USS Carl Vinson carrier force was recently sent to the waters near North Korea. As always, Pyongyang has in response issued a strong statement and even mentioned the use of nuclear weapons as self-defence if necessary. Since the first nuclear test in North Korea back in 2006, the tensions on the Korean Peninsula have never eased, and today it has again become the focus of the world.
To put a brake on North Korea’s nuclear weapons program, the international community including China has adopted several measures to put pressure on North Korea, and continued to deepen the scopes and strengths of the sanctions. However, as stated in an essay published by two scholars from R.O.K. and U.K., the effects of the financial sanctions against North Korea imposed by the international community remained dubious from an international political economics point of view.
Western community led by U.S. has long tried various means to increase pressure on North Korea. The earlier sanctions imposed by Western countries were mainly on bilateral trade, with emphasis on restricting North Korea’s import and export of specific goods. Yet the sanctions on bilateral trade did not prevent North Korea from finding a third-party country outside the trade barriers and continuing the trade via this new route.
In such case, U.S. and its allies in Asia-Pacific regions, such as R.O.K. and Japan, jointly imposed multilateral trade sanctions against North Korea. During the Cold War period, the effects of these sanctions were still limited, as North Korea was not only receiving direct financial aids from Soviet Union and other political allies, but also had established its own international trade network outside the realm of U.S., Japan, R.O.K. and other countries.
After the Cold War, trade sanctions imposed by Western countries were often ineffective, due to North Korea’s relatively isolated economic system which was born out of its long-term isolation from the Western world. In the 1990s, North Korean leaders even accused the Western world for imposing trade embargoes and sanctions, which became one of the causes of famine in North Korea; after the “Arduous March”, North Korea’s trade system had become even more isolated despite of the massive food aids it received from the international community.
In such conditions, U.S. government started to consider implementing targeted ‘smarter sanctions’ against North Korea, utilising the important role that US dollar played in the global financial systems, in the hope of demolishing the existing financial and trading relations between North Korea and the rest of the world. In the beginning of such ‘currency war’, the United States did prevailed, thanks to its prominence in the international financial market.
In September 2005, the U.S. Treasury Department accused Banco Delta Asia, a bank in Macau, of assisting North Korea with money laundering and circulation of counterfeit currency, and advised that American companies shall cut off any engagement with the bank. As a result, the banking regulators in Macau blocked 52 accounts that belonged to North Korea at Banco Delta Asia, freezing around USD 24 million in total; the accusation made by the Treasury Department had significantly damaged the confidence of other clients who banked with Banco Delta Asia, resulting directly a run on Banco Delta Asia due to the fear of losing their deposits.
With the Banco Delta Asia case, the U.S. government had learnt to be more proficient in putting pressure on other financial institutions. Since 2005, having received direct warnings from the United States, more than 20 financial institutions based in Asia and Europe have curtailed or cut off their business with North Korean counterparts.
In the name of ‘protecting global financial orders’, the United States had severely damaged the financial linkages between North Korea and the rest of the world. Without foreign currencies, North Korean government was unable to turn its wealth into the foreign goods and materials that were in urgent need, even with all different means of collecting domestic resources and assets. Some observers stated that North Korea could no longer handle the financial attacks from the United States, which led them to return to the table of Six Party Talks after the first nuclear test.
The U.S. sanctions, rather than decreasing, have ever since increased. Under such constant pressure from the United States, many financial institutions, including the four state-owned banks in China became reluctant to deal with North Korean banks, which even affected the payment of employees of the United Nations and some NGOs working in North Korea. Despite of such conditions, North Korea not only conducted its second nuclear test in 2009, but also withdrew from the Six Party Talks, causing the rise of tensions on the peninsula.
So, despite of the first round of winning, why were U.S. sanctions unable to continue being effective? According to the two scholars, it was because of the fast growth in Sino-North Korean trade across the border. Data shows that the trade volumes between the two countries was just over USD 1 billion back in 2003, but only a decade later, the figure reached USD 6.54 billion. Since 2009, the Sino-North Korean trade volumes have far exceeded that of Sino-South Korean; by 2013, 77% of North Korean produce was exported to China.
The majority of North Korean exports to China are minerals and clothing. North Korea is abundant with iron, gold and copper mineral resources; building development zones in bordering areas has attracted investments from China, which boosted the demand for North Korean human resources to some extent. The financial sanctions failed to have a fundamental impact on the exports of minerals and clothing from North Korea to China, due to the share of border and the long history of active border trade between the two.
In addition, there have been and are still considerable amounts of cash transactions and bartering across the border, which would generally not appear on the radar of the financial regulators, and thus would not be affected by the financial sanctions. In turn, we could even say that the flourishing of less sophisticated means of trade such as cash transactions and bartering across the Sino-North Korean border was due to the financial sanctions which blocked North Korea from many usual channels of international trade.
Evidently, it would not always work to wage a currency war against a country that has long been outside of the international financial and trade systems. The ongoing U.S. sanctions against North Korea have failed to achieve the initial goal of forcing the regime to succumb, and rather to a certain extent, strengthened the role of the regime in facilitating the national economic development; the sanctions not only failed to destroy the economy of North Korea, but also reduced the possibility for North Korea to develop a market economy.
Many observers argue, North Korea’s only important channel of foreign exchanges has now been blocked, as China started to impose carefully the import ban on North Korean coal this year, which would be more direct and targeted than the previous financial sanctions imposed by the United States. North Korea still holds a tough stance for now, and might go even tougher, but the question is, without the economic strength, would North Korea be able to survive the sanctions this time?
Lee, Jong-Woon, and Kevin Gray. 2017. “Cause for Optimism? Financial Sanctions and the Rise of the Sino-North Korean Border Economy”. Review of International Political Economy, Advance online publication. doi:10.1080/09692290.2017.1301977.