Foreign Policy Magazine
Two more rounds of United Nations sanctions against North Korea have been passed since the beginning of August, with restrictions or total bans on North Korean exports of iron, coal, lead, seafood, textiles, and labor, and on North Korean oil imports. The hope is these measures will bring North Korea to its knees, or at least to the negotiating table.
That’s fanciful. While North Korea will undoubtedly feel some pain, an economic collapse from sanctions is not going to happen, because the North Korean economy has evolved to withstand — and even thrive under — precisely such hardships.
It would be going too far to suggest that North Korea is booming under sanctions — there is extensive malnutrition, especially outside of Pyongyang, much of the internal transportation network is nonfunctional, and the famous satellite images of North Korea at night suggest that electricity remains a luxury in the countryside. Yet, according to the South Korean central bank North Korea’s formal economy grew at 3.9 percent last year, Pyongyang is experiencing a building boom, and North Korea somehow funds its current account deficit with China every year.
This is partly because, despite its international reputation as the Hermit Kingdom, North Korea is not actually that isolated. North Korea has long been a political pariah, engaging in provocative acts that undermine its position in the international community, but economically it has survived by plugging itself into the global economy in creative ways, and in building surprisingly strong trade networks with the outside world. North Koreans, from the bottom of society to the very top, are some of the more capable entrepreneurs in the world.
As a consequence of the great famine of the 1990s, when society was brought to the point of collapse and citizens were left to fend for themselves, North Korea has developed into a country where everyone is essentially out to make money by almost any means necessary to survive. Nearly every organization in the country — whether government or private — is a revenue-generator in some way and has evolved to evade sanctions, the North Korean government, the Chinese government, or all three.
At the top, the central state firms that are the target of U.N. sanctions because of their involvement in selling weapons overseas, and in bringing in components for the country’s weapons of mass destruction programs, have developed sophisticated methods of evading sanctions, including networks of ever-changing front companies with fake registrations, multiple bank accounts, and vague or misleading documentation.
North Korea’s diplomatic outposts around the world have become the locations for front companies and brokers for clandestine businessmen and shady deals. Perhaps most importantly, they have managed the impressive feat of getting non-North Koreans to evade sanctions for them. Foreign companies manage nearly all buying and selling and handle the logistical chain around the world up to the North Korean border, so that the North Korean role is impossible to track without extensive investigations. North Koreans themselves are left only with the task of figuring out how to transfer money and pick up or send off the goods at the border.
At the bottom, North Koreans have built up small private, unregistered businesses, buying and selling wares in private marketplaces and engaging in their own foreign trade, largely with China and South Korea. In North Korea, everything is for sale, including status as a state company: Because North Korea continues to ban private enterprise, private companies masquerade as state-owned companies, with the original owner being hired as a manager by the cooperating state official, and thereby gain political protection for a fee and a cut of the profits.
North Koreans also have built strong smuggling networks, with the tacit consent of North Koreans and Chinese, businesses and government officials alike. Together, they have developed a range of means of getting goods across the China-North Korea border. Boats cross the Yalu and Tumen rivers in the summer, and trucks drive across the ice in the winter, as paid-off border guards look the other way. At sea, Chinese smugglers meet their North Korean partners in international waters to make exchanges. These smuggling networks operate with the tacit consent of North Koreans and Chinese, businesses and government officials alike. One smuggler we talked to had an agreement with local Chinese officials to allow a percentage of his goods to be captured during periodic smuggling crackdowns, so as to allow him to continue to operate, and the officials to meet the quotas imposed by their superiors. Meanwhile, otherwise legitimate traders regularly conceal smuggled items in legitimate shipments through checkpoints, in hopes that the illicit goods can make up for the prohibitively high costs of doing business in North Korea.
Ironically, the networks behind smuggling between North Korea and China are efficient because North Korea is, formally, such an economic basket case. Based on research I conducted with Yaohui Wang at the University of Kansas, much of North Korea’s trade in minerals, textiles, and seafood was already being smuggled, even before the imposition of sanctions on those goods. This is largely because of the political and legal deficiencies that have long hampered North Korean markets. Many traders prefer smuggling, regardless of any sanctions, because it allows them to minimize the impact of North Korea’s political instability. The North Korean government has always been prone to sudden and damaging policy reversals — the 2009 currency reform, in which North Korean won were overnight made worthless, is an example. But Kim Jong Un, with his extensive purges of potentially disloyal officials and constant reshuffling of trade and border security personnel, has intensified Pyongyang’s capriciousness.
In our research, we found that traders smuggled seafood because it would spoil if they actually waited to go through the border checkpoint, clear customs, and deal with corrupt North Korean bureaucrats. Traders smuggled minerals (North Korea’s main formal export until recently) because the state companies with access to minerals were not always authorized by the North Korean government to sell it. Traders smuggled food and prescription medicine into North Korea to willing buyers because the North Korean government controlled and limited the population’s access to food and medicine. They smuggled gold out of the country into China because North Korean businessmen and officials wanted to build up foreign reserves in case they needed to flee the country at short notice. And this smuggling is extensive. One trader told us that he estimated 70 percent of the trade through Dandong, the main Chinese city on the North Korean border, was smuggled.
Perhaps the most surprising thing about all of this is that North Korean business activity succeeds despite the North Korean government, not because of it, and yet the North Korean government has found a way to profit from activities it officially tries to suppress. To do business in North Korea, regardless of legality, requires paying off officials with bribes and a cut of the profits in order to ensure political protection. Those officials, who have to exploit their positions and engage in side businesses to survive themselves, in turn pay off their own superiors, and so on up the chain to Kim and his associates.
As a result, in addition to having adapted to get around sanctions, the North Korean government has revenue streams outside of those closed off by sanctions. There are political consequences for how North Korea’s economy has developed: Kim could be willing to engage in behavior that provokes sanctions in part because he is confident that his income will not entirely dry up, and that North Koreans will find ways to survive no matter how tight sanctions get.
North Korea is adaptable, but not infinitely so, and China has taken some steps to make it more difficult for North Korea to get around sanctions. Hundreds of North Korean trading companies have set up shop in the border region of China as a way of dealing with their Chinese counterparts without the hassle of being in North Korea. China’s recent move to end China-North Korea joint ventures, encourage Chinese firms to leave North Korea, and kick out North Korean firms from China, if enforced, has the effect of ending this ploy to get around North Korean dysfunction.
While Chinese border officials have generally been blase about smuggling into North Korea, and even smuggling into China as long as the smugglers don’t try to move drugs or weapons, this laxity can always end. Reports from Chinese businessmen in the past month indicate that smuggling networks, and the private North Korean markets that they supply, are struggling as China has cracked down on all trade, at least temporarily.
But given how robust the trade networks are, it would take both China and Russia cutting off formal trade entirely across their respective borders and physically guarding the entire land border (including in mountainous areas) to stop smugglers — plus patrolling their waters to ensure that ships did not enter or leave North Korea with cargo. In short, it would require an embargo.
While China has gone further than ever before in punishing North Korea with the latest rounds of sanctions, its goal with sanctions is not to push North Korea to collapse but to signal displeasure with North Korea’s path and to bring the wayward country back to talks. In our research, we found little love for the North Korean regime from Chinese businesspeople and government officials on the ground in the border area. But those grassroots feelings make little difference to Beijing. Cutting off North Korea entirely would require a genuine strategic change from China’s central leadership, which has so far not been forthcoming.