By Travis Lindsay
China’s active involvement in the passage of UNSCR 2270 demonstrates a shift in its calculus on the Korean peninsula. The Chinese government had long softened the impact of international censure on the Kim regime, either watering down or outright blocking UN resolutions that looked to castigate or materially damage the government in Pyongyang. Signing on to the toughest North Korean sanctions bill in history shows that Beijing’s patience may be wearing thin.
A real question exists, however, of exactly how large this shift in policy is. Is the Chinese government only signaling its disapproval to Pyongyang, or is it actively punishing the regime? Or perhaps it’s a little of both: the passing and initial enforcement of UNSCR 2270 is a warning to the Kim regime that it is crossing certain red lines for Chinese policymakers, and comprehensive enforcement may follow if the DPRK remains incorrigible to external pressures.
The first step to demystify Chinese intentions is to answer the question of enforcement. Have the Chinese implemented, either wholly or partially, the sanctions outlined in UNSCR 2270? There are many metrics and litmus tests by which we can attempt to find an answer. We’ll examine a few of those, and see what consensus (if any) they present.
The easiest window into viewing a closed society like North Korea is the great eye in the sky: satellite imagery. Geospatial intelligence gathering has been a key part of North Korea watching for decades, and Korea watchers everywhere can’t help but be fascinated every time eagle-eyed analysts determine the DPRK may be about to test a nuclear device or angrily fire missiles into the sea.
Satellite imagery has also been applied to industrial analysis, where it has been able to build consensus on the fate of the Kim Chaek iron and steel complex. Imagery analysis was able to temper media accounts that the complex had shut down, leading to a more accurate middle ground that the complex was running below capacity instead of being closed outright.
Trying to apply this approach to trade relations between China and the DPRK, however, is a much more difficult task. Two main impediments to this approach exist. The first stems from the type of prohibited goods, which includes both minerals and (vaguely defined) luxury goods. Trying to spot whether a luxury goods ban is being enforced from space is challenging. It is much easier to spot, track, and analyze coal shipments on North Korean roads and railways than it is to find a bottle of cognac and a Rolex stuffed away in a smuggler’s suitcase. If satellite imagery is going to play an important part in UNSCR 2270 verification, it is best placed to handle the mineral and natural resources side of the sanctions equation.
This is where the second impediment presents itself. In order to reach a clear conclusion on Chinese enforcement, satellite imagery would need to have captured a clear and continuous assessment of Chinese-DPRK trade at pre-sanctions levels to establish a benchmark. Then, it would need to capture comparable data (preferably during the same time of year) to estimate trade post-sanctions. Along with imagery data going back further to establish any larger trends over time, it would be possible to build a satellite imagery based model that could give us a clear answer as to how trade has been affected in the wake of 2270.
The primary limitation to this approach is resources. While we understand the process and methods to analyze satellite imagery, there are finite geospatial resources chasing a great deal of intelligence and national security needs. For national security officials, monitoring a port for nuclear submarines in the South China Sea might be a higher priority than monitoring cargo containers on their way to the DPRK-Chinese border.
Just Look at the (Chinese) Numbers
Rather than gathering expensive satellite imagery, a more straightforward option would be to look at North Korean trade data. This approach faces one major obstacle: North Korea does not publish or disseminate trade data. Instead, trade statistics are gleaned by looking at bilateral trade data released by the DPRK’s trading partners.
With China being responsible for upwards of 90% of the DPRK’s trade, this basically means that the world relies almost exclusively on Chinese reporting to derive North Korean trade numbers. While the Chinese government has for the most part reported consistently over the years, it has had the habit of making its crude oil trade with the DPRK disappear from its statistics entirely or at times has simply decided it doesn’t want to report its trade data anymore.
Looking at China’s most recent trade data, we see a decline in year-on-year total trade value in April 2016 from April 2015, with specific decreases in North Korean exports to China. Total North Korean exports to China have declined in value 22%, a decrease that is largely being pushed by a nearly 40% decrease in coal exports by value.
