Tag Archive | "sanctions"

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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The North Korean ICBM Test: A Significant Step, But Still Just a Step

By Mark Tokola

It usually takes some time to figure out the details of what a North Korean missile test has accomplished – what type of missile it was, how it performed, its capabilities – but from the initial information regarding North Korea’s July 4th missile test, it appears that they have successfully tested an Intercontinental Ballistic Missile (ICBM).

The accepted technical definition of an ICBM is a missile that can travel 3,400 miles. The North Koreans test fired their missile to fly a short range but with a high trajectory; it landed off the west coast of Japan. If the trajectory was flattened out, the missile in theory could have flown over 4,000 miles, enabling it to reach Alaska but not the lower 48 states.

Conducting an ICBM test is a significant step in North Korea’s weapons program, but it is just a step. Kim Jong-un’s stated objective is to develop a reliable ICBM that can carry a nuclear warhead to the American homeland. The July 4th missile did not demonstrate that kind of range, and there is no evidence (yet) that North Korea has a nuclear warhead that could be carried by an ICBM. We shouldn’t downplay the significance of this test, but calling it a “game changer” may be an overstatement.

The true importance of the July 4th test is the timing – following a series of other missile launches in 2017, it is clear that North Korea is not slowing the pace of its quest for nuclear weaponry that can threaten the U.S. Further, Kim Jong-un has crudely described it as a “gift for the American b******ds,” implying it was timed for Independence Day. The language choice shows that the North Korean regime sees no hypocrisy in using such language about other countries while having a hair-trigger sensitivity to slights to its own national dignity. The test also comes on the eve of a G20 meeting, demonstrating North Korea’s desire to be in the international limelight.

Perhaps the most important fact about the timing of the North Korean ICBM test is that it comes on the heels of the first visit of new South Korean President Moon Jae-in to Washington, where he spoke clearly of his desire to engage North Korea in dialogue. If North Korea had any interest in demonstrating an openness to President Moon’s overture, it would not have conducted an ICBM test only days after President Moon’s public remarks. We should all hope that North Korea would be responsive to a South Korean initiative to defuse tension, but the July 4th test makes it hard to believe that there is any basis for that hope. North Korea seems unresponsive to China’s efforts to defuse tensions, and even less so to South Korea’s initiatives. North Korea seems single-mindedly focused on trying to acquire a reliable ability to credibly threaten the United States with a nuclear attack — truly a high stakes gamble on North Korea’s part.

Still, it is not too late for a diplomatic solution. That would be in the best interest of South Korea, China, Russia, Japan, the United States – and even for North Korea. That diplomatic path may be narrowing, and it will only be possible if South Korea, China, Russia, Japan, the United States, and others are able to maintain a common front against North Korea’s nuclear ambitions. There is some evidence that sanctions are beginning to bite – which may be also be contributing to Kim Jong-un’s rush. As the world’s leaders gather for the July 7-8 G20 summit in Hamburg, watch for signs of unity or division to see how the international community may handle this growing threat.

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

Photo from Stefan Krasowski’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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By the Numbers: The Frequency of North Korean Missile Tests Under Kim Jong-un

By Troy Stangarone

Since Moon Jae-in won the South Korean presidency in May, North Korea has conducted five missile tests. This is somewhat of a quickened pace of tests, with five tests in the four weeks of the Moon presidency, but not unprecedented by North Korean standards. North Korea conducted seven tests, for example, in a four week time period in 2014. Based on the dataset maintained by Beyond Parallel, North Korea conducted 20 missile tests in 2016, the most since Kim Jong-un succeeded his father in late 2012, and only a handful of tests less than all of the tests North Korea conducted under Kim Jong-il.

Since assuming leadership in North Korea, Kim Jong-un averaged 10.8 missile tests per year in the 2012-2016 period. Though, these numbers are driven up by the higher volume of tests in recent years. In 2012 and 2013, North Korea conducted a total of eight missile tests. If those initial years are excluded and only the more recent period where the rate of testing has increased are examined, the average is 15.3 tests per year in the 2014-2016 period.

 

While there is no linear pattern to North Korea’s missile tests, if North Korean tests continue at the same pace as they have so far this year we should expect a new missile test every 2.1 weeks and another 13-14 tests. If that is the case, which it may not be, North Korea would exceed last year’s total number of missile tests by 3-4 tests.

