The New Cold War
America, China, and the Echoes of History
The North Korean nuclear crisis has placed a premium on the ability of sanctions to avert war, and the past two years have seen an important increase in U.S. and international sanctions against Pyongyang. Since the beginning of 2016, the United Nations Security Council has enacted five new resolutions that rank among the toughest such penalties the UN has ever imposed on any country—targeting the North’s sources of income and trade, and not simply entities directly involved in its nuclear program. The U.S. Congress and President Donald Trump’s administration also enacted important new sanctions last year, including a welcome move to begin imposing sanctions on Chinese companies that engage in commercial trade with North Korea. Just last week, the Trump administration strengthened these measures by imposing sanctions on more than a dozen North Korean financial and procurement representatives based in China and by targeting two Chinese companies that engaged in commercial business with North Korea.
These measures have had a notable effect, thanks in part to better Chinese cooperation to cut off key trade in coal and other minerals, South Korean shipping interdictions, and international financial vigilance. But for economic sanctions to force North Korean leader Kim Jong Un into making meaningful nuclear concessions, let alone to bring a change in North Korea’s leadership, the United States and its allies need a long-term strategy to constrain North Korea’s economy and make the sanctions bite.
The key to a successful sanctions strategy is recognizing that such measures take time to achieve results. Consider the case of Iran. U.S. President George W. Bush first began a campaign of international economic pressure against Iranian banks in 2006, and the UN and the U.S. Congress both enacted tough sanctions between 2010 and 2012. But it was not until 2013, after the economic isolation began to take its toll and lower oil prices hurt Tehran’s budget and reserves, that the regime was prepared for serious negotiations over its nuclear program. It would be another two years of talks before the Joint Comprehensive Plan of Action, the 2015 nuclear agreement, was signed.
To be sure, North Korean sanctions have also been in place for years. But until recently, the measures applied were limited and episodic in scope; the ability of North Korea to adapt to pressure and the lifeline of the Chinese economy had blunted the effects of this pressure. As a result, the now-amplified penalties will take time to fully impact North Korea’s economy and change Pyongyang’s strategic calculus. The Trump administration thus needs to map out a long-term strategy rather than one premised on achieving short-term results or reacting to near-term North Korean provocations.
A long-term sanctions strategy against Pyongyang has four pillars. The first is relentless enforcement—particularly of the new measures enacted in 2017—and making every effort to prevent circumvention of the sanctions.
The key to a successful sanctions strategy is recognizing that such measures take time to achieve results.
The popular portrayal of North Korea as a hermit kingdom has long been a misleading characterization, at least in terms of the country’s economics. The South Korean government estimated that in 2016, North Korea exported $2.8 billion worth of goods and imported $3.7 billion worth. This trade provides North Korea with both critical revenues and key economic and commercial imports, such as fuel, vehicles, machinery, and other equipment.
The UN and U.S. sanctions enacted over the past two years have the potential to cut deeply into North Korea’s economy. UNSC Resolution 2375, which was passed in 2017, for example, prohibits North Korean textile exports, a major revenue source. Indeed, in September the U.S. Mission to the United Nations estimated that the resolution, combined with other initiatives, bans 90 percent of North Korea’s exports by value. The resolutions also capped Pyongyang’s oil imports and prohibited foreign companies from participating in joint ventures in North Korea. This is why Pyongyang reacted so loudly to the imposition of these sanctions, calling them an “act of war.”
Sanctions, however, are only as effective as their enforcement. This point is particularly critical given North Korea’s well-documented history of using shell companies, middlemen, and evasive techniques such as money laundering to dodge international scrutiny. Indeed, Pyongyang is already working to circumvent the sanctions on oil imports by arranging offshore ship-to-ship oil transfers to mask its identity as the ultimate oil purchaser. Washington needs to continue to maintain an aggressive pace of designations and prosecutions against companies that violate North Korea sanctions in order to shut down illicit networks and deter would-be future violators.
The United States also needs to tackle North Korea’s growing use of cybertools and digital sanctions circumvention. Over the past two years, Pyongyang has mounted an aggressive, multifaceted campaign to use cybertools to hack banks, likely including stealing tens of millions of dollars from the Bank of Bangladesh’s account at the New York Federal Reserve Bank and from a bank in Taiwan. Pyongyang is also using ransomware and other cybertools to acquire cryptocurrencies to finance its operations. Although the dollar value of North Korea’s digital currency activities is likely small, Washington and its allies need to stop Pyongyang’s ability to evade sanctions through digital means before it becomes a major weakness in the global sanctions regime.
The second pillar of a long-term strategy for North Korea sanctions is integrating sanctions with other coercive economic and national security tools, including the anti-money-laundering tools established by Section 311 of the U.S.A. Patriot Act. Washington has already taken important first steps along these lines. The U.S. Treasury designated North Korea as a “jurisdiction of primary money laundering concern,” and last year the Trump administration imposed a Section 311 action on Bank of Dandong, a Chinese bank that was facilitating financial transactions for North Korea.
There is, however, room to do considerably more. The Trump administration should build on its previous actions by issuing a “class of transaction” Section 311 designation. With this action, Treasury would designate any North Korean financial and commercial transaction or activity as a class of transaction of “primary money laundering concern” and require specific enhanced due diligence, information collection, and reporting tied to any transactions touching North Korean activity. This would put the onus on financial institutions, in particular Chinese banks with exposure to the United States and Western banking systems, to determine if they have direct or indirect exposure to anything that touches North Korea. This in turn would increase pressure beyond the existing designations of North Korean banks and companies, whose names and affiliations may change.
