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Reaching Out to Touch North Korea: The Sanctions Debate and China

While the UN Security Council debates the scope and strength of a new resolution condemning North Korea's May 25, 2009 nuclear test, two main questions have come to the fore: what will China do and can sanctions work? The policy debate over the UN Security Council statement and North Korea's response to the UN Security Council action following last month's missile test provided a dress rehearsal for this round of discussions. Marcus Noland's January 2009 article in Asia Policy reviews the implementation of the 2006 UNSC Resolution 1718 condemning North Korea's first nuclear test. In that article, he concludes that North Korea "appears to have calculated correctly that the direct penalties to its foreign trade for establishing itself as a nuclear power would be modest."

I argue in my new book, China's Rise and the Two Koreas: Politics, Economics, Security, that China has assumed that its political and security leverage would grow as a result of economic interdependence with both South and North Korea, but North Korea's 2006 and 2009 nuclear and missile tests prove that China's reliance on incentives to influence North Korean behavior was a miscalculation.

Despite a dramatic increase in trade relations with North Korea and regular high-level political contacts with North Korea since 2003, China has been unable to enhance its political influence over North Korea on issues decisive to China's national security. China's trade with North Korea has increased by over 40 percent year-on-year to $2.793 billion in 2008, but China's economic influence was insufficient for North Korea to refrain from conducting a second nuclear test. Only after North Korea's 2006 nuclear test did China begin to consider economic sanctions to be a potentially effective tool for influencing North Korea.

Views of Chinese analysts on sanctions are taken up in recent articles by both The Washington Post and Los Angeles Times. Both reference a recent Global Times survey that shows Chinese analysts are split down the middle on the idea of tough sanctions against North Korea. In the past, most Chinese analysts have remained dubious about the effectiveness of sanctions and have expressed worries that imposition of sanctions would only expand the problem by inducing instability and flows of refugees into China, so this result suggests a gradual shift in the direction of willingness to consider sanctions as a tool for dealing with North Korea.

What about so-called "smart sanctions," which might have the ability to target North Korea's leadership while diminishing destabilizing effects on the North Korean population, thereby mitigating the risk of stimulating refugee flows to China? In Smart Sanctions: Targeting Economic Statecraft, David Cortright and George Lopez studied cases from the 1990s in which "smart sanctions" on financial and commodity transactions, arms trade, and travel "that target coercive pressure on decision-making elites" were used to influence the behavior of target states while minimizing collateral damage to their populations. EU and American financial and travel sanctions in combination with encouragement to civil society opposition within Serbia are regarded as the model for application of smart sanctions. But with North Korea, there is no civil society to speak of and the elite travels relatively rarely. Also, such an approach clearly requires cooperation from China as a prerequisite for success.

Sanctions Scenarios and China's Response

The possibilities under which China might pursue sanctions can be broken down into three possible situations: a) sanctions in cooperation with a U.S.-led regime, b) sanctions under the rubric of the UN system, c) bilateral sanctions in which China uses tools at its disposal to pursue its own interests. The two specific reference cases that have shaped China's consideration of smart sanctions are China's response to the U.S. Treasury's designation of Banco Delta Asia (BDA) as an entity suspected of facilitating North Korean money laundering and counterfeiting in a September 15, 2005, announcement under the U.S. Patriot Act, and Chinese actions following North Korea's 2006 nuclear test.

China's response to the application of the U.S. Patriot Act to the Macao-based BDA was instructive. In response to the U.S. Treasury's advisory, Chinese bankers and financial officials had no choice but to cooperate in implementing a freeze on BDA assets and to implement their own internal efforts across the Chinese banking system to ensure that North Korean banking activities were not suspect. China has an enormous stake in maintaining the credibility of its own banks as part of the international financial system.

As a result of the U.S. Treasury's designation, the North Koreans could not open new bank accounts abroad and almost all financial transactions between North Korea and the outside world had to be conducted by cash or barter. U.S. officials reported that their North Korean counterparts admitted in private conversations that the U.S. Treasury actions were hurting; but North Korea's response was essentially to freeze all negotiations until the United States lifted the advisory and took extraordinary measures in the summer of 2006 to return the money to North Korea.

China also went along with sanctions under UNSC Resolution 1718, authorized sanctions against North Korea's trade in nuclear and missile components, large-scale conventional weapons, and luxury goods, but the international coordination process to implement those sanctions was slow, and China was never in a position in which it became necessary to implement such sanctions. Without China's cooperation, implementation of any UN-led sanctions regime is likely to be ineffective.

Taking a cue from China's own BDA experience, there are reports that immediately following the 2006 North Korean nuclear test, Dandong-based Chinese banks temporarily implemented financial sanctions unilaterally. Some speculate that it was these measures that really catalyzed North Korea to renew its promises to participate in the six party talks within weeks of the test.

Leading Chinese analyst Shi Yinhong's assessment in the most recent issue of the Korean Journal of Defense Analysis reinforces the idea that China prefers unilateral sanctions: "China's financial or economic pressure should have been unilateral rather than collaborative with the United States or any other country, unpublicized rather than publicized by other parties, and paralleled by China's pressure on the United States for changing its rigid stance toward the North Korean nuclear issue, rather than only exerting pressure against the DPRK. However, China did precisely the opposite when it supported economic sanctions in 2005."

But past studies show that for international sanctions to be effective, they must be applied multilaterally and rapidly (versus unilaterally and gradually). This suggests that China's preferred approach to sanctions is a prescription for ineffectiveness, and is likely to be the stumbling block moving forward. But it is also doubtful that China is willing to risk the costs of non-cooperation with the U.S. Treasury, in the process damaging the credibility of China's own banking system, for the sake of North Korea. Of course, this assumes that the U.S. Treasury still has sufficient credibility to lead an effective response in safeguarding the international financial system.

Ultimately, effective U.S.-China cooperation on North Korea may require a shift in China's overall strategic perspective regarding North Korea. If China abandons the false choice between stability and denuclearization in North Korea and embraces the recognition that a nuclear North Korea under the current leadership is inherently destabilizing, then China will be asking the United States for help in solving its North Korea problem, rather than the United States pursuing China as the key to a solution on the Korean peninsula.

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