The international community should be prepared to more quickly respond to the advancing pace of North Korea’s missile tests by preparing a menu of tightening multilateral sanctions options that have been informally agreed to in advance.

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 Prachatai’s photostream on flickr Creative Commons.

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It’s Time to Change How We Handle North Korea’s Missile Tests

By Troy Stangarone

It took all of five days after the election of Moon Jae-in as South Korea’s president for North Korea to test a ballistic missile. The test, perhaps intended to gain maximum effect by simultaneously sending a signal to China, took place only hours before Xi Jinping was set to give a major address at an international summit hosted by Beijing on the One Belt, One Road initiative.  Two additional missile tests have since followed, the first of which was likely designed to simulate the reentry of an intercontinental ballistic missile (ICBM) without provoking the United States by conducting an actual ICBM test, and the second of which was thought to be a demonstration of North Korea’s capabilities.

While the international community has largely focused on North Korea’s nuclear tests, its continuing development of delivery devices is equally dangerous to international peace and stability. In recent years, Pyongyang has made significant progress on its missile development and is likely able to mount a nuclear warhead on a missile capable of reaching South Korea and Japan. It has also made progress on developing missiles that could serve as a second strike capability and which would provide little warning prior to launch. It has been most successful in developing a mobile launched solid fuel rocket, but has also begun the process of developing a submarine launched ballistic missile.

Despite the danger that North Korea’s missile tests present, to date they have largely been consequence-free for the regime. While the international community condemns the tests, there has been little real cost to North Korea for its decision to keep advancing the development of delivery systems for its nuclear weapons. In contrast, its nuclear tests have sparked far harsher responses. Since Kim Jong-un has come to power, North Korea has conducted three nuclear tests and more than 60 missile tests. The United Nations has passed new sanctions resolutions after each of North Korea’s nuclear tests, but only four resolutions related to North Korea’s missile development.

The first resolution related to North Korea’s development of ballistic missiles, Resolution 1695, pre-dates Kim Jong-un and calls for the suspension of North Korea’s missile programs and for member states to prevent missile technology from being transferred to North Korea in accordance with national and international laws. While further resolutions have added sanctions or placed restrictions on missile related activities, only Resolution 2087 was explicitly related to a North Korean ballistic missile test while Resolution 2270 was in response to the quick succession of North Korea’s nuclear test and space launch.

On the international level, this may be slowly changing. The UN Security Council recently passed a small set of new sanctions tied to North Korea’s missile programs which sanctioned four entities and fourteen individuals. However, much as with prior sanctions, the lesson North Korea will likely draw is that there will be little cost to continuing on its current trajectory.

While U.S. sanctions are designed to slow the progress of North Korea’s weapons programs, they do not necessarily impose new costs on North Korea for each additional missile test.

Outside of the sanctions regime, the international community has tried a few other options to cut off the DPRK’s weapons program. For example, the United States and its allies have also worked to interdict the technology that North Korea needs for weapons development, specifically through programs such as the Proliferation Security Initiative (PSI). But there are limits to this approach. While PSI has been endorsed by over 100 countries, key countries such as China, Pakistan, and Iran have not done so to date. In addition, there are limits to interdicting materials in transit, even though UN sanctions also call for the inspection of all cargo destined for  North Korea.

Additionally, military options in the absence of a clear threat by North Korea to attack are unlikely to be a solution. Preemptively attacking missile sites prior to tests or attempting to shoot down North Korean missiles once they have been launched would both entail risks. A preemptive strike could precipitate retaliation by North Korea, while attempting to shoot down a North Korean missile and failing could lead Pyongyang to conclude that the U.S. and allied missile defenses are vulnerable. That leaves increasing sanctions as the only viable option for raising the costs of North Korea’s missile tests.

However, 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 their missile technology.

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 Ahsitaka San’s photostream on flickr Creative Commons.

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Is the Hallyu Crisis with China Over?

By Jenna Gibson

Beijing has approved the broadcast of a new Korean drama that had been co-produced by a Korean and a Chinese company, according to a source in the Chinese entertainment industry, making it the first Korean show to get the green light since before the THAAD spat.