Those numbers aren’t necessarily the smoking gun they appear to be. Trade had begun to drop in 2015 for the first time in half a decade, meaning that the current drops we’re seeing could be part of a larger trend pushed by falling commodity prices. DPRK-Chinese trade increased precipitously in the first quarter of 2016, possibly a sign that the market anticipated sanctions and front loaded coal shipments. Chinese environmental policy may be pushing an overall shift away from coal burning electric plants. And finally, those dropping commodity prices translate to coal trade only declining 20% when measured by volume.
Three other factors put the Chinese numbers method on shaky ground. While none of them are necessarily disqualifying on their own, or even when taken together, they do have the effect of making the use of Chinese numbers potentially unconvincing for sanctions enforcement skeptics. First, there is suspicion within parts of the U.S. policymaking community that China has a tendency to misreport macroeconomic data, specifically in regards to its GDP; why would they be truthful in reporting trade data that would be a violation of a UN resolution they helped craft and voted for? Second, Chinese enforcement relies in part on self-reporting of whether materials violate 2270, which creates major incentive for merchants to lie or mislead about what they’re shipping. Finally, the language of the resolution allows for trade of goods that are “exclusively for livelihood purposes” – an elastic clause that could give the Chinese government maximum flexibility in choosing the degree of sanctions enforcement. The Chinese government could conceivably justify complete non-enforcement of sanctions and still be within the letter of UNSCR 2270, giving the government a convenient fall back if it was caught misrepresenting its trade numbers.
Unfortunately, there just isn’t enough data using Chinese statistics to draw a clear picture of whether enforcement is happening or not. While we can point and say that it seems trade (in coal in particular) is declining, these could be blips in overall trade flows or the result of market and policy forces completely separate from a sanctions enforcement mechanism.
But The Market Might Know Best
A more elegant measurement of sanctions enforcement stems from fairly basic macroeconomic theory. As championed by UCSD School of Global Policy & Strategy’s Steph Haggard, any sort of meaningful enforcement or threat of enforcement by the Chinese should have noticeable effects on either the black market currency exchange rate or domestic prices within North Korea. Looking at market data from Daily NK, we can see that there has been no major movement in either category. The exchange rate has stayed mostly consistent around 8,200 won to the dollar, and rice prices have remained consistent at roughly 5,000 won per kilo.
There are some arguments we can make to explain why China may be enforcing sanctions without having an effect on prices or exchange rates, but most are tenuous or require logic too convoluted or circumstantial to be convincing. Even if some scenario of elite donju and political class collusion leads to an attempt for the DPRK central bank to defend the won, it certainly does not have the capital reserves necessary to defend it for long, if at all. Or perhaps North Korea could be doubling down on illicit activities, including printing counterfeit dollars – but tens of billions of dollars in illicit activity coming online in such a short period of time seems both implausible and unsustainable.
Without a compelling alternate explanation, it seems that macroeconomic indicators push us toward a simple answer: China is not enforcing UNSCR 2270 in a way significant enough to affect the North Korean economy. The complete lack of exchange rate movement in the direction one would expect seems to indicate that markets don’t think there will be any enforcement in the future either.
Markets aren’t perfect, and dealing with North Korea’s black market (even though it’s not as dark and mysterious as we might think it is) might mean it takes more time for shocks and risk to filter through the system. Or, fledgling financiers in North Korea may know something we don’t about Chinese motives and intentions when it comes to all this UNSCR 2270 business.
Judging by all three metrics, the number one thing we seem to need is more time and more data – more satellite images, more trade numbers released, and more time to see how markets react.
As it stands, an easily identifiable consensus on sanctions enforcement does not exist. The imagery method faces serious resource limitations. Chinese trade data may lead us to believe that there is movement towards enforcement, but there are other explanations that could also explain the changes in the balance of trade. The macroeconomic indicator method, on the other hand, suggests sanctions are not being enforced. On balance, it does seem that the evidence stacks slightly in the favor of one conclusion rather than the other. You can be the judge of which.
Travis Lindsay is an intern with the Korea Economic Institute and a graduate student at the UCSD School of Global Policy & Strategy. The views expressed here are the author’s alone.
Photo from Roman Harak’s photostream on flickr Creative Commons.