Washington sounds ready for a trade war with Beijing over North Korea

Just as our diplomacy with Pyongyang has always failed because we were unwilling to induce a regime-determinative economic or political crisis there, our diplomacy with Beijing over North Korea (and other differences) has always failed because we were unwilling to attach a high enough cost to its willful support for Pyongyang’s proliferation. As Professor Lee put it, Beijing will not enforce sanctions against Pyongyang “unless the costs become unbearable on China.”

A trade war, needless to say, would hurt both the U.S. and China. But for several reasons, I believe it would hurt China more. China is an export-oriented economy whose rising wages and high corruption no longer make it a manufacturer’s ideal venue. In the short term, a trade war would disrupt global markets and spur inflation. Manufacturers would pass those added costs on to consumers, and the result would be inflation. In the mid-to-long term, manufacturers might shift more capacity to Taiwan, Vietnam, Thailand, Malaysia, or Mexico.

A mass migration of manufacturing from China would threaten its stock market, housing market, and banking sector. It could depress China’s growth rates below the level needed to pay its pensions. China’s banks also have a notoriously high debt load, much of which is linked to an inflated real estate market. Its stock market is probably also held up, in large part, by intervention by state-controlled banks. And when China holds its ruling party congress this fall, Xi Jinping will want not distractions to interfere with his installation of cronies in key positions or the extension of his own rule. Thus, while I pray that the rising talk of war in Washington is a bluff — and that it will stop — I hope recent trade threats against China, which are implicitly or explicitly tied to North Korea, are sincere.

One of those threats is to invoke section 301 of the Trade Act of 1974, against Chinese manufacturers that steal or rob U.S. manufacturers of their intellectual property. Section 301 authorizes the U.S. to “to deny U.S. trade benefits or impose import duties in response to foreign trade barriers.” 

Democrats are also pushing for a harder line. Senator Schumer is calling on the President to direct the Committee on Foreign Investment in the United States to disapprove Chinese investments in certain industries that are deemed vital to U.S. national security, and where it has the authority to disapprove foreign acquisitions. Schumer is explicitly linking that threat to China’s non-cooperation on North Korea.

Sections 314, 315, and 321 of the KIMS Act give the President other economic weapons against China, to say nothing of those in section 104 of the NKSPEA.

I have long said that our relations with Beijing and Pyongyang will have to get worse before they can get better. I don’t deny that all of these things would have serious and adverse economic impacts on the United States. But compare them to the humanitarian and financial cost of another Korean War, or any of these consequences, and suddenly, the economic costs of a trade war don’t seem all that bad.

~   ~   ~

Update: This Wall Street Journal story says that the White House has delayed plans to take Beijing on over trade because it still hopes to gain Beijing’s cooperation on North Korea. Similarly, this Reuters story says that the U.S. held off on additional secondary sanctions against Chinese banks (which had been the topic of rumors) in the hope that China will enforce UNSCR 2371. Now obviously, it’s much better if we don’t have to use these threats to get Bejing’s cooperation, but for obvious reasons, I’m skeptical.

Continue Reading

For Beijing, a sharper choice on N. Korea: accord and prosperity, or discord and chaos

Writing in Foreign Affairs this week, Zhu Feng sketched out a vision of the thinking in Beijing from the perspective of a person more reasonable than Xi Jinping has been, so far. Zhu’s piece suggests the outlines of an agreement with Beijing to defang Kim Jong-Un and manage North Korea’s transition to peace. Alas, Zhu Feng is not in charge in Beijing, and Xi Jinping is. Suspend your paranoia that this essay is only an artifice to persuade us that Beijing will be reasonable, if only we stay our hands on secondary sanctions another year or two (years we no longer have). The piece is well worth reading in its entirety, if only for what it tells us about the thoughts of those in Beijing whose influence we should seek to weaken or strengthen, and whose fears we should seek to exploit. 

In this regard, Trump needs to understand the complexity of China’s thinking on North Korean policy. Getting China to take more responsibility on North Korea requires both a gentle and a hard push. The Trump administration has made it clear that it will not tolerate a nuclear North Korea—but Beijing has heard this before. Despite the rhetorical flourish, to the experienced Chinese diplomat, the Trump administration’s policy sounds quite a lot like those of Presidents George W. Bush and Obama: a desire to achieve denuclearization but an unwillingness for this to come at the cost of war on the peninsula. Chinese President Xi Jinping is similarly bound by the strategic logic of China’s long-standing approach to its petulant neighbor—avoiding the dangers and uncertainty of war and instability by looking past the present consequences of North Korea’s actions. Xi’s view of North Korea is still dominated by the fear of a reunified Korea under Seoul, which may want U.S. forces to remain in the country. This is a legitimate concern, but it is possible, given Trump’s isolationist stance, that he might consider not stationing U.S. troops above the 38th parallel or deploying offensive capabilities to a unified Korea. [Zhu Feng, Foreign Affairs]

I can envision how an agreement with Beijing might work: China would enforce the U.N. Security Council resolutions — no more and no less. It would import no more than $400 million worth of coal, and it would not buy coal or anything else from any entities designated by the U.N., that were associated with Pyongyang’s weapons programs, or that were reasonably suspected of contributing to those programs. It would freeze the assets of North Korea’s proliferators and their front companies and put their agents on the first Air Koryo flight home. It would also freeze any accounts of North Korean nationals or trading companies until it ensured, in accordance with UNSCR 1718, paragraph 8(d), that those funds could not be used for WMD programs or other prohibited purposes. For good measure, it would also expel any North Korean workers. It would keep those measures in place until Pyongyang was fully disarmed. That, in turn, would almost certainly require the removal of Kim Jong-Un, but coordinated economic strangulation of the regime — which should carefully avoid impeding the trade in food — would likely cause the elites to lose confidence in him. By many accounts, that confidence is already shaky.

In return, the U.S. would agree not to station forces inside the borders of what is now North Korea (something that we should not do under any circumstances anyway). We might even discuss a timetable for the withdrawal of U.S. ground forces, which would no longer be needed in Korea. We would agree to suspend sanctions, year by year, provided Pyongyang was making progress toward the conditions described in our laws, toward a more humane and open society whose disarmament we could actually believe in. This state would be neither a militarized totalitarian cult nor a Jeffersonian democracy, but a state that was evolving from totalitarianism to one that was merely authoritarian, along the lines of what we see in Burma today. Great change takes time. North Korea and its people would need time to evolve into a self-governable society, ready to take its place in the world.