This move is good news for Korean entertainment companies, which have been lamenting the Chinese ban which had slowly pushed Korean stars out of the spotlight throughout last year and culminated in direct retaliation against tourist packages and Lotte Department stores. It also bodes well for drama co-productions, which had seen tremendous success in last year’s standout Descendants of the Sun. At the time, before THAAD derailed things, Korean-Chinese collaboration was seen as the new frontier in Hallyu, and key to the continued success of Korean creative content in the Chinese market.

What’s interesting is the impetus for China’s reversal on allowing Hallyu content. Beijing is likely trying to start off on a good foot with newly elected Korean President Moon Jae-In, himself a skeptic of the THAAD system, in an attempt to give Moon some leeway should he decide to review the deployment.

A recent op-ed in the People’s Daily-affiliated Global Times insisted that “It is likely that Moon will stop THAAD’s deployment,” saying, “The huge economic losses South Korea has suffered are a result of the Chinese public’s anger. South Korea, which relies heavily on China economically, needs to weigh its potential gains and losses carefully” and that “Both Beijing and Seoul should take Moon’s presidency as an opportunity to promote warmer bilateral relations.”

But in reality, Moon has little room to maneuver at this point. THAAD is already in place and operating at some capacity, and recent missile launches from North Korea (the second of which was detected by THAAD) have highlighted its necessity in the public eye.

Although there was a dip in approval last November, the Korean public has largely remained favorable toward the THAAD system, according to polling by the Asan Institute in Seoul.  As of March, 50.6 percent of Koreans approved of THAAD, with 37.9 percent opposed. Perhaps because of this, President Moon has softened his position from outright opposition during the early stages of the campaign to stating that he objects to the way the decision was made, not the system itself.

As Asan Vice President Choi Kang pointed out in a KEI podcast after the election, President Moon may be constrained both by domestic politics and public opinion. Moon’s Minjoo Party only has 120 seats out of 300 seats in the National Assembly, and he failed to breach 50 percent of the vote during his election.

“How he can make a coalition or compromise with opposition parties is going to be a very, very critical issue for him to handle in the early phase of his presidency,” Choi said.

This could be particularly difficult when it comes to China, which has seen a steep decline in popularity among the Korean public since they stepped up their economic pressure over THAAD. Beijing’s economic retaliation has included the ban on selling tourist packages to Korea as well as cancelled concerts and a block on Korean entertainment content being uploaded to streaming sites.

According to a new report from the Korea Institute for Industrial Economics and Trade (KIET), “China’s ban on South Korean cultural imports will amount to 5.6 trillion won (US$5.02 billion) and 15.2 trillion won (US$13.6 billion) in direct and indirect damage in the consumer goods distribution sector” if it continues for six months. New numbers from the Korea Tourism Organization show a 66 percent year-on-year drop in Chinese visitors in April, driving much of the estimated losses for industries such as clothing and cosmetics.

“It’s quite difficult for South Korea to improve its relations with China because public understanding of China has deteriorated over several months,” Choi said. “So unless there is a positive sign coming from China on this economic pressure, it is very unlikely for the South Korean government to improve drastically its relations with China.”

Now that China seems to be offering an olive branch, public opinion may begin to shift back in Beijing’s favor. But after months of panicked headlines over China’s latest crackdown, it’s unlikely that one fantasy romance drama will be enough to turn things around entirely.

At this point, Beijing may continue to roll back its content and tourism bans in the hopes of wooing President Moon to their point of view, or as a face-saving measure. Either way, though, Chinese leadership would be ill-advised to hold their breath for a THAAD removal.

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 LG전자’s photostream on flickr Creative Commons.

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The Challenge of Managing Relations with North Korea for the Moon Administration

This is the eighth in a series of blogs looking at South Korea’s foreign relations for the new Korean administration. The series also includes blogs on relations with China , the United States, Japan, Russia, the European UnionASEANAfrica, the Middle East, and Latin America

By Troy Stangarone

As the new Moon Jae-in administration begins to put its personnel in place, one of the more challenging international relations to manage will be North Korea. In the strictest sense, with the closure of the Kaesong Industrial Complex, South Korea no longer has relations with North Korea, though this is something that the Moon administration hopes to change. However, even if dialogue or engagement with North Korea restarts under the Moon administration, handling relations with Pyongyang will be complicated by the need to manage relations with other powers in the region as well.

Developing relations with North Korea is complicated, to say the least. Since Roh Moo-hyun left office in 2008, when Moon was his chief of staff, North Korea has conducted four additional nuclear tests and numerous missile tests as it works to advance its nuclear program. It also sank the South Korean naval ship Cheonan and shelled Yeonpyeong island resulting in the deaths of 48 South Korean military personnel and 2 civilians in total.

