In a Q&A, SK Center Fellow Yong Suk Lee discusses U.S. policy toward North Korea and the viability of 'secondary sanctions'

North Korea launched its first intercontinental ballistic missile (ICBM) on July 3, a first for the country that has increasingly advanced proliferation and testing over the last three years despite condemnation from the international community.

The United States, following the ICBM launch, called for additional efforts to cut-off flows of currency into North Korea. Officials have said, as part of the proposals, they are considering ‘secondary sanctions’ that would target companies and financial institutions that deal with North Korea even beyond those already banned by U.N. Security Council resolutions.

Just returned from Seoul, SK Center Fellow Yong Suk Lee spoke with Shorenstein APARC about the effectiveness of historical sanctions on North Korea, one of his research areas. He also shared thoughts on U.S. policy toward North Korea and the viability of new sanctions.

Could you describe how sanctions have historically been applied on North Korea? What do they generally look like in terms of scope and whom do they often target?

Sanctions generally fall into three different categories: trade, travel and financial transactions, and in the case of North Korea, all three kinds have been applied. Trade sanctions, for example, have focused on minerals, technology and energy sources, with the goal of hindering the purchase of products that could aid in weapons development. Financial sanctions, for example, have sought to control flows of money to and from certain individuals and entities associated with the government. Whether sanctions are applied multilaterally through the U.N. or unilaterally, it’s difficult to enforce them especially in a country as closed-off as North Korea. It’s also difficult to identify how to draw the line between sanctions that only punish the bad behaviors of a few versus those that affect the broader population: that’s a balance policymakers attempt to strike.

Your research has looked at the impact of sanctions in both rural and urban areas of North Korea from the 1990s through the 2000s. How did you analyze their implementation and performance? In a technical sense, have sanctions been effective?

In the 1990s, sanctions on North Korea relaxed in concert with the Sunshine Policy, an effort by the South Korean administration under Kim Dae-jung to engage North Korea. By the early to mid-2000s, the international community began to increase sanctions again as North Korea continued its nuclear and weapons development. The goal of my research in analyzing those two time periods was to compare and understand the impact of sanctions within North Korea, particularly the impact on its domestic economy. Since there’s not much subnational data available, I identified a proxy for economic activity – nighttime lights as seen from outer space – that acted as an indicator of consumption, production and energy allocation across North Korea.

I found that certain areas became relatively brighter than other areas when sanctions increased. The capital Pyongyang, cities that share a border with China, and pockets where manufacturing is clustered all became brighter. This result indicates that sanctions were effective in a technical sense, yet were ineffective in reaching their intended target. The North Korean regime has found ways to reallocate resources toward urban areas where government officials and elites reside.

How has North Korea evaded potential effects of sanctions in the past?

North Korea has avoided effects of sanctions through internal actions, such as redistribution of resources to government officials and elites, like those patterns identified in my research, and also though external actions, such as trade with other countries. Increasing financial activities and trade with neighbor countries fills in some of the gaps caused by sanctions. North Korea has also maintained ties with African, Southeast Asian and Middle Eastern countries, some of which receive migrant workers from North Korea. Those workers often send remittances back to acquaintances in North Korea, thereby supporting its economy.

In a recent report, you’ve written about China’s relationship with North Korea and how that relationship has aided in the development of markets. Can you describe how the two are tied?

The relationship between China and North Korea is close. By sheer numbers, around 80 percent of North Korea’s trade is with China. All sorts of goods are exchanged through China. For example, goods produced in Western countries that are barred from directly trading with North Korea are often funneled through China. Especially outside of urban areas, North Koreans seek goods from China because they can’t otherwise access them. They also make money by selling goods, mostly minerals, to China. The China-North Korea border is quite porous, so you have a situation where a large number of individuals are engaging in small transactions, and although they may be disparate, the transactions add up.

Is there a strategy that provides hope that China will step up pressure on North Korea?