Once North Korea was disarmed and the artillery was removed from the bunkers along the DMZ, Korea could be reunified in all but name. Korean families would be reunited, a new pan-Korean culture would be reborn, and commerce would flow freely across the nature reserve formerly known as the DMZ. An agreement with Beijing and Seoul might preserve a fig leaf of separation for an agreeable transitional period, excluding any foreign forces and ensuring friendly relations with all of Korea’s neighbors, friends, and trading partners, to assuage Beijing’s security and economic concerns. South Korea would assume responsibility for controlling the China-North Korea border and caring for the poor and dispossessed North Koreans who might otherwise cross it. The consequent economic revitalization, including access to refurbished North Korean seaports, would be a boon to China’s northeastern rust belt. The political status of North Korea after this transitional period — say, ten years — would be for the people of both Koreas to decide. Enough of foreign powers drawing lines through a nation that ought to be able to decide its own fate. A unified Korea would be no threat to China.

Of course, if Beijing does not cooperate, things might have to take a darker turn.

The real difference that Beijing and Washington must overcome, however, is China’s fear of chaos in North Korea spilling over its own borders. Such instability could spell an unmanageable situation involving all sorts of crises: civil war, famine, and mass displacement, not to mention the danger of fissile material and biological weapons falling into even more unstable hands. Of course, some Chinese hardliners take this view even further, suggesting that it would be foolish for China to take the North Korean burden off the back of its greatest competitor. They argue that, considering that the United States is in many ways a thorn in the flesh to Chinese interests in areas such as Taiwan and the South China Sea, it would be against China’s national interests to release the United States from this problem.

Today, many within China believe that Beijing must reevaluate its relationship with both Koreas, which essentially means abandoning Pyongyang. It is both the strategic and the moral choice. Choosing South Korea, a democracy with a strong economy, will place China on the right side of history. China’s lack of clear direction on this issue is beginning to negatively affect its reputation, with Beijing seen by the international community as reluctant to cooperate or behave responsibly. These are not traits that behoove a rising power. [Zhu Feng, Foreign Affairs]

I can also envision how things would have to work if China does not cooperate. The alternative would be China’s greatest fear — chaos. It would have to be. Pyongyang insists that its nuclear program is non-negotiable. Even assuming that, under extreme duress, Pyongyang eventually said otherwise, it will never be possible for a prudent person to believe in the denuclearization of a society as closed as North Korea’s, or to trust the words of a regime as mendacious as Pyongyang’s.

Because of all the years wasted by Bill Clinton, George W. Bush, and Barack Obama, we may, for a while, be stuck with the option of trying to deter a nuclear North Korea. This option is only slightly less terrible than war, and anyone who has watched how Pyongyang has behaved in recent years knows that this isn’t sustainable. We are always laying down red lines we think Pyongyang wouldn’t dare cross. Our calculations are invariably miscalculations, and Pyongyang crosses our red lines like so many cracks in a sidewalk. Can we deter a regime that built a reactor in Syria, used VX in the middle of the crowded Kuala Lumpur Airport terminal, or uses cyber attacks to terrorize us, smother own freedom of expression, and rob banks? Can we deter a regime that has carried out multiple armed attacks, cyber attacks, and assassination attempts in South Korea since 2010, killing at least 50 people? Can we deter a regime that sells chemical weapons technology to Assad and MANPADS to terrorists? How do you deter Pyongyang once it thinks it can nuke Seoul, Tokyo and New York? Will Pyongyang become more restrained when it thinks we think it can, or might?

Eventually, Pyongyang will go too far and we will be at war. Deterrence will fail. That’s why the Trump administration is right to turn down the idea of a freeze — not that Pyongyang is interested in one anyway. Pyongyang can’t be allowed to have nukes, or even nuclear technology to sell to others. But no one believes it is possible to take these things away from Pyongyang without a fundamental change in the regime’s character.

~   ~   ~

The cold, hard truth that too few of us are willing to confront is this — there is no peaceful solution to the North Korea crisis as long as Kim Jong-Un remains in power. The syllogism is a simple one: if Kim Jong-Un won’t disarm, and if we can’t live with Kim Jong-Un (or he won’t live with us) if he doesn’t disarm, then Kim Jong-Un must go. The question then becomes a matter of finding the least-risky option to achieve that result.

Once we conclude that Pyongyang won’t disarm under pressure, what it means for sanctions to “work” shifts. Then, the focus of sanctions also shifts, from creating economic pressure on Pyongyang to supporting political subversion of the regime by targeting its immune system — the border guards, the army, Ministry of State Security, the State Security Department, the Reconnaissance General Bureau, and the Propaganda and Agitation Department. In a country whose political and economic models are fragile and possibly unsustainable, change can take many forms. Certainly, it should not take the form of invasion or decapitation unless that’s our only protection against a grave and imminent threat to ourselves and our allies. It could mean sudden collapse if the elites turn on Kim Jong-Un, but our influence over such an event would be indirect at best. Don’t get me wrong — we should do everything within our power to prepare the Pyongyang elites for it, if only to make the right people in Pyongyang and Beijing nervous, and most urgently, to discourage North Korean troops from killing their brother and sister Koreans in the event we can’t prevent war.

The change we can do the most to catalyze, however, is a slow-motion revolution in the countryside. Our strategy should be to use sanctions and information warfare to degrade the regime’s capacity to repress, even as we use economic engagement and information warfare help an informed, enriched, and empowered people rise. This would not be regime change, exactly, but regime decline and regime replacement by dozens of local shadow governments. As the security forces lost their foreign sources of income due to sanctions, their members would desert, turn to corruption, or allow themselves to be coopted by the rising merchants and shadow warlords. Officers patrolling the markets could not shake the people down without fear of resistance or reprisal. Inside the jangmadang, they would become prisoners of the people. Inside their stations, they would be besieged, isolated, and ineffective. As the state’s power melted away and flowed back down the songbun scale, information operations would tell the elites that Kim Jong-Un’s days are numbered, that they should not support him, and that they should disobey any orders to kill their brothers and sisters. Implicit in the slow degradation of a totalitarian state is the historical inevitability that it can decline only so much before it can’t contain an explosion. That is, it must change or perish. Political change tends to happen like bankruptcy: gradually, then suddenly. Who is to say when regime decline might become the people’s revolution that Thae Yong-Ho has predicted? Beijing and Pyongyang should certainly worry about this.