Another important tool is increased information sharing with the private sector. In recent months the U.S. Treasury has taken an important first step by more frequently sharing its knowledge of suspected North Korean–linked companies with major banks in the United States and Europe. Treasury should expand on this step by joining with allied nations to establish a dynamic information sharing mechanism with key private sector actors, including banks, shipping companies, and other key global industries. For example, the Treasury should launch a formal public-private partnership against North Korea’s illicit trade that would regularly convene key corporate stakeholders from different industries and different allied countries to share information and analyze trends.
Washington and its allies should also combine these forms of pressure with a more aggressive interdiction strategy—building on the Proliferation Security Initiative that has made it easier for the United States and allied countries to board ships suspected of carrying WMD components and provisions of UNSC resolutions tied to interdiction of suspect vessels. The strategy should make clear that Australian, Japanese, South Korean, and U.S. naval vessels will be targeting suspect shipments moving in and out of North Korea. Given the proliferation risks of a regime willing to share and trade in missile, nuclear, and other prohibited technologies, a more robust and consistent effort on this front is necessary.
The third pillar of a long-term sanctions strategy on North Korea involves China. Chinese-North Korean trade increased tenfold between 2000 and 2015, and China likely accounted for 90 percent of North Korea’s external trade in 2017. Chinese exports to North Korea increased during the first part of 2017, even as China’s imports from North Korea fell following the new UN sanctions. Changing Pyongyang’s behavior requires Beijing exerting more coercive influence than it has in the past.
Chinese and U.S. interests with respect to North Korea have never aligned neatly—with China worried more about instability on its border than nuclear development—and it is no surprise that China has been reluctant to cut off trade with its neighbor, including in oil. Nonetheless, there are several steps that Washington can take to increase China’s cooperation without having to directly confront Beijing.
U.S. officials should emphasize compliance with UN Security Council obligations, a class of sanctions China has long stated it accepts even while denouncing U.S. sanctions as illegitimate. Publicizing photos and other evidence of evasion, like North Korea’s ship-to-ship oil transfers, can shame China into greater compliance. But the United States will also need to be prepared to increase pressure in ways that will ultimately change China’s strategic calculus. China needs to understand that the costs it will face by allowing North Korea to continue on its current path outweigh the costs of taking a harder line with Pyongyang.
Recent U.S. sanctions on Chinese companies doing business with North Korea represent a solid start. But the companies sanctioned to date likely had limited exposure to the United States and sanctions are unlikely to have major economic costs for China. U.S. officials need to make clear that they are prepared to target large Chinese banks and companies that are heavily connected to the United States and the U.S. financial system if China does not fully enforce UN sanctions on North Korea and push its neighbor toward denuclearization. Chinese legitimacy and its economic health are core interests for Beijing that have never been put at risk because of North Korea.
In this regard, Washington should also create and announce task forces that will focus intelligence, law-enforcement, financial, and regulatory attention on the corruption, human rights violators—including the networks supporting North Korean forced labor around the world—and cybernetworks that North Korea relies on to run its system. These areas touch and affect China indirectly and directly and often cut to the heart of Chinese interests. These task forces can complement U.S. sanctions regimes already in place to focus on these issues, including the Global Magnitsky Act, which authorizes the Treasury Department to sanction individuals involved in corruption and human rights violations, and Executive Order 13757, targeting malicious cyberactivity and networks. China must understand that U.S. and international pressure and presence will only increase over time, as the risks from North Korea, such as proliferation, persist.
The Trump administration must also deter other countries from propping up North Korea. In 2017 there were troubling signs that Russia was quietly increasing its support for Kim, including by facilitating illicit North Korean coal exports and by covertly providing oil to North Korea. Washington needs to make clear that Moscow will face punishing costs if this trend continues, including more aggressive sanctions against the Russian government officials and ministries involved in supporting Pyongyang.
The final pillar of a long-term sanctions strategy against North Korea is ensuring that the measures have adequate time to work.
The recent sports diplomacy between Seoul and Pyongyang and the announcement that North Korea will participate the 2018 Olympics and march together with South Korea under a unified flag during the opening ceremonies represents a valuable reduction in tensions and should ensure that Pyongyang does not engage in a provocation during the Olympics next month. But it is vitally important that the international community maintain the economic pressure on North Korea until it actually makes concrete nuclear concessions. In the past, Pyongyang has used diplomatic gambits to seek a reduction in pressure without having to concede anything meaningful, a strategy that has allowed it to avoid truly punishing economic consequences. Sanctions pressure is just beginning to bite and a quick move to unwind would cost the United States, South Korea, and other allies vital leverage. Giving up such leverage too quickly or downplaying the effect of sanctions to achieve sustainable concessions has been a repeated failure of Washington’s economic statecraft.
The Trump administration will also need to find ways to slow North Korea’s nuclear tests. Given the rapid advances in its nuclear and ballistic missile programs, North Korea may perfect a nuclear device capable of hitting the United States prior to buckling under crippling economic pressure. The United States and its allies need to continue aggressive efforts to slow the North’s nuclear progress and to continue readying its military capabilities in a bid to deter further North Korean provocations. This will signal to China as well that the time for them to influence Pyongyang is now. Every month that Washington can slow North Korea’s nuclear progress is another month for the economic pressure of the sanctions to build.
North Korea’s nuclear program represents potentially the greatest national security challenge the United States faces today—one that will require the effective deployment of all types of national power. Done effectively, a long-term sanctions strategy has the potential to be a central element of a peaceful solution. In recent memory, sanctions and financial pressure often have been misunderstood and underestimated in their ability to achieve diplomatic results. Now is the time for urgency in the attempt to change behavior and avert war.