A lot of the debate, especially in the United States, is about putting pressure on China to do something about North Korea. But if you take a step back and think about it from the Chinese perspective, I think a valid question to ask is: why would China be interested in pressuring their neighbor? For the United States, the main issue with respect to North Korea is the nuclear threat. For China, Japan and South Korea, however, the main issue is not necessarily the nuclear threat but instead the issue of regional stability. So, while China remains important, it is one of many actors that are involved in addressing challenges related to North Korea. I think that point is largely missing from the debate.

U.S. policy has maintained that sanctions will encourage the North Korean regime to change its behavior. Could additional sanctions help?

New sanctions might help. If the intended goal is to decrease flows of currency into North Korea, it would make sense to impose sanctions on Chinese entities or individuals since they remain North Korea’s most prolific trade partners. But the question remains: would it encourage the Chinese government to change its position, and in turn, the North Korean government to bow to additional pressure? From my perspective as an economist, I don’t think enough incentives are at play for either country to react significantly. North Korea is one of the poorest countries in the world, and as history has shown, poor countries can survive in that manner for a long time. They find ways to adapt. Additionally, North Korea has nuclear weapons and the government sees them as leverage for maintaining the status quo.

What should officials keep in mind when considering sanctions?

Sanctions by their very nature are meant to inflict some harm, and that aspect alone does not sit well with the North Korean government. This, however, is where U.S. policy currently stands. It is caught in a deadlock. On one hand, the United States feels an immediate need to discipline the regime for its repeated missile launches under grounds that it threatens national security, and on another hand, the United States does not recognize North Korea’s nuclear program. Given this context, there is little room to consider tools of engagement.

There’s clearly no easy solution to the challenges posed by North Korea, and whatever the solution may be, it will consist of many steps. Over the long-term, I think slowly relaxing sanctions and pursuing quiet engagement with North Korea has greater likelihood of success. Putting aside political leadership and ideology for a moment, if North Koreans had an opportunity to engage in limited economic activities, it could create incentives. Economic development is already changing North Korea and might be its greatest motivation to come to the table to talk about change.

The United States has placed unilateral sanctions on other countries such as Iran, for example, which negotiated the 2015 nuclear deal, and Cuba, which saw opening and reforms in 2016. Do those cases provide lessons that could be applied to the North Korea case?

Iran, compared to North Korea, has a much larger population and holds a prominent position on the world’s stage. Sanctions on Iran carry weight because of the country’s economic ties across the world. That’s one aspect to keep in mind. Another is that Iran isn’t a totalitarian society. The government has to respond to its people to some degree. So, in general, there are more incentives that exist in Iran that could have influenced the decision to negotiate the 2015 Nuclear Deal.

As for Cuba, the case is also unique. The U.S. trade embargo that existed following the end of the Missile Crisis of 1962 lasted for decades not because of a continued existence of nuclear weapons, as in the case of North Korea, but I believe because of ideological issues that remained between two countries. Cuba wasn’t as isolated either, so it was able to conduct business with many countries during that time period. Sanctions have recently been lifted by the United States due to the passage of time and diplomatic efforts.

South Korean President Moon Jae-in and U.S. President Donald Trump recently held a summit in Washington, their first face-to-face meeting in a time of heightened tensions on the Korean Peninsula. Experts from the Shorenstein Asia-Pacific Research Center offered insights in a series of publications and press interviews.

In advance of the summit, William J. Perry Fellow Kathleen Stephens spoke on Bloomberg television about the challenges facing the United States and South Korea, and how those challenges would be prioritized during the bilateral meeting.

Moon would be bringing the message that the U.S.-South Korea alliance is a “strong one and that he remains committed to it,” and that, “only by working transparently and closely together” could the two countries address areas of concern, Stephens said.

“Only when Washington and Seoul are able to talk very frankly to each other and come up with a coordinated plan do we have any chance of making some progress on North Korea,” she added.

Stephens joined the program from Seoul, where a group of Shorenstein APARC faculty and fellows participated in a public seminar and the Korea-U.S. West Coast Strategic Forum, a biannual conference that seeks to foster dialogue about issues affecting the Korean Peninsula and the U.S.-South Korea alliance.