For poor North Koreans, this would mean freedom of trade, freedom from fear, and freedom from the confiscation of their land and their crops. It might also mean chaos along China’s border. China would have to deploy troops to seal that border. Dandong, Dalian, and other cities involved in cross-border trade would face the concentrated effects of secondary sanctions, and even a loss of access to trade with America, that might plunge them into recession and unemployment. If the propaganda circulating in the jangmadang harnessed North Korea’s nationalism in an intensely anti-Chinese direction, it could make North Korea an unsafe place for Chinese investments for years to come. Even after reunification, Chinese goods would face steep fees for the use of North Korean ports. China would be offered no guarantees about the future disposition of U.S. forces (though we’d be smart to leave the pacification of North Korea to the Koreans). Chinese investments — particularly those found to violate U.N. sanctions — might be confiscated, or written off as odious debts. Refugees would flood across the Tumen, and Seoul and Washington would be powerless to stop that flood. To prevent Pyongyang from proliferating, we might have to impose a naval blockade, and an economic air blockade.

All of this is a much more chaotic alternative than an agreement to enforce the sanctions Beijing already voted for at the U.N. Security Council, but for us, it’s far better than the collapse of global nonproliferation or a coerced capitulation of South Korea. If Beijing is blithe about (or applauds, or encourages) our greatest security fears, then our response should be to identify and exploit its greatest fears in return.

Continue Reading

China finally pays a (symbolic) price for its North Korean slave trade

This blog has long posited that a nuclear North Korea will not coexist with us and that war with it would be inevitable; that preventing another Korean War will require a focusing an assortment of financial, diplomatic, and political pressures on Pyongyang; and that to deter China’s government and industry from undermining that pressure will require us to pressure China itself. This will carry costs for both economies, and to the relationship between the two governments. Relations with China will have to get worse before they can get better. That is unfortunate, but it is a far better outcome than nuclear war, the collapse of global nonproliferation, or effective North Korean hegemony over South Korea.

Since the Mar-a-Lago summit in April, I’ve worried that President Trump’s tough talk about secondary sanctions against Kim Jong-Un’s Chinese enablers was a bluff. It’s still too early to say that it wasn’t, but the news that Secretary of State Rex Tillerson has dropped China from Tier 2 to Tier 3 under the Trafficking Victims Protection Act — specifically for its use of North Korean slave labor — is a welcome sign that the administration has begun (and hopefully, just begun) to escalate its pressure on Beijing.

“China was downgraded to the Tier 3 status in this year’s report in part because it has not taken serious steps to end its own complicity in trafficking, including forced laborers from North Korea that are located in China,” Tillerson said during a ceremony to release the report.

Tillerson said that forced labor is a key source of illicit revenues for the North.

“An estimated 52,000-80,000 North Korean citizens are working overseas as forced laborers primarily in Russia and China, many of them working 20 hours a day. Their pay does not come to them directly. It goes to the government of Korea, which confiscates most of that, obviously,” Tillerson said.

The North regime receives hundreds of millions of dollars per year from forced labor, he said.

“Responsible nations simply cannot allow this to go on and we continue to call on any nation that is hosting workers from North Korea in a forced-labor arrangement to send those people home. Responsible nations also must take further action,” he said. [Yonhap]

Tillerson’s decision reflects rising anger within the administration that Beijing is (sit down for this) still not fully implementing U.N. sanctions against North Korea.

So what does this action mean for China’s economy and trade, in practical terms? For now, not much. Beijing probably doesn’t care if the U.S. denies it foreign assistance or votes against World Bank loans for it. Any of the TVPA’s sanctions can be waived, and often are. But as Erik Voeten writes in the Washington Post, governments really do care about their tier rankings for reasons of national honor and reputation. I don’t think I’m speaking out of school by saying that during my time at the Foreign Affairs Committee, the competing appeals of diplomats and NGOs to raise or lower a government’s tier status in the next TVPA report consumed an inordinate amount of staff time. The Chinese government, being hypersensitive about its own reputation, will care very much about this.

In Beijing, foreign ministry spokesman Lu Kang said the government was resolute in its resolve to fight human trafficking and the results were plain to see. “China resolutely opposes the U.S. side making thoughtless remarks in accordance with its own domestic law about other countries’ work in fighting human trafficking,” he told a daily news briefing. [Reuters]

Beijing is furious, naturally. I expect it to make some ostentatious displays of non-cooperation to punish Washington. It would be especially tragic if China decides to take its anger out on North Korean refugees. Hopefully, the State Department has already gamed out its responses to potential Chinese escalations. Our message to Beijing must be that we’re also prepared to escalate. China, which needs another decade of high growth rates to pay its coming crop of pensions, cannot afford this. Both sides would suffer in an economic war between the U.S. and China, but China’s export-dependent, labor-intensive economy and fragile banking sector would suffer more. That may give us more leverage to press China to expel its North Korean laborers or the U.N.-designated North Korean proliferation and money laundering networks that have operated openly on its soil for years.

The Chinese companies using the North Korean labor will care much less — at first — but they are facing far greater financial consequences, especially if the KIMS Act passes the Senate. (I sense a particularly strong appetite in both chambers of Congress and both parties for secondary sanctions against North Korean forced labor.) Under section 201 of that legislation, the products of those companies may face exclusion from U.S. markets, and their dollar assets may be frozen. (Needless to say, prospective Kaesong recidivists will not find this news reassuring.)

Dropping China to Tier III will have little immediate legal or economic effect. It still isn’t the “maximum pressure” President Trump promised us. It is an escalation and a warning. It is symbolic, but powerfully so. Ultimately, Beijing may care about being listed as Tier III for human trafficking for the same reason that Pyongyang cares about being listed as a state sponsor of terrorism — because to governments obsessed with their images, symbols can be powerful things. One hopes that this will cause more Chinese citizens to see that North Korea is a ball-and-chain on their country’s acceptance into the family of civilized nations and continued economic growth. One hopes that more of them will say that it’s time to take a hacksaw to the chain.

Continue Reading

C4ADS: Pyongyang’s networks in China are “centralized, limited, and vulnerable” to sanctions 

Because I’ve already given too many minutes of my life to the moveable farce named Dennis Rodman, I’m devoting today’s post to something more consequential: the Center for Advanced Defense Studies’s new report exposing more North Korean financial networks in China, and dispelling the misinformation that North Korea is isolated from the financial system and thus sanctions-proof. (Full disclosure: I advised C4ADS on the drafting of the report, without compensation of course.) Money quote:

The continuing misperceptions of North Korea as the “Hermit Kingdom” or “the most sanctioned country in the world,” are fueling the narrative behind the narrowing of non-military options on the Korean peninsula. In truth, the North Korean regime, far from being isolated, is globally active throsugh its overseas networks. The impact of these misperceptions is considerable, most notably in the false belief that sanctions cannot succeed on a “closed” country like North Korea. 

