Maximum pressure? How UNSCR 2371 will impact North Korea’s economy
For the new measures to have serious bite, they will have to be implemented and enforced like never before
On August 5, the 15 member-states of the United Nations Security Council (UNSC) unanimously passed Resolution 2371, a new sanctions package targeting North Korea. The aggressive new sanctions aim to carve out one-third of Pyongyang’s total export profits: a cool USD$1 billion.
Put simply, the scope is unprecedented. 2371 includes an outright ban on purchasing whole sectors of North Korean exports, including some of their biggest money makers: coal, iron, lead, and seafood. It is well known that the Kim regime has been using mineral resources as a lifeline, but the fisheries industry is a lesser known source of currency for the regime.
As seen below, fisheries exports have nearly tripled within the last six years, reaching USD$195 million in 2016. By looking at the graph below, it is easy to see that the vast majority of these products are sold to China. This fact underscores the larger picture: for the last three years in a row, over 90% of North Korea’s trade has been with China.
Section 10 of 2371 stipulates that, “the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, seafood (including fish, crustaceans, mollusks, and other aquatic invertebrates in all forms), and that all States shall prohibit the procurement of such items from the DPRK by their nationals.”
Sanctions expert Joshua Stanton believes this provision also bars states from purchasing fishing rights from the North Korean government, something already covered under new U.S. sanctions legislation.
The efficacy of the sanctions will be limited by the extent and scope of their implementation
Although lesser known than coal or garment exports, sales of fish, crustaceans, and mollusks have constituted a large and growing source of foreign currency for the regime. The Party, the Korean People’s Army, and the Cabinet are all reported to have operated separate fisheries business units as a way to earn cash. Kim Jong Un himself has stepped in to boost fisheries production by setting quotas administered through the Workers’ Party.
North Korean business people have set up illicit fisheries operations by bribing state officials and smuggling their catch for sale in China. Other smuggling outfits are state-run. News stories of these smuggling operations hint that the value of fisheries exports might be more than the figures reported by the Korean Trade Investment Promotion Agency (KOTRA).
Ironically enough, Kim Jong Un reportedly banned the export of fisheries products in October 2015. The dip in fisheries exports in 2015 seen in the above graph is a testament to this brief trend, which was later reversed. The likely purpose of the order was to redirect squid, octopus, crab, shrimp, and shellfish away from China and towards military units in North Korea, and to grow the domestic economy. As a result of the ban, some of the fisheries units began selling to domestic consumers in local markets.
North Korea’s secret weapon: a resilient economy
It is nearly impossible to forecast whether the new international sanctions will be implemented as legislated. If the past is any indication, there will be issues. As has been noted by careful statistical analysis by big-data firm C4ADS and the Asan Institute, Chinese enforcement of previous UNSC resolutions has been subpar at best.
The United Nations Panel of Experts reports regularly note the presence of illicit North Korean financial networks operating in China. As ever, the efficacy of the sanctions will be limited by the extent and scope of their implementation.
Although it’s difficult to forecast, we do have some tools at our disposal. By looking at the past, we can ascertain the North’s behavior patterns and capabilities. To predict whether the new sanctions resolution will be a game changer, it is helpful to get a data-based impression of the economy and how it has adapted over time. Unfortunately, this history does not bode well for the international community.
It is well known that the Kim regime has been using mineral resources as a lifeline, but the fisheries industry is a lesser known source of currency
Despite unprecedented sanctions and international pressure to isolate the North Korean regime and its sources of currency, the North was able to grow its economy and increase trade flows in 2016. The economy grew 3.9% last year – the fastest growth since 1999. Trade increased 4.7% (excluding trade with South Korea), totaling USD$6.5 billion.
The top four trading partners (China, Russia, India, Thailand), and the top four traded products (minerals, textiles, steel/metal, electronics) did not change from 2015.