As a result of these actions the international community and South Korea have placed a range of sanctions on North Korea rolling back the economic interactions that were expanded under the Sunshine Policy. These include the May 24 measures which ended trade outside of the Kaesong Industrial Complex, limited expansion within Kaesong, halted aid, and forbid North Korean ships sailing in South Korean waters. More recent measures closed the Kaesong Industrial Complex and banned ships that docked in North Korea from traveling to South Korea for a year.

Expanding ties with North Korea would require rolling back these measures in part or finding ways to work around them, as well as ensuring that any new activities were in compliance with United Nations sanctions. Under the Park Geun-hye administration, South Korea faced these same challenges and encouraged firms to invest in Russian rail companies to help further the administration’s Eurasia Initiative.

As long as North Korea continues to conduct weapons tests, the scope for creative avenues to engage the North will continue to narrow. North Korea has become significantly more aggressive in its testing patterns under Kim Jong-un and seems to be committed to completing its development process.

Engaging with North Korea also requires a willing partner, something that it is unclear is available in Pyongyang. Park Geun-hye came into office with the policy of Trustpolitik, hoping to slowly build trust between North and South Korea on humanitarian issues such as family reunions, but was quickly met with a nuclear test, a “space launch,” and the North Korean withdrawal of its workers from Kaesong. Ultimately, North Korea’s behavior pushed her away from a policy of engagement. President Barack Obama was also originally willing to engage North Korea having expressed an openness in his 2009 inaugural address and shortly after Kim Jong-un came to power with the Leap Day Agreement, but was rebuffed on both occasions by North Korean provocations. Ultimately, the Obama administration settled for a nuclear deal with Iran and reopening relations Myanmar and Cuba instead of continuing to work on cutting a deal with North Korea.

It seems as though North Korea intends to provide little deference to Moon despite his stated desire to engage, having tested a ballistic missile capable of hitting Guam and Japan five days after Moon came into office. However, the test more likely was designed to send a message to China as Xi Jinping was set to give a major speech at his One Belt, One Road conference with 29 world leaders looking on only hours after the test. The proximity to Moon’s inauguration may merely have been coincidental in light of the larger Chinese target.

Further complicating efforts to manage relations with Pyongyang is Seoul’s need to manage relations with the United States, China, and other powers in the region and coordinate policies. While no international relationship is truly independent, South Korea’s approach towards North Korea is perhaps more constrained by the policies of other countries than other policy areas.

Poor relations with Washington or Beijing potentially hinder efforts by Seoul to directly engage Pyongyang, as China has the ability to undermine South Korean efforts directly and Pyongyang has consistently expressed a preference for bilateral talks with the United States. Seoul will need to avoid any outcome where it is estranged from Washington, which potentially encourages the United States to seek solutions not involving South Korea. Tacking too far away from Washington could result in outcomes such as a preemptive military strike on North Korean nuclear installations that Seoul would want to avoid.

Prior experience with the Sunshine policy also demonstrates that when Washington isn’t on board, the policy is less effective. If Seoul wants engagement to be viable, it will need to find a way to weave its strategy into the United States’ policy of maximum pressure and engagement, while also bringing China along on the broader strategy, which is also one that will require gaining Russian and Japanese support.

Managing relations with North Korea will require a delicate balance by South Korea. It will need to find space within the sanctions regime to develop engagement, but also need a willing partner in Pyongyang to make any strategy of engagement viable. At the same time, it will need to manage the interests of the other parties in the region. If a South Korean policy of engagement were to place China under greater pressure from the United States, Seoul may find an unwilling partner in Beijing as its economic and geostrategic interests are challenged. At the same time, Seoul will need to develop a policy that the United States can embrace rather than work against. Alliance management and North Korea policy has always worked best when Seoul and Washington are on the same page and that is unlikely to change in the near future.

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 Prachatai’s photostream on flickr Creative Commons.

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Will Gasoline Prices Shake Pyongyang?