Following on last September’s exposé on Dandong Hongxiang, C4ADS sifted through public databases, shipping registries, and business records to widen its focus and try to find the extent of North Korea’s financial network in China. From this, C4ADS found, contrary to a lot of widely disseminated misinformation, that North Korea’s network is centralized, limited, and vulnerable to detection and sanctions:

Centralized. For example, C4ADS dug further into the role of Dandong Hongxiang and found it to be highly centralized around key nodes. It also exposed two more networks that were similarly centralized. In one case, C4ADS started with the seizure of the M/V Jie Shun at the southern entrance to the Suez Canal with a record haul of North Korean weapons (mostly PG-7 anti-tank rockets) aboard, which I figure were probably bound for Syria. Starting from the findings of the UN Panel of Experts (see paragraphs 61 through 71), C4ADS worked backward through shipping registries and corporate records and identified the holder of the Jie Shun’s compliance document as a Chinese national named Fan Mintian. Fan runs a company called V-Star Ships.

Fan and V-Star have been operating openly in China, helping North Korea evade shipping sanctions for at least four years. V-Ships did (much? all?) of its business through the dollar system, clearing its payments through the United States. Sadly, C4ADS doesn’t identify the author of the “please do not send us any instructions” email, which sounds like the kind of thing the FBI and the Justice Department may find worthy of further investigation, to say the least.

In another case, Wells Fargo was the correspondent bank, and its compliance officers were alert and on the job, and refused to process V-Star’s transactions. People may praise bankers even less than they praise lawyers, but here’s to Wells Fargo, for taking its compliance obligations seriously and refusing to launder money for North Korea.

Yet another major Chinese network, Dandong Zhicheng Metallic Material Inc. (DZMM) may be an even more important node for Pyongyang than Dandong Hongxiang. DZMM buys coal from North Korea. 

Three North Korean companies are currently designated by the Treasury Department: Daewon Industries (a part of Pyongyang’s military-industrial complex, designated in December), Kangbong Trading Company (same), and Paeksol Trading Corporation (controlled by the Reconnaissance General Bureau, designated in March). If DZMM willfully engaged in dollar transactions with any of those companies after their respective designations — and I stress that I don’t see proof of all of these elements from C4ADS’s report alone — that could constitute any of several federal felonies: violation of the International Emergency Economic Powers Act, money laundering under 18 U.S.C. 1956(a)(2), or conspiracy to commit either of the aforementioned under 18 U.S.C. 371. Even if you don’t arrest a single suspect, the Justice Department can bankrupt those networks by blocking their funds as they move through the financial system and forfeiting them.

Limited. C4ADS found that just 5,233 companies are involved in bilateral trade between China and North Korea, with the top ten companies controlling about 30 percent of it. If 5,233 sounds like a lot, last year, there were 67,163 Chinese companies exporting to South Korea. The concentration of wealth in the hands of a few state-controlled companies is consistent with Pyongyang’s centralized and controlling ways of running everything else. Even then, further research revealed that many of these companies were interconnected:

That means knocking over a few major networks could collapse much of the system that sustains His Porcine Majesty’s rule. C4ADS’s report even lays those connections out in charts.

And yet again, as with Ma Xiaohong, the person running a North Korean trade network turns out to be a member of the Chinese Communist Party. Arguably, our third attribute should be “inculpatory,” but it isn’t.

Vulnerable. Regular readers of the U.N. Panel’s reports will find North Korea’s methods of concealing its network aren’t qualitatively different than those used by terrorists, narco-traffickers, or other rogue regimes to launder money and evade sanctions; hence, the limiting reagents in U.S. sanctions enforcement are primarily political will and resources (cops, intelligence analysts, and lawyers). Contrary to widely-held assumptions, the networks are detectable.

The report goes on to note that because of “these networks’ reliance on the licit systems of finance, trade, and transportation … they leave behind a digital trail within public records, and other data sources, and are acutely vulnerable to targeted sanctions.” They also leave money trails. C4ADS’s conclusions reinforce what the U.N. Panel of Experts and the Justice Department have already established — that North Korea’s networks continue to launder their money through the dollar system. That’s a critical vulnerability that no U.S. president has yet had the political will to exploit. 

The last time C4ADS published a report, Treasury designations, an indictment, and a civil forfeiture complaint soon followed. Which doesn’t sound imminent this time, judging by this Wall Street Journal report covering the C4ADS report. It suggests that the Trump administration is still in the bargaining stage with Beijing, asking it to curtail the activities of Chinese companies, run by party members, that are knowingly violating U.N. sanctions. 

The Trump administration has asked Beijing to take action against nearly 10 Chinese companies and individuals to curb their trading with North Korea, according to senior U.S. officials, as part of a strategy to decapitate the key networks that support Pyongyang’s nuclear-weapons program.

Although there is no firm deadline, the U.S. has indicated the Treasury Department could impose unilateral sanctions on some of these entities before the end of the summer if Beijing doesn’t act, the U.S. officials said. [WSJ, Jay Solomon]

While you’re at it, don’t miss Solomon’s other recent report on another North Korean network in China, which I didn’t have time to blog about when it came out.

So as with the Obama administration, we’re back to asking Bejing to enforce sanctions it has spent the last ten years willfully violating. That similarity must owe a great deal to the fact that Trump can’t get key appointees in place to execute a policy that resembles his tough talk. For all the talk of sabotage by the “deep state,” the effect of slow appointments is that the administration ends up abdicating a lot of policy decisions to holdovers and similarly disposed career civil servants. In any event, let no one say that sanctions against North Korea can’t work, if we ever muster the will to use them.

~   ~   ~

Update: At the Washington Post, Anna Fifield adds:

Targeting just a few pivotal Chinese companies could severely disrupt North Korea’s ability to circumvent international sanctions and buy illicit goods — and could even cause its entire overseas network to collapse, according to a report out Tuesday.

[….]

The new report, by Washington-based research group C4ADS, lays out multiple ways for Beijing to cut off North Korea’s trading routes to the outside world, if it wanted to. It also found a Chinese citizen who was conducting large amounts of trade with North Korea while serving as president of a company in the United States — a status that would allow him to open bank accounts and send or receive shipments.