The seminar, held in conjunction with The Sejong Institute, received press coverage; such articles can be read on the Voice of America website (in Korean) and Sisa Journal website (in Korean).

In an analysis piece for Tokyo Business Today, Associate Director for Research Daniel Sneider assessed the outcomes of the summit between Moon and Trump, suggesting that their meeting was satisfactory – without signs of major discord.

“For the most part, this display of calculated pragmatism worked well. There was no visible daylight between the two leaders over how to handle the North and THAAD totally disappeared from the summit talk, at least in public and in the joint statement issued by the two governments.”

The summit, however, may prove to be a “temporary gain,” Sneider added. “Beneath the smiles, there was plenty of evidence of the gaps, and even the tensions, that exist between a progressive government in Seoul, one that echoes the views of its ideological predecessors of a decade ago, and a nationalist, conservative regime in Washington.”

Read the piece in English and Japanese.

Days after the summit, North Korea test-launched an intercontinental ballistic missile (ICBM), which the United States and South Korea followed by hosting joint military exercises.

Stephens spoke on WBUR radio about the ICBM test launch and the initial reactions of the Trump administration.

“If [President Trump’s] agenda is to take stronger defensive measures against North Korea, I think he will find strong partners in Japan and South Korea,” she said, noting that other measures, such as diplomacy and economic sanctions, have also been used to affect pressure on the regime.

Responding to a question about China’s relationship with North Korea, Stephens said Beijing has not exhausted all possible tools in its efforts to persuade Pyongyang to slow or abandon its nuclear and missile activities. This is because China fears a collapse of the regime and “takes a long view” in its calculus, she said.

This news item has been updated.

Countries like the Asian “tigers” that experienced rapid economic growth inevitably encounter slowdowns that signal a fundamental shift in their economies. At this juncture, transitioning their institutions and policies often proves to be a most daunting task. Cautionary comparisons like these set the tone for the conference titled “China’s Possible Futures” on May 12, 2017, when the China Program celebrated its 10th anniversary.

As China nears the end of four decades of reforms, “China’s Possible Futures” was a fitting theme to mark the China Program’s first decade at Stanford’s Shorenstein Asia-Pacific Research Center. The launch of the Program in 2007 began with an international conference titled “Growing Pains: Tensions and Opportunities in China’s Transformation,” which resulted in a book of the same title. This year’s 10th anniversary conference appropriately heralded both change and continuity of the themes that were explored in 2007. A decade ago, the conference showcased the tremendous reach and rise of China as an economic and international powerhouse, and in 2017, the conference expanded to highlight the critical juncture that China is again facing on its developmental path.

The full-day conference, held under Chatham House Rule, was divided into four sub-themes with speakers addressing China’s economic future; its political future; the future of its international relations and global economic engagements; and a comparative panel that examined China’s prospects from experiences drawn from Japan, South Korea and former Soviet and Eastern European countries.

Panel I: China’s Economic Future

Speakers agreed that China’s tremendous growth over the last 40 years has no easy parallels in history. Some argued, however, that the policies realized over the next few years will prove critical to China’s long-term growth. Favorable factors, such as demographic, migratory and structural changes supported by a stable international order, enabled China’s spectacular, double-digit growth over the last 40 years. When “miracle growth” countries of Northeast Asia – like Japan, Korea and Taiwan – entered their periods of moderate growth, however, painful readjustments were necessary. Restructuring was required because the very policies and institutions set up to enable rapid growth were counterproductive to creating a foundation for moderate, sustained growth. Speakers variously emphasized China’s need to invest in human capital and undertake financial reforms, urban-rural reforms and state-owned sector reforms.

In addition, several speakers noted that China is facing mounting demographic challenges as its population ages and as its elderly population lives longer. According to one speaker, people who are aged 60 and over in China will equal the population of people aged 0 to 14 within the next couple years; and by year 2045, the population of people who are 65 and older in China will be as large as the entire population of the United States today. This situation implicates rising costs in healthcare and calls for major institutional reforms in China’s health sector.