By William Brown

Maybe not, given the still small use of cars in North Korea, but last week’s momentary doubling of prices at Pyongyang service stations, according to Daily NK reporting, on rumors China would cut off crude oil supplies in the event of a nuclear test, should have caught the attention of Kim Jong-un and his economic and security advisors.  Diesel prices, apparently, behaved similarly.  Prices had given up about half their gains by the end of the week amid no indications of either a nuclear test or an actual crude cutoff.  Still, more than any other sanction imposed on the country, a cutoff of Chinese crude oil, translated into price hikes, angry customers, and slashed revenues, would cause big problems for Kim Jong-un as he pursues his byongjin linethe so far successful parallel development of the country’s nuclear and economic strength.

China Exports to NK

Looking forward, the price volatility suggests the North Korean landmass might not be the only thing shaking following its next nuclear test, and opens new avenues for affecting change in North Korean society.  With widespread markets for commodities and services, and prices that apparently adjust to changes in supply and demand conditions, North Korea is in a far different place than either of Kim’s two predecessors could have imagined; more prosperous and productive, but also much more vulnerable.  Speculation, driven even by rumors, could see a resumption of destabilizing inflation, a plunge in the value of the won, and trouble for the government reminiscent of the botched currency revaluation in 2009, as Kim was getting ready to take power.  Kim seemed to have learned important lessons from that episode, and has managed to get a grip on inflation and currency devaluation, probably by allowing productivity enhancing market activities to continuously expand.  But as a reminder of how little we know about the government’s ability to control markets, the volatility in gasoline and diesel prices stand in perplexing contrast to relative stability following China’s announced cuts in coal purchases just a month earlier, and the loss by now of about $1 million a day in national income.  One would have thought this would spur traders to dump won and buy dollars but this, apparently, has not happened. At least according to the same Daily NK reporting.

China Exports to NK Graph 2

Tinkering with North Korea’s crude oil supply, and the income it provides, would be of far greater importance than the coal shutoff and would be treated very cautiously by Beijing.  In a possible trial balloon in late April, Beijing allowed the first-ever hints of halt to its free delivery of about 50,000 tons of crude oil per month (valued at about $20 million at current Chinese export prices) if Pyongyang continues to test its nuclear weaponry, thus threatening to topple a longstanding pillar of the Mao Tse Tung – Kim Il Sung “lips and teeth” relationship.

Since the collapse of the Soviet Union, China has stood by North Korea, providing all the crude oil that the country refines and uses, in a small rail and pipeline served by a Chinese-built refinery across the border from Dandong in North Korea’s northwest, not far, ironically from the satellite launch site. The Soviets provided crude oil to a similar refinery just inside the northeast border, supplied by ship, but this has gone largely unused since trade collapsed in the early 1990s. Much smaller amounts of petroleum products are imported, again mostly from China but, aside from an annual gift to help with agriculture, these imports are probably on commercial terms.  There are no hints that these product shipments would be subject to a Chinese boycott and, since they are profit driven, they would likely continue and even expand.

Chinese authorities have long been sensitive about the crude shipments, telling foreign academics and officials that this is a national security issue and thus any discussion is off the table.  China was a net crude oil exporter when the presumed aid agreement was signed and oil flowed freely from the newly found Daqing oil field in Heilongjiang. But now China is a huge oil importer, and the supergiant oilfield is in decline, so the oil it gives North Korea is the same as if it were imported, and paid for by taxes on Chinese people, something Beijing probably does not want to advertise.  And, by now, the uncollectable North Korean debt on this deal must have accumulated to tens of billions of dollars.  Curiously, in 2014, Chinese Customs authorities stopped recording the crude exports even though sources indicate the oil continues to flow as normal. Placing the data off the books may have been meant as a warning that the supply is not endless and that Pyongyang needs to earn its way, or at least stop creating international tensions.  These new warnings, however, are more direct and open to the public, guaranteed to add to the Chinese public’s musings over support to Kim Jong-un.

Though rich in coal and hydropower energy resources, and uranium, North Korea has no oil or gas resources and is entirely dependent on outside sources for transportation fuels. It has been adept at using its coal for petrochemical and fertilizer purposes, and much of the rail system is electrified, though in poor condition.  With liberalized markets, demand for taxi, truck, and bus transportation has exploded in recent years, but is highly sensitive to price hikes and supply disruptions.  In fact, the markets probably could not survive without gasoline and diesel-fueled transportation and agriculture would be severely harmed.