“By being centralized, limited and ultimately vulnerable North Korean overseas networks are, by their nature, ripe for disruption,” C4ADS researchers wrote in the report, titled “Risky Business.”

[….]

There is still plenty more to be done, C4ADS writes. “Although to date economic coercion has been ineffective in persuading North Korea to abandon its pursuit of nuclear weapons, this does not mean it cannot work,” the researchers say. 

On the contrary, targeting key companies could cripple multiple networks across multiple countries simultaneously, they write, because so many of these firms are intertwined.

[….]

The C4ADS researchers said focusing on these kinds of logistical “chokepoints” could cut off North Korea’s centralized, global system of illicit finance. 

For example, the Dandong Hongxiang Industrial Development Co., which was sanctioned by the U.S. Treasury Department last year — sending a sudden chill through the border city that acts as North Korea’s main commercial gateway to the outside world — is one of 18 companies that make up the Liaoning Hongxiang Group. This suggests the potential for an indirect effect if one company is stopped from helping North Korea, perhaps disrupting numerous other linked companies.

“Based on what we’re seeing in the data in terms of the reach and scope of these networks and the limited nature of the system that they live in, and the contamination with illicit activity, there is inherent value to enforcement actions,” said David Thompson, a senior analyst at C4ADS.  [WaPo, Anna Fifield]

See also this Washington Post editorial, citing the C4ADS report.

Continue Reading

China is cheating on the North Korea coal import ban (again) (with updates)

Via the indispensable Leo Byrne:

Two North Korea-linked ships have arrived at two separate coal terminals in Shanghai since Sunday, while one other was departing the area after having left a third facility at a similar time.

Satellite imagery shows that each of the terminals is equipped to handle coal. The UN currently restricts member states from importing North Korean coal, while Beijing has said numerous times that it has suspended all imports for the remainder of 2017.

“Imagery indicates these sites are primarily used for coal unloading. Some of the larger port areas are multi-use, but the specific berths that the ships were tracked to appear to primarily handle bulk coal,” Scott LaFoy, a Washington-based satellite imagery analyst, told NK Pro. [NK Pro]

As Byrne notes, this isn’t the first time in recent months China has been caught breaking its promise to stop importing North Korean coal this year. In addition to this, in 2016, China imported twice as much coal as permitted under a U.N. import cap. Much of North Korea’s coal trade is controlled by the North Korean military, or its external spy/terrorist/hacker agency, the Reconnaissance General Bureau.

China’s failure to identify the North Korean links to the ships is, at a bare minimum, negligent. For example, one of the ships, the Pu Hung 1, is controlled by Rungrado General Trading Corporation, which deals in various goods and services including slave labor, which had been mentioned in U.N. Panel of Expert reports for proliferation, and which the Treasury Department designated in December.

Byrne links two other ships to one Hiroshi Kasatsugu. You can read about Mr. Kasatsugu’s links to Mirae Shipping, a front for U.N.- and U.S.-designated Ocean Maritime Management Company, in paragraphs 143 through 148 of the 2015 report of the U.N. Panel of Experts.

One of the ships that recently arrived in a Chinese coal terminal, and which is linked to Mr. Kasatsugu, was later sold to a front for none other than Dandong Hongxiang Industrial Development, or DHID. DHID is under indictment in a U.S. federal court in New Jersey for money laundering, conspiracy, and sanctions violations on behalf of North Korea.

China is obligated to expel representatives of U.N.-designated entities, including Ocean Maritime Management, which the U.N. designated in 2014, yet Mr. Kasatsugu apparently continues to operate there. Not that this should surprise us, given how many members of North Korea’s proliferation network operate openly in China.

Brian Moore said it best:

I’ve come to the conclusion that official Chinese trade statistics are to certain journalists and economists what pro wrestling is to certain 10-year-old boys. So for this round, it’s NK News 1, Yonhap -1.

Mark your calendars for July 15th, everyone.

~   ~   ~

Updates:

It’s an oversight on my part that this post didn’t also work in Byrne’s reporting on other Chinese businesses helping North Korea register ships associated with its smuggling fleet. UNSCR 2321, paragraph 24 requires U.N. members states to “de-register any vessel that is owned, controlled, or operated by the DPRK.”

Expect to hear much more about this topic soon, from another source.

China is also increasing imports of North Korean iron ore. Under paragraph 26(c) of UNSCR 2321, the U.N. banned imports of North Korean iron ore except for “livelihood” purposes unrelated to its WMD programs — whatever that means in Chinese.

Continue Reading

Make Korea China Again? Xi Jinping confirms colonial ambitions for Korea.

As regular readers of this site know, China is opposed to unilateral sanctions, except when it isn’t. In the case of North Korea, China is also opposed to the multilateral sanctions it voted for in the U.N. Security Council; consequently, North Korean missiles ride on Chinese trucks, North Korean proliferation networks operate openly on Chinese soil and launder their money through Chinese banks, North Korea’s weapons are made from components and technology procured from or through China, and those weapons are imported or exported through Chinese ports. North Korean abduction squads kidnap refugees and murder activists on Chinese territory, and North Korean spy rings operating inside South Korea meet in safe houses on the outskirts of Beijing.

China’s answer to these charges, as near as I can make sense of them, is that it only violates the sanctions it voted for because sanctions never work and it’s afraid they’ll work and it has no influence over North Korea anyway and also, it isn’t violating them. But China’s unilateral sanctions to disarm South Korea, which are clearly calculated to leave it prostrate to Pyongyang’s (and Beijing’s) blackmail, put the lie to all of this.

Thus, two weeks ago, I drew the unavoidable conclusion and advanced the inflammatory theory that China’s failure to reign in North Korea’s nuclear program might not be a failure at all. Perhaps North Korea’s nuclear program is a proxy for China to disarm, isolate, Finlandize, and control both Koreas. After all, one could excuse a few lapses in North Korea sanctions enforcement as oversights by a fundamentally corrupt state, but it isn’t plausible that the same people, front companies, and networks could have escaped the all-seeing eye of the world’s most efficiently intrusive surveillance state for decades. And now that Xi Jinping is revealed to have spoken the words that the peoples of Asia fear most — “part of China” — Koreans’ worst fears are confirmed. For the full interview, go here. Here is the quote in context:

But we had a really good meeting [with Chinese President Xi Jinping], and it was supposed to be 10 minute session and then you go into a room with hundreds of people, you know all different representatives, and the meeting was scheduled for 10 to 15 minutes, and it lasted for 3 hours. And then the second day we had another 10 minute meetings and that lasted for 2 hours. We had a — just a very good chemistry.

