sanction foreign individuals who employ North Korean laborers.

The legislation also ensures that humanitarian aid destined for North Korea is not affected by heightened U.S. sanctions.  However, H.R. 3364 did not retain a provision in the original House version that contained an exemption for planning family reunification meetings with relatives in North Korea, including those from the Korean-American community meaning that family reunions will still be subject to sanctions.  In addition, the bill contains a reward for informants who report violations of financial sanctions on North Korea, in the hopes of increasing the government’s ability to enforce these sanctions.  Finally, it requires a report from the Administration within 90 days after the bill becomes law on the efficacy of putting North Korea back on the State Sponsors of Terrorism list. The debate over reinstating North Korea on the list was revitalized in light of the assassination of King Jong Nam, the exiled half-brother of the ruling leader of North Korea, at the Kuala Lumpur international airport in Malaysia using the VX nerve agent, a banned chemical weapon.

H.R. 3364 should not be seen as an end-goal, but as part of a continuing process of ratcheting up pressure on North Korea to denuclearize.  As this bill is implemented, North Korea will find new ways to evade sanctions.  Further legislation or action by other nations and the U.N. Security Council may be required to further clamp down on these loopholes.  However, the question remains unresolved if heightened sanctions from both the U.S. and the international community will produce the desired outcome – a nuclear-free Korean Peninsula – particularly before North Korea acquires the ability to launch a nuclear warhead on top of an intercontinental ballistic missile (ICBM) capable of reaching the mainland of the United States.   Sanctions are only as strong as its weakest link.  Thus, North Korea’s main trading partner, China, needs to do much more if it is to live up to its rhetoric that “they will strive for the complete, verifiable and irreversible denuclearization of the Korean Peninsula.”

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.

Image from Shawn Clover’s photostream on flickr Creative Commons.      
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[1] Response by bank robber Willie Sutton to the question as to why he robbed banks, January 20, 1951, edition of the Saturday Evening Post, “Someday, They’ll Get Slick Willie Sutton.”

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Secondary Sanctions on North Korea Should Be About More than China

By Troy Stangarone

In late June, President Donald Trump signaled a shift in the administration’s North Korea policy when he tweeted that “While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried.” Little more than a week later the administration placed sanctions on a Chinese bank and shipping company and two individuals. More recently, there are reports that the administration will continue to increase the pressure on China by placing sanctions on additional small banks and firms doing business with North Korea. While sanctioning Chinese entities that are evading sanctions to do business with North Korea is a key step, the administration should continue to go after non-Chinese actors engaged in sanctioned activities with North Korea.

Shortly before shifting track on China, the administration sanctioned two Russian firms for their ties to North Korea’s weapons programs. Now there may be an interesting new case to consider. Recent investigative reporting by NK News found that Singaporean based OCN (S) Pte Ltd., which built a new commercial development in North Korea and operates two high-end department stores in Pyongyang, has ties to Office 39 and is involved in importing luxury goods banned under UN sanctions. If the claims are corroborated, it could expose OCN to U.S. sanctions. Under tools available to the administration OCN would be subject to U.S. sanctions for both its ties to Office 39, which is an entity sanctioned by the United States and the United Nations, as well as it aid in the facilitation of luxury goods imports into North Korea.

There are three good reasons for the administration to pursue sanctions on entities not based in China. First, for sanctions to be effective against North Korea they need to deprive the regime not simply of access to resources, but the effects need to be felt by the ruling elite in Pyongyang. While North Korea will not give up its weapons due to a few less bottles for cognac or a decrease in other luxury goods, limiting the regimes access to luxury items is one means to create discontent among the ruling elite with the regime’s policies. If the burden of sanctions is only borne by the broader population, it will have little impact on North Korean policy.

Second, while China receives the majority of the attention on sanctions enforcement, as North Korea’s most significant trading partner should, it is not the only source of revenue and goods for the regime. If the administration is able to utilize secondary sanctions against Chinese entities to either restrict North Korean trade or induce greater Chinese cooperation, it also needs to be closing off alternative sources that might be able to provide the regime in Pyongyang a lifeline in a crisis, if not to the same degree as China. Focus on China is necessary, but not sufficient for sanctions to work.

Going after sanctions violating entities in other countries sends a signal to those doing business with North Korea that they are not safe merely by not being a Chinese entity.  It also begins to constrict Pyongyang’s options.