The rumors began when the unofficial English language affiliate of People’s Daily, Global Times, included an editorial on April 12 suggesting China might go along with new UNSC sanctions and cut crude supplies if North Korea tested a nuclear weapon[i].  This was followed on April 21 when a leading academic, and an authority on the subject, told a Japanese newspaper that China should consider such a cutoff.  Soon thereafter, gasoline supplies in Pyongyang appeared to have been restricted and prices jumped from an average of 8,400 to 9,600 won per kilogram (about $3.00 a gallon at the unofficial but widely used exchange rate) to 17,625 won ($6.10) on 27 April, before falling back to 14,800 ($5.20) by  May2, according to Daily NK. Diesel prices rose even more, from 4,720 to 17,150 won per kilogram. Although these prices seem high for a country as poor as North Korea, the market productivity engendered by a truck or a taxi, compared to a bicycle, is enormous and thus well worth the expenditure. Moreover, with no state subsidies, the prices must be higher than in neighboring China to induce the imports. No official statements confirm that China is willing to halt the oil shipments, and the price jumps might engender more concerns in Beijing, as well as Pyongyang, over potential instability.

Gasoline has long been dealt with inside the communist state’s fixed price system and thus transferred only by ration or through the central planning mechanism.  Private use was strictly not allowed.  But in recent years, as markets have sprung up for other products, gasoline has come to be sold at market prices, first by military or other government organizations which apparently have needed the cash—often U.S. dollars or Chinese yuan—and now, during the Kim Jong-un era, in relatively normal gasoline stations sponsored by several government and military government organizations which apparently are drawing on their state plan allocations or they are able to purchase products in China, sell them in North Korea, and make a profit.  This has allowed a rapid increase in private automobile traffic, including many taxis and commercial delivery vehicles and some private automobiles. As compared to when all such transportation was by bicycle or bus, the gasoline use has spawned a huge rise in productivity and marketization. Whereas this commercialization has given a substantial boost to the otherwise still moribund, and sanction laden, general economy, security officials, and communist ideologs, must feel threatened.

Information is sketchy about where the gasoline comes from and how the private sector or the government organs earn the hard currency needed to import it. Chinese trade data shows a steady increase in gasoline shipments to North Korea, recently eclipsing a slow rise in diesel and other middle distillates imports.  But these are still much lower than the crude oil shipments and, presumably, much of the gasoline now comes to the market via unsanctioned transfers from the refinery.  This makes sense since North Korean state enterprises that receive their rations from the refinery are hard pressed to come up with the increasing amounts of money needed to purchase goods and services in the markets, and thus they must be tempted to sell, rather than consume, their planned oil allocations.  This, of course, creates havoc for the planning system which seems to have largely broken down.

China would have several options should it want to use oil to penalize Pyongyang for a nuclear test.  A short-term halt in crude oil shipments, a permanent end to the credit arrangement forcing Pyongyang to pay for the imports, or a cutoff of all crude and product shipments. Each would have different impacts and Beijing would likely try to decide which would have the most desired impact—deterring the nuclear program while not leading to instability. One way to do that would be to end the credit arrangement but, since it has become such a valued and important commodity, continue to allow or even induce more private trade in petroleum products. North Korea buyers would have to come up with more hard currency and would try to do this by increasing their private exports, so trade might even expand to the advantage of the Chinese and to the North Korean private sector.  The impact on the North Korean government, on the other hand, would be severe as it would not only have to pay hard currency for its own considerable use of petroleum, but would also no longer be able to earn hard currency from its domestic sales.

Pyongyang, of course, could react by closing off private sales and use valuable hard currency to import petroleum for its own use.  It would likely try but have a hard time finding a foreign supplier for the old Soviet refinery, which can be served by ocean tanker, perhaps in return for some of the plant’s output.  Cutting private sales might be necessary, but it would go against the grain of Kim Jong-un’s policies to date.  Whatever can be said about his stubbornness in pursing nuclear weapons, and in terrorizing his subordinates with selective executions, Kim has generally made good on his promise to push forward economic development.  He inherited an economy with hyperinflation and a disintegrating domestic currency, but by allowing productivity enhancing markets to expand he has been able to control inflation and the won, at least for the moment  All of this would likely be lost, however, should Chinese crude oil deliveries suddenly stop.  In this context, even if short lived, the jump in gasoline prices must be enough to give him and his advisors pause over when to undertake the next nuclear test.

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 Joseph’s photostream on flickr Creative Commons.