He then went into the history of China and Korea. Not North Korea, Korea. And you know, you’re talking about thousands of years …and many wars. And Korea actually used to be a part of China. And after listening for 10 minutes I realized that not — it’s not so easy. You know I felt pretty strongly that they have — that they had a tremendous power over China. I actually do think they do have an economic power, and they have certainly a border power to an extent, but they also — a lot of goods come in. But it’s not what you would think. It’s not what you would think. [WSJ]

If South Koreans are worried and outraged, both sentiments are well justified. The scars left by South Korea’s occupation by a certain other predatory neighbor are still raw and painful to South Koreans, and I would argue that the legacy of China’s influence over North Korea has been far worse than the legacy of Japan’s occupation — including war, famine, gulags, smothering thought control, and exploitation of women on a scale and severity comparable to Japan’s exploitation of wartime sex slaves.

In most news outlets, this story is being reported as a Trump faux-pas, which it certainly was to the extent Trump seemed to credit Xi’s imperialist narrative. But that is not the real story, because (1) the world already discounts Trump’s words in ways that it did not discount the words of other presidents, and (2) there are men and women in the White House who are smart enough to disabuse Trump of this nonsense, clean it up, and make the appropriate assurances to South Korea, despite that damage that has been done. Those assurances are going to be very, very important when we are three weeks out from an election in South Korea, when South Koreans are already wondering if we are still a reliable ally.

But in another sense, we should silently thank Donald Trump for (however unwittingly) telling us the real story, which the media seem to be missing entirely. The real story is that Xi Jinping just tipped his hand about his colonial ambitions to control all of Korea. Xi Jinping, after all, does not tweet. He does not ramble, muse, or offer idle, half-considered thoughts. He is nothing if not deliberate and calculating. He went to Mar-a-Lago with meticulously premeditated plans to influence the President of the United States in certain directions, to achieve a certain ambition.

The historically accurate truth is that Korea was never a “part” of China, but was a tributary nation under substantial Chinese influence or control for centuries. Put another way, there is no more historical basis to Xi’s claim than there is to the Northeast Asia Project or Xi’s claim that the South China Sea is a part of China now. Who believes that Xi Jinping will let either truth or law get in his way when he senses that the time has come to make his move? If I were living in South Korea, I’d want missile defense and nuclear weapons now more than ever. I’d also want a president with the greatest possible influence over the United States, and the backbone to stand up to Xi Jinping. In other words, I’d want a choice I don’t have — so I’d pick the lesser evil who can still win.

Continue Reading

Dear Korea: Let’s talk about China’s plans for you in its new co-prosperity sphere

Ever since China embarked on its retaliatory campaign against South Korea, of state-orchestrated protests, business closures, and boycotts, I’ve often tweeted that China is opposed to unilateral sanctions, except when it isn’t. Recently, the Asan Institute released the results of a survey showing that this campaign has done the unthinkable — it has made China even more unpopular than Japan in the eyes of South Koreans.

For anyone who has lived in South Korea, it’s hard to overstate the significance of this. And if China’s goal was to depress South Korean support for THAAD, its strategy has been a failure.

With the caveat that coincidence isn’t the same as causation, the South China Morning Post reasonably concludes that China’s sanctions against South Korea have backfired and increased public support for THAAD:

“Even more surprising is that Koreans are now more favourable toward Japan (3.33) than China (3.21),” it said, noting Japan had consistently been Koreans’ least favoured country after the North.

The survey also showed the ratings of US President Donald Trump, Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe all declining, but Xi’s falling the most, plunging from 4.25 in January to 3.01 in March.

“The only good news for President Xi was that his rating remained higher than Prime Minister Abe’s,” Asan said.

The survey, of 1000 adults carried out from March 6-8, also showed increasing support for THAAD, with 50.6 per cent in favour, up from 46.3 per cent in November, with opposition falling from 45.7 per cent to 37.9 per cent. [SCMP]

Despite a small and temporary drop in pro-American sentiment after Donald Trump’s election, reports of a Trump Shock (such as this one, from Putinprop outfit Sputnik) turn out to have been greatly exaggerated. All of this is bad news for the Chinese foreign policy and security establishments, which (as I argued here) see themselves as in a zero-sum competition with the U.S. for influence in Asia. The fact that they believe this makes it mostly true, no matter how much pro-China scholars may wish it were not. It’s increasingly undeniable that the little gray men pulling the levers in the Forbidden City are profoundly anti-American, and are waging a propaganda war against us. I’m old enough to remember the Tienanmen Massacre, when all the smart people said that the correct response was to increase trade with China, because capitalism would make China friendly and free (sound familiar?). It’s not working out that way.

Behind this propaganda are both offensive and defensive aspects. One clearly senses that Beijing is on the defensive and sees itself as besieged by our ideas — mostly, as expressed in private speech by journalists and NGOs. (China, like North Korea, makes no distinction between speech by the state, the press, movie studios, and private individuals; it sees censorship as a “responsible” state’s right and duty.) But there is also a more offensive agenda behind what China is sowing here.

It’s worth recalling that Xi Jinping’s ham-handed reaction is to the stationing of a purely defensive missile system in South Korea, to protect South Korean cities from a nuclear threat that China | has | done | so | much | to | create in the first place. If you actually click those links and read those posts, what’s now undeniable is that China’s support for North Korea isn’t just economic support that incidentally aids its nuclear and missile programs. Rather, China is willfully hosting Pyongyang’s proliferation networks, laundering money for entities that are designated by both the U.S. and the U.N. for proliferation, and selling Pyongyang the materiel it uses in its missile programs, including the trucks its missiles ride on.

In other words, China is using North Korea to menace and intimidate South Korea, and when South Korea tries to protect itself, China is using its economic power to bully South Korea into submission and unilateral disarmament. As South Korea’s ally, we must not stand for this. I expect that when President Trump meets with “President” Xi (as China calls its unelected tyrants), he will tell Xi to knock it off. Secretary of State Rex Tillerson previously told the Chinese that its bullying of South Korea was “uncalled-for.” But it was Defense Secretary James Mattis who really nailed it when he said this:

“In the South China Sea, we see China shredding trust as they adopt a tribute-nation kind of approach where all other nations have to pay tribute or acquiescence to the more powerful nation, the larger nation,” Mattis said during a Senate Appropriations Committee hearing.