There were large upticks for both automobile and fisheries imports. In addition, Sri Lanka and Luxembourg entered the top ten, while Ukraine and Hong Kong left the top ten. The two graphs presented below are a testament to both the volatility and the resilience of the North’s economy. Though subject to shocks and prone to vacillations over the past 10-20 years, the regime seemed to have found its footing against daunting odds in 2016.
Top trade partners
The figure below shows North Korea’s top ten trading partners by percentage. The bigger the circle, the larger the share of North Korea’s total trade. Looking at the illustration, it’s easy to see how much North Korea depends on its major partners.
The most prominent of these, China, constituted 92.5% of North Korea’s trade in 2016. All others partners constituted less than 1.2% of the whole. Following China, in order, was Russia, India, Thailand, the Philippines, Pakistan, Luxemburg, Singapore, Taiwan, and Sri Lanka. The data from KOTRA excludes trade with South Korea, but inter-Korean trade was not significant in 2016.
How much did partners get from North Korea?
The bubble graph above shows us which countries North Korea is economically dependent on, but it gives us no indication of the inverse. We should also ask: How economically dependent are these trading partners on North Korea? The short answer is that none of the partners get a significant portion of their imports from North Korea.
In fact, among the top 30 trading partners, the highest level was less than 0.2%, but is nonetheless instructive to compare these figures because it suggests which countries might be diplomatically targeted to reduce economic interactions with the North. The following figure shows these percentages for select trading partners.
Countries represented by bigger boxes got a greater share of their imports from North Korea than countries represented by smaller boxes. The countries included were all top 30 trading partners. Some were excluded from the calculations because no 2016 trade data was available through UN Comtrade at the time of writing – these include Thailand, Taiwan, and Ukraine.
The below graph shows how North Korea’s top exports have increased over the past 20 years. Minerals and textiles have emerged as prominent earning sectors, capturing an increasingly large portion of total exports over time. The North Korean regime uses both sectors as a source of foreign cash.
In 2016, exports grew by 4.6% to USD$2.8 billion. China-bound trade increased by 6% on the year, comprising 93% of all exports in 2016. Overall exports were dominated by coal/mineral products, which comprised 42.3% of all the whole, totaling USD$1.2 billion. In February 2017, China announced it was suspending coal imports from North Korea.
Garments and textiles (25.8% of all exports in 2016) have also become a lucrative sector for Kim Jong Un: controversy erupted when it was discovered that North Korean labor was used in the production chains of Western brands like Land’s End, Edinburgh Mill, and Rip Curl.
Minerals and textiles have emerged as prominent earning sectors
North Korean embassies in China have been known to dispatch tightly-controlled contingents of overseas laborers to cut-and-sew shops in the Northeast provinces. The laborers are forced to kick back the lion’s share of their wages to the regime.
Imports grew by 4.8% to USD$3.7 billion in 2016. Compared to exports, imports were more evenly distributed, with fuel (HS27) comprising 11.8% of all imports at the USD$440 million mark. Electronic equipment took up 8.9% of imports. Boilers and machinery took up 7.6%.
If sanctions are to have their effect, the international community will have to implement and enforce like it has never done before
Like exports, the total value of imports increased over the five periods. North Korea’s large and growing textiles imports are used in the production of garments, which are then exported as a top product for the regime.
The story of the North Korean economy is both tragic and surprising. Every time it seems as if the regime has painted the country into a corner, the economy finds a way to eke along somehow. At the ASEAN Regional Forum, North Korea’s foreign minister denounced 2371 as illegal and proclaimed that North Korea would never surrender its nuclear weapons at the negotiating table.
If sanctions are to have their effect, the international community will have to implement and enforce like it has never done before.
This, essentially, means that it all comes down to China.
Secretary of State Tillerson summed up the U.S. position in saying: “We certainly don’t blame the Chinese for the situation in North Korea. Only the North Koreans are to blame for this situation.”
“But we do believe China has a special and unique relationship because of this significant economic activity to influence the North Korean regime in ways that no one else can.”
Edited by Oliver Hotham
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