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Why North Korea-China Trade Increased in the 1st Quarter Despite Sanctions

By Troy Stangarone

Full first quarter data on trade between North Korea and China is not yet available, but data released by China’s General Administration of Customs raises interesting questions in regards to ongoing trade between China and North Korea.

According to reports, total trade with North Korea grew 37.4 percent in the first quarter from the same period in 2016, with imports increasing by 18.4 percent and exports increasing by 54.5 percent. On the surface, this might seem as though sanctions are again failing, but the increase in total trade and Chinese imports from North Korea may not be that surprising. Trade between China and North Korea had been increasing in 2016 and had grown 48 percent from $1.2 billion in the first quarter to $1.8 billion the fourth quarter. Even with the new UN sanctions resolution that took effect December it is not unsurprising to see year-on-year growth from 2016 and likely should be expected with sanctions still being implemented.

Despite trade in coal with North Korea having been suspended, higher prices for coal in 2017 than 2016 likely drove total imports higher before the suspension took effect. While customs officials noted that imports of coal dropped 51.6 percent for the period, this is likely due to a drop in volume as opposed to value. China has already declared that it was approaching its import limit under UN caps for North Korean coal. In 2016, China’s total imports from North Korea in the first quarter were only $587 million. With the cap on North Korean coal imports set at $400 million and China having reported to the UN that it imported roughly $231 million worth in the first two months of 2017, it is easy to imagine year-on-year imports having increased.

This is also the case with imports of iron increasing 270 percent year-on-year. While the total trade value of iron imports was not released, the final value will likely come in around $13 million. While this will not totally replace North Korean coal exports, it is likely an indication that North Korea is looking to substitute other exports for the revenue it lost from the cap on coal exports. Going forward, iron ore, as well as exports of zinc, textiles, and seafood will be items to watch in determining how successful North Korea is at substituting exports for the lost revenue from coal.

While some the shifts on North Korea’s exports to China are not surprising, what is surprising is the increase in Chinese exports to North Korea. With a growth of 54.5 percent from the first quarter of 2016, that puts exports at close to $938 million for the quarter, or just below $974 million in exports for the last quarter of 2016.

In the end, the first quarter data likely reflects the pre-UN coal cap trade between North Korea and China and not the picture of the future trade relationship. Going forward, we should expect to see trade decrease with revenues from coal out of the picture. While North Korea will likely try to replace some of lost revenue, as is already evident, with other exports such as iron ore, it would raise flags if trade held steady or increased. In addition, if North Korea conducts further tests there will be increasing pressure on China to curtail other imports from North Korea despite the livelihood exceptions that have allowed trade to continue to flow. The first quarter trade numbers should represent a final peak before a decline rather than a new trend. That would be a good thing.

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 Prince Roy’s photostream on flickr Creative Commons.

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Turning Out the Lights?: The Impact of THAAD on Hallyu Exports to China

By Jennifer Cho

Ever since the decision last summer to install the Terminal High Altitude Area Defense (THAAD) missile defense system on the Korean peninsula, China has strongly opposed the system for security and political reasons. But instead of keeping the dispute in the political sphere, China has started to show its ire by imposing sanctions on Korean pop culture (Hallyu) content.

The State Administration of Press and Publication, Radio, Film, and Television, which supervises state-owned enterprises in the radio, film, and television industries in China, has not released any official statements about a ban on Hallyu content. However, an insider from the Chinese media industry said that the agency has given an unofficial order to ban Korean content from online streaming services, prohibit Korean celebrities from appearing on TV shows, and restrict cooperation with Korean entertainment companies. Additionally, there is a list of 42 Korean celebritieswho have been banned from Chinese media entirely, possibly in effect since last September.

The growing visibility of the missile defense system issue brought about an increase in anti-Korea sentiments in China and even a boycott on Korea goods. An online poll about the boycott of Korean stars has gained over 300,000 responses so far, and 87 percent of the respondents say they support the ban. The phrase, “No idol is above national interest,” has been spreading among Chinese internet users. Of course, those who might wish to argue against the ban on-line are prohibited from doing so.

