Cause for optimism? Financial sanctions and the rise of the Sino-North Korean border economy

ABSTRACT

This article critically engages with recent arguments that financial sanctions are capable of overcoming the shortcomings of traditional trade sanctions as well as more targeted ‘smart sanctions.’ Much of the existing analysis of financial sanctions cites as evidence of their success the case of the US Treasury's 2005 accusations against Macao's Banco Delta Asia of facilitating North Korean money laundering. We argue, however, that analysis of the broader impact of financial sanctions on North Korea's principle bilateral economic relationship, namely the Sino-North Korean border economy, reveals that such measures have merely served to increase the scope of evasive economic activity. In particular, financial sanctions have meant that methods of trade settlement in the border economy are based primarily on cash and barter, with minimal recourse to the official banking system. This raises questions not only regarding the effectiveness of financial sanctions but also the degree to which they serve to provoke counter-responses that actively undermine the broader objectives pursued by sender states. Through examining the case of Sino-North Korean border economy, this article contributes to a more comprehensive understanding of the shortcomings of financial sanctions as a tool of foreign policy.

KEYWORDS:

• China
• North Korea
• sanctions
• trade
• border economy
• financial regulation

Acknowledgments

The authors would like to express their gratitude to three anonymous reviewers as well as the participants in a panel at the Joint East Asian Studies Conference at the School of Oriental and African Studies, London, September 2016, for valuable and constructive feedback on earlier drafts of this article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This analysis is based in part on field research in China's north-east cities of Dandong, Shenyang, Yanji, Hunchun and their neighbouring regions between 2009 and 2016, involving in-depth semi-structured interviews with Chinese business people engaged in trade and investment with North Korea, and several Chinese government officials and researchers. The identities of the interviewees have been kept confidential due to their concerns regarding potential negative repercussions vis-à-vis both the Chinese and North Korean authorities.

2. For a detailed account of US sanctions against North Korea, see Chang (2003) and Lee and Choi (2008).

3. For UN documentation on Security Council Resolutions, see http://www.securitycouncilreport.org/dprk-north-korea/index.php?page=1

4. These figures include inter-Korean trade and are drawn from statistics released by the Korea Trade-Investment Promotion Agency (KOTRA) and the Ministry of Unification. It should be noted, however, that since 2010, inter-Korean trade has been centred around the Kaesong Industrial Complex and consists mainly of the inflow of raw materials and outflow of CBP-based figures, thereby elevating the trade figures.

If inter-Korean trade is excluded, China’s share in North Korea's foreign trade was estimated to reach 89.1 per cent in 2013, while further rising to 90.1 per cent in 2014 and 91.3 per cent in 2015.

5. In 2015, China's recorded total share of North Korea's external trade seemingly declined to 63.7 per cent, though this is closely related to the fact that Chinese Customs stopped recording crude oil exports to North Korea in 2014. With the closure of the Kaesong Industrial Complex and thus all North–South trade, China's share of North Korea's total external trade is likely to increase significantly in 2016.

6. Interviews with Chinese firm owners engage in trade business and CBP (November 2012, March 2013 and July 2016 in Dandong and Shenyang).

7. Interviews with local government officials, Dandong City, November 2012.

8. Interviews with the managing staff of several trading companies in Dandong, November 2012 and July 2016.

9. Interviews with local government officials and merchants based in Dandong, June 2009 and November 2012.

10. Chinese merchants and trade agents interviewed in both Yanji in Jilin province and Dandong in Liaoning province discussed these lax customs inspections and informal customs practices during in-depth interviews. The loading of undeclared goods and equipment onto the vehicles is also frequently carried out by owners and staffs of Chinese firms investing in North Korean mines and engaged in CBP-based clothing manufacturing in North Korea.

11. Based on interviews with Chinese merchants in Dandong, November 2012.

12. In the 2000s, the North Korean government reportedly opened representative offices of North Korean banks in several Chinese cities, including Beijing, Dalian and Shenyang, as well as in key border cities. In Dandong, representative offices were opened by Kwangson Bank, Hana Bank, Korea United Development Bank and Koryo Bank. For example, Kwangson Bank, an affiliated financial institution of North Korea's Foreign Trade Bank, reportedly established its representative office in Dandong in 2002. The function of its Dandong office was expanded to mainly dealing with trading companies and merchants in Chinese border regions in the mid-2000s following the US Treasury's action against the BDA in Macao. The Pyongyang government also established the Golden Triangle Bank in North Korea's Rason SEZ as well as a representative office in Hunchun, Jilin province, as a means of promoting Chinese investment into the zone.

13. Interviews with Chinese merchants engaging in trading business with North Korea on several occasions in June 2009, April 2011 and November 2012.

14. Chinese intermediaries are individuals who reside in Chinese bordering regions and work for North Korean trading companies or government agencies. These intermediaries often engage in cash transfers between Chinese importers and North Korean firms, and by doing so, receive a commission.

Additional information

Funding

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea [grant number NRF-2016S1A5A8020098].

Notes on contributors

Jong-Woon Lee

Jong-Woon Lee is an assistant professor in international development at Far East University. Before moving to his current academic position, he worked as a senior researcher at the Korea Institute for International Economic Policy, South Korea’s flagship research institution. His recent work has appeared in such journals as World Development, Development Policy Review, Development and Change, The Pacific Review, and North Korean Review.

Kevin Gray

Kevin Gray is a reader in international relations at the School of Global Studies, University of Sussex. He is the author of Korean Workers and Neoliberal Globalisation (Routledge, 2008), Labour and Development in East Asia: Social Forces and Passive Revolution (Routledge, 2015). His work has appeared in New Left Review, Pacific Review, New Political Economy, and Third World Quarterly.