Lastly, targeting third countries provides political space for both the United States and China. China has long opposed the use of U.S. domestic laws to achieve foreign policy goals. However, while China may oppose the method, if the evidence for the violations is solid and firms other than those in China are targeted it may provide space for Beijing to begrudgingly continue to cooperate with the United States. For the United States, it demonstrates that Washington is going after any and all entities that are violating sanctions on North Korea and avoids leaving the appearance of solely targeting China. Maintaining space for Chinese cooperation is important as the United States eventually will need China’s cooperation to deal with North Korea.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are his own.

Photo from aotaro’s photostream on flickr Creative Commons.

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Is China Helping? We Might Be Surprised

By William Brown

President Trump made lots of people a little nervous last week, tweeting that China had been “helpful” on North Korea but that “It just hasn’t worked out.” As if resigned to the inevitable, he typed “At least it tried”.  With breaking news TV stations reporting activity at the nuclear test site it seemed something actually might happen.  Maybe years of crossed red-lines was finally coming to this, a Kim Jong-un test of Trump’s resolve.  I must admit, I woke up in the middle of the night just to check my USGS earthquake tickler.  It, and KOPSI, was quiet.

 

China Tried Tweet by Trump

North Korea, we all know by now, can surprise us with a nuclear test at any time but so far, in the five months of Trump’s tenure, it hasn’t, nor has it crossed a different red line and tested an ICBM, despite warning of such in January.  Many short and medium range missiles have been test fired, of great danger to South Korea and Japan, but nothing close to one capable of hitting the US mainland.  So, while it is still early, it is fair to ask; is China finally bringing effective pressure to bear on Pyongyang to stop the tests that so worry the United States, as we and others have demanded?

China Trade May 2017

Surprisingly, after so many years, perhaps so.  Over the week-end, China released trade data for May and it seems to show, despite lots of naysaying from Washington pundits, that the economic pressure is building.  Monthly data is volatile, and this is not seasonally adjusted, but the trend clearly is not in North Korea’s favor.  Chinese exports to North Korea were fine, in fact up 19 percent in the year through May from the same period of 2016, but imports plummeted 24 percent, largely attributable to a zeroing out of anthracite coal imports.

For Pyongyang, the rise in imports and fall in exports pushed the long-term average $50 million monthly goods trade deficit to about $200 million in each of March, April, and May.  This seems unsustainable, meaning it is likely larger than the funds North Korea can garner from other activities, i.e. trade with other countries, and from services sales and remittances from overseas workers and from families who have fled, leaving their relatives.  Almost no aid is flowing into the country, the Kaesong money pot is broken, and the capital account, usually a balancer for a poor country with a large trade deficit, is likely flat given no one is willing to lend anything to Pyongyang, let alone invest. If all this is correct, imports will not hold up for long and the people will begin to experience the brunt of shortages of all kinds of imported goods.

The first of these might have already happened.  In May, after mere threats that China may reconsider its decades long provision of free crude oil, a legacy of the Mao-Kim era, lines for gasoline formed and prices leapt in Pyongyang, holding high at least through the end of May  (see May blog).

China NK Trade Surplus

Of course, one has to be cautious in depending too much on published Chinese trade data, especially in an area like this with such important policy dimensions and with great lack of transparency.  Ever since Beijing prohibited imports of coal from North Korea back in February, the data has shown exactly zero imports, an unlikely proposition.  The same can be said for other products such as precious metals although it is not true for all UN sanctioned items which have seen reductions but not to zero.  Observers have seen some North Korean coal in Chinese ports and are thus skeptical the coal really has been stopped. And Beijing has a track record of fooling around with its crude oil export data, off the books since mid-2014 (this flow is not counted in the above graphics).  If North Korea had to pay for the vital crude oil, this would likely add another $30 million or so to the monthly deficit.  And even if Chinese customs faithfully records what it sees, there is no doubt a lot of smuggling takes place.  Even so, the data, even if inaccurate, is telling North Koreans who can see it an important story; as Trump says, China is trying to limit economic interchange, a strong and worrisome message in and of itself.

China Coal May 2017

Market data should begin to help confirm if the Chinese cutback on imports is real.  With Kim Jong-un having bought in to at least passive acceptance of a partial market economy, domestic prices are reasonably free to rise sharply, if and when the market exchange rate deteriorates and demand for dollars rises. So far, except for gasoline and diesel, though, such changes have been only slight, as indicated by the DailyNK website.  And clever North Koreans may find other things to sell in exchange for hard currency or imports.  Nonetheless, price and exchange rate stability are two of Kim’s most important success stories to date and are something his father or grandfather never achieved.  It will thus be important to watch these indicators to see if Chinese pressures really are building, giving the young leader worrisome things to think about, even more than Trump’s tweets.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Photo from Global Panorama’s photostream on flickr Creative Commons. 

 

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