Last October, the Korean Ministry of Culture, Sports, and Tourism conducted a survey about the effect of the THAAD retaliation on Korea’s domestic content industry. According to the survey, 80.6 percent of the surveyed companies agree that the deployment of THAAD will negatively influence their economic relationship with China. Among them, 35.3 percent of the companies responded that they have experienced direct economic loss due to THAAD deployment.

thaad chart

Currently, the China Office of the Korean Creative Contents Agency (KOCCA) has received notice of 17 cases where domestic content companies had suffered an economic loss due to the ban on Korean pop culture. These cases include five halted productions, five breaches of contract, two investment suspensions, one cancellation of a performance, and four business delays.

China is South Korea’s largest trading partner, making up 25 percentof the country’s entire export sector. According to Dr. Ingyu Oh, a professor of sociology from Korea University, the Hallyu market in China is worth just under $1 billion. Oh said that the installment of THAAD may lead to lost revenue in the Hallyu market, especially since exposure to k-drama and TV shows is highly correlated with consumption of k-beauty products and Korean food in China.

In the cultural content industry, Korean pop music became the first target of the Chinese retaliation. Most k-pop concerts that had been scheduled before the decision to deploy THAAD were carried out, but no concert with over 10,000 seats has been allowed since last October. EXO, a Korean boy band, was scheduled to have a concert at Nanjing’s Olympic stadium last December, but it was rescheduled and then eventually cancelled, as was the stop in Chengdu. The Chinese agencies did not state a clear reason why the concerts were rescheduled. The one concert that EXO was able to perform in China last year took place in Hangzhou in September, drawing a sold-out crowd of 12,000 and netting $1.5 million in revenue. Assuming the two other Chinese concert venues were similarly sized, that means a loss of $3 million for the group because of this controversy. Several other groups have seen similar cancellations.

Last year, Descendants of the Sun, a Korean TV drama, was a big hit in China. Unlike the usual Korean model of filming dramas as they air, this show was pre-recorded so that it could be played in Korea and China at the same time (and to satisfy Chinese censors, who require all content to be previewed before going on air). The show also saw investment from Chinese video-streaming site iQiyi, which paid $250,000 per episode ($4 million total) for exclusive streaming rights to the show. However, other k-dramas submitted after the THAAD announcement, like Legend of the Blue Sea and Saimdang, Light’s Diary, were supposed to be played on Chinese TV but did not pass the censorship standard. Recently, Huace Film and TV, one of the leading media companies in China that invested in Descendants of the Sun, has decreased the size of its branch office in South Korea. Fewer and fewer Chinese media companies are working with Korean production companies and their investment has been decreasing. As of now, there is no k-drama scheduled to be on air on any of the four major broadcasting companies in China.

In addition to banning k-dramas on TV, China has blocked access to k-content on online streaming services. Guardian: The Lonely and Great God, a recent romantic drama, became very popular in China even though it was not played on TV. The show’s 16 episodes were available at first, but were recently removed from Weibo, China’s main social media platform. Major online video streaming services no longer provide recent episodes of Korean TV shows. Further, Wangyi Cloud Music, one of the major music streaming sites in China, recently deleted the k-pop chart from its website after Korean company Lotte, which owns the land where THAAD would be deployed, officially decided to provide land for the missile defense system.

The ban on Korean pop culture has not been limited to Korean actors and pop singers, but has also affected Korean classical artists. In early January, a performance by the Korean pianist Paik Kun-woo and the Guiyang Symphony Orchestra, scheduled for March, was called off. Mr. Paik was replaced with the Chinese pianist Sa Chen. In addition to Mr. Paik’s case, soprano Sumi Jo was supposed to have a concert in three different cities this February, but her visa to China was rejected without any reason. Finally, last year, the Shanghai Ballet Company invited South Korean ballerina Kim Ji-young to perform Swan Lake, but recently notified her that she will no longer be part of the performance this April.

In the midst of an increase in anti-Korea sentiment and the boycott on Korean goods, there are still a number of Chinese people who watch Korean TV shows and listen to k-pop music. Before the ban on new uploads of Korean content, popular drama Uncontrollably Fond racked up more than 4 billion hits on Chinese site Youku, showing that many Hallyu fans remain undeterred by the THAAD row. The question will be how long this ban is sustained, and whether a long absence can make Chinese fans forget their favorite Korean stars.

Jennifer Cho is a graduate of Kalamazoo College and an intern at the Korea Economic Institute of America (KEI). The views expressed here are the authors’ alone.

Graphic created by Jennifer Cho. Photo from Peter Kaminski’s photostream on flickr Creative Commons.

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The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.