Mattis also accused China of “seeking veto power over the economic, diplomatic, and security decisions of nations on their periphery.” He did not elaborate, but one such case is Beijing’s retaliatory measures against South Korea for hosting the U.S. THAAD missile defense system. [Yonhap]

Also spot-on was Congressman Ted Yoho, who accused China of “sanctioning the wrong Korea.” Then, yesterday, 26 senators from both parties released this letter:


All of this is exactly right, for now. The U.S. is sending a clear and united message against China’s ham-handed imperial overreach, and that message is being heard in Seoul. It’s a message we can sharpen further: I’m convinced that China means nothing less than to disarm South Korea, suppress its sovereignty, decide what its newspapers can print, and control its resources. Its ambitions for Korea aren’t materially different than Japan’s ambitions for Korea in 1905. For now, Seoul is defiant. But in the long term, China means to impose its own Eulsa Treaty on Korea, and it probably thinks it has found just the man to sign it.

I’ve argued that Xi Jinping’s economic warfare against a close U.S. ally calls for economic deterrence against China in concert with China’s two other largest trading partners, Japan and South Korea. I say this despite acknowledging that finishing the trade war that China started will have costs for everyone. My hope is that a strong and focused response that targets banks, businesses, and the port in, say, Dandong, would cause enough political trouble for Xi to end the war quickly and prevent a recurrence. If Trump is feeling protectionist anyway, why not use a protectionist counter-attack to damage North Korea’s finances and Xi Jinping’s domestic political support, and increase the confidence of our allies that we’ll stand behind them?

But of course, our response doesn’t have to be symmetrical. Other tools at our disposal will do us less harm. One of those is to strike harder in the political war that China is already waging against us. It’s time to speak clearly to the peoples of Asia about Xi Jinping’s plans for a grand new Co-Prosperity Sphere in which they will be China’s tributaries. As in the past, the tributaries’ share of that prosperity will be highly unequal. China’s conduct is both a threat and an opportunity to drive home what is now manifest. Xi Jinping means to bully his way into economic, naval, and (ultimately) political hegemony over all of East Asia. He isn’t building those islands in the South China Sea just to protect Chinese trade routes. He isn’t even building them because he wants the fish and the oil in those waters. As the THAAD episode clearly illustrates, he wants to be in a position to dominate his neighbors. If we mean to prevent that outcome, we will all have to unite against it.

Continue Reading

Royce introduces bill to toughen sanctions on N. Korea; subcommittee holds hearing

The big news yesterday was that Ed Royce, the Chairman of the House Foreign Affairs Committee, has introduced a sequel to the North Korea Sanctions and Policy Enhancement Act, or NKSPEA. You can read the full text here, but briefly, the bill —

  1. Expands the mandatory and discretionary sanctions in NKSPEA 104 to match the sanctions added by UNSCR 2270 and UNSCR 2321. It also adds a few more, like authorizing Treasury to sanction anyone who imports food from North Korea — a gravely immoral thing when so many North Koreans are going hungry, and when the state obviously isn’t using its food export revenue to buy gbrain to feed them.
  2. Provides new authorities to ban North Korea from financial messaging networks. Of course, SWIFT is reportedly disconnecting all North Korean banks, but this provision now becomes important to prevent SWIFT’s less reputable competitors from taking that business on.
  3. Codifies the Treasury Department’s new regulatory ban on providing indirect correspondent account services to North Korean banks.
  4. Toughens the NKSPEA 203 provisions denying aid to states (mostly in Africa and the Middle East) that buy weapons from North Korea.
  5. Toughens the NKSPEA 205 provision allowing U.S. Customs to increase inspections of cargo coming from ports that aren’t meeting their UNSCR 2270 obligations to inspect North Korean cargo. It also creates a blacklist of non-compliant ports, including Dandong and Dalian. That could put pressure on those ports to either meet their inspection obligations or shun North Korean cargo altogether. Think of it as the customs equivalent of Banco Delta Asia. But I haven’t even told you the best part yet.
  6. Creates the authority for secondary shipping sanctions against North Korea by giving the Coast Guard the authority to ban ships, shippers, and flags that violate U.N. shipping sanctions from U.S. ports and waterways. That will make for some lively discussions with the Ways and Means and Transportation committee staffers. It also takes a page from the South Koreans and Japanese who’ve enacted similar measures. That would effectively bring the U.S. into a coalition with those nations to isolate North Korea from the global trade system. Given that this coalition would now include China’s three largest trading partners, that’s potentially quite a powerful measure. And as I’ve noted more than once, let there be no doubt that it was China that started the trade war over North Korea. This is how we stand by our allies and deter economic bullying.
  7. Increases sanctions against companies that employ North Korean slave labor, and threatens to raise the tier status of those governments under the Trafficking Victims Protection Act.
  8. Adds a new condition for the suspension of sanctions — that North Korea permit Korean-Americans to have unrestricted and unmonitored meetings with their North Korean relatives before they die.
  9. Offers rewards to defectors, and maybe other informants, who provide information leading to the arrest or conviction (in any country) of persons involved in North Korean WMD, cyberattacks, or money laundering.
  10. Piles on more pressure to designate North Korea as a state sponsor of terrorism.

And we still haven’t even seen the member amendments, which promise to be lovely. (On a related note, the Senate is also moving separate legislation to sanction the companies that have participated in China’s island-building in the South China Sea.) This promises to be an action-packed year for all you sanctions geeks out there. The dark circles under my eyes should be proof enough.

~   ~   ~

The other big event yesterday was the first hearing run by the new Chairman of the Asia-Pacific Subcommittee, Ted Yoho of Florida. As of yesterday morning, I hadn’t really viewed Yoho as a thought leader on Asia policy, but after his performance yesterday, I’ve reassessed that view. Yoho ran a tight ship, kept the proceedings on time, and despite this being his debut, projected a sense of calm command of the proceedings. More importantly, both Yoho and new Ranking Member Brad Sherman came in extremely well-briefed on the issue, and in full command of the facts. There was undoubtedly some first-rate staff work behind that. They’ve clearly digested the Panel of Experts’ latest, something that I’m still in the process of doing. You should really watch the whole thing:

The panel members were Bruce Klingner of the Heritage Foundation, Professor Sung-Yoon Lee of the Fletcher School, and former State/Treasury official Anthony Ruggiero, who has added much-needed expertise to the debate about sanctions policy and administration. I thought all three were extremely effective in breaking through to the members, but then, I consider all three men to be good friends, so I won’t even pretend to be objective. I’ll just post a money quote from each of them. First, Klingner sets the stage for where we find ourselves today, and why Americans should care:

Professor Lee’s statement, frankly, is some of his best work. It’s a must-read, not just for its historical insight about the often-strained relationship between China and North Korea and what that doesn’t mean, and not just for its insight into North Korea’s political objectives, but for the beauty of its prose (which Chairman Yoho also praised).