One speaker spoke of the rapid rise in China’s returns to education, i.e., the rise in income for each additional year of education, over the past four decades, which now looks more closely aligned with that of the international average of approximately 10 percent. Another speaker asked whether China was now pursuing a different developmental model with increasing focus on inland industrial development and explored what this might mean for social inclusion and labor conditions of workers.

Panel II: China’s Political Future

One speaker argued that Chinese President Xi Jinping’s reform agenda does not mark a break with the past, as many have argued, but rather continuity with his predecessors’ policies. Other speakers discussed the scope and scale of Xi’s corruption crackdown; fiscal imbalances in central-local state relations that underpin China’s corruption problems; and the implications of social media on Chinese governance. All speakers spoke about mounting difficulties in the political sphere, including powerful interest groups; local paralysis arising from corruption crackdowns; mounting local government debt and misalignment of central-local interests; and governance challenges stemming from the social media revolution. Overall, speakers seemed to suggest mounting difficulties for Xi’s reform agenda, which the Chinese government must push through to avoid a sharper downturn and slower growth prospects for China’s future.

Panel III: China’s International Relations and Global Economic Engagements

Speakers spoke at length regarding the history of U.S.-China relations since Deng Xiaoping’s “reform and opening”; territorial disputes in the South and East China Seas; China’s “Belt and Road” policy; and China’s outbound capital flows into various regions of the world. The speakers held varying views regarding Beijing’s motivations and intentions in the world, both militarily and economically. Speakers held different opinions about whether Beijing has a well-defined vision for its global role. One speaker questioned whether China’s maritime assertiveness in the South and East China Seas characterizes the expansionary policies of a rising power; or whether it represents something more singular as China protects what it considers its “core interests” in the region. One speaker expressed the view that the United States and the U.S.-led international order is still too important for China’s development for it to threaten its functioning in any meaningful way. Another speaker discerned a “broad brush strokes” of a developmental concept in China’s “One Belt, One Road” policy that the United States might do well to heed as it considers whether to join any parts thereof.

Panel IV: China’s Future: A Comparative Perspective

The conference also included speakers who provided comparative examples from Japan, South Korea, the former Soviet Union and Eastern Europe to inform their views on China’s “possible futures.” One speaker warned against directly applying Japan’s development model to China, warning that Japan experienced a massive credit boom and debt accumulation in the 1980s like China is experiencing today. Zombie firms were a key factor in Japan’s economic stagnation. As the speaker warned, zombie firms also proliferate in China’s economy. Another panel member highlighted Korea’s struggles to attract and retain global talent and drew lessons for China as it strives to escape the middle-income trap and build an innovation-driven economy.

Another panel member spoke of the key difference between China’s political environment in 1978 when Deng Xiaoping announced his “reform and opening” policy and today when Xi is implementing his Third Plenum decision of 2012. Vested interest groups are stymieing the implementation of urgently-needed reforms, especially in the state-owned sector and in China’s financial sector. In 1978, by contrast, the catastrophic results of the Cultural Revolution ironically enabled Deng to successfully champion and implement his agenda because bureaucratic interests had been gutted by Mao. The speaker spoke of the urgent need for Xi to change course in the next 3-4 years and use his personal power to push through tough, market-oriented reforms. Beijing’s leaders must not only craft correct policies and identify the most effective structural correctives, they must also break through the political logjam of entrenched interests that have benefited from the current system.

Panelists pointed to the increasingly difficult challenges that the government faces as China tries to avoid the middle-income trap after four decades of impressive gains and usher in sustained economic growth driven by innovation and domestic consumption. Speakers also agreed that the leadership is encountering a more complex and diverse society, a fractured elite, and the Gordian knot of economic and demographic predicaments, which require not only painful structural adjustments but also tremendous political will to realize policies that will ensure an optimal future for China.

Related links:

Brochure: Celebrating the First 10 Years of the China Program

Former ambassador reflects on US-China relations, Thucydides Trap