Ruggiero then brings his practical experience and careful research to the often-underinformed discussion of sanctions as a policy tool. And if I had to pick one panelist whose testimony really seems to have broken through to the Committee members, it’s probably Ruggiero, who reformatted their c-drives about a lot of junk analysis about sanctions:

Thanks for that!

Ruggiero also had some choice words for SWIFT, which I’ll let you read on your own.

With the Trump administration about to conclude its policy review and clearly headed in the direction of a harder line that will emphasize sanctions without sparing Chinese violators, this advice will undoubtedly find audiences in the White House, the National Security Council, and the State and Treasury Departments. My guess is it’s going to be a tense dinner at Mar-a-Lago when — or if — Xi Jinping comes around. But as I’ve said before, our relations will China may have to get worse before they can get better.

Continue Reading

Will China cooperate on North Korea sanctions? That depends on which “China” you mean.

I often talk about the importance of pressuring China to pressure North Korea. When I do, people sometimes cock their heads like my dog would do when he heard a new sound, and ask me whether China would cooperate with that. I answer this question with a question of my own: “Which China?” China, for all its top-down authoritarianism, isn’t a monolith. Like most societies, it has different constituencies with different views that fear different risks and pursue different interests. That’s why my answer to the first question depends on the answer to the second.

If you mean the Chinese defense establishment, which is constitutionally hostile to the United States and sees itself as in a zero-sum, Cold War competition against us, the answer will always be “no.” That China is our enemy by its own choice. Its default is to view anything that’s bad for America as good for China. Its attitude is probably hardening.

If you mean the Chinese foreign policy establishment, the answer will also be “no,” but its obstructionism might be tempered by strategic compromises or interrupted by some temporary feints at compliance (currently, the so-called coal ban). It’s almost as hostile to us as the defense establishment, but it pursues its ambitions more intelligently. It may despise Kim Jong-un, or it might just be pretending to, but either way, it probably despises us even more. Still, it recognizes the value of playing us, and it does that very well.

If you mean the Chinese businesses that willingly deal with North Korea, the answer will be “no” as long as North Korea’s checks clear, and it will be “yes” the instant they don’t, and it will be “yes” the instant the businessmen learn — to their abject horror — that some other businessman who deals with North Korea just had his bank accounts frozen and couldn’t make the payments on his Buick and that America can really do that.

If you mean the Chinese Finance Ministry, it will be “no” until we raise the cost of non-cooperation to unsustainable levels, by threatening to depress the levels of growth it must sustain to pay pensions for its aging population and maintain economic stability. That is its mission. And interestingly enough, China’s terrible reputation for financial integrity is a growing threat to that mission. I’ll explain in a moment.

If you mean the Chinese banks, it will be “no” until subpoenas start to rain down on their New York branches and their lawyers tell them that the only way to avoid the fate of BNP Paribas is to cooperate with the feds and settle for reduced civil penalties and deferred prosecution.

It’s a misnomer to refer to a “Chinese” banking industry that relies on access to foreign finance, and thus subjects itself to foreign regulation. Going global can cause some culture shock for banks that are used to China’s lax Anti-Money Laundering (AML) regulation. For the last few years, Treasury’s AML focus has been on European and Middle Eastern banks dealing with Iran, so Chinese banks have had a (mostly) free ride from the feds. But New York and EU regulators haven’t been as laissez-faire about AML compliance and have been handing them some stiff fines. That’s why People’s Bank of China officials recently “pledged a tougher fight against money laundering.”

Behind this clarion call by Beijing’s bank supervisors was an unnerving realization that some of the nation’s biggest banks had left themselves vulnerable to anti-money-laundering sweeps by regulators abroad.

This vulnerability stems from ambitious overseas expansions in recent years by the Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC) and other powerful, state-owned lenders. As of June, according to official data, China’s biggest bank, the ICBC, was operating 412 branches in 42 countries, while the BOC had 564 branches in 46 countries. China Construction Bank (CCB) counted 140 overseas branches, and Agricultural Bank of China (ABC) had 17. [Caixin Global]

Here comes the culture shock.

At home, according to banking experts who spoke with Caixin, Chinese banks have been operating in a regulatory environment that’s generally soft on money laundering rules for financial institutions. Some of these banks have thus learned the hard way that many regulators outside China not only diligently enforce rules designed to prevent dirty transactions, but are also eager to slap violators with heavy fines and even imprisonment.

And also, don’t usually take bribes.

The BOC, the nation’s fourth-largest lender, reportedly agreed on Feb. 17 to pay 600,000 euros ($634,000) to settle a money laundering case involving its branch in Milan, Italy. The branch had been targeted by Italian investigators since June 2015 who had looked into whether BOC helped clients transfer to China about 2 million euros linked to criminal activity.

In addition, a judge in the Italian city of Florence on the same day handed four BOC-Milan branch employees two-year suspended prison sentences after they were convicted of breaking Italy’s anti-money-laundering laws.

A Hong Kong-based expert on money laundering who declined to be named said while the fine against BOC-Milan was comparatively “moderate,” the criminal convictions were “surprising.” The decisions in Italy followed a November decision in the United States by New York state’s Department of Financial Services, which fined a local ABC branch $215 million for illicit money transfers.

By now, it has become reasonably clear that the Trump administration will soon revoke the sub rosa immunity the Obama administration had given Chinese banks to launder North Korea’s money. Not only will Chinese banks have to worry about EU and state regulators, they’ll have to start worrying about the Treasury Department, too.

That isn’t just a worry for China’s smaller, shadier banks. Some of the biggest banks in China were servicing North Korean customers until at least early 2016. Others were named in the Dandong Hongxiang case for doing so months later. Some of those banks have branches in New York. Those without still depend on U.S. correspondents to process their payments through the financial system, just as Banco Delta Asia once did.

The correspondents, in turn, have legal duties to comply with Know-Your-Customer (KYC) and AML regulations, which will require them to ask questions about the names, nationalities, and passport numbers of their customers; whether they’re sanctioned by the UN, Treasury, or the EU; and whether their business addresses are, say, shell companies in the British Virgin Islands, or empty offices next door to the local North Korean embassy. Treasury expects banks to hire qualified compliance specialists, employ highly specialized compliance software, and implement AML and KYC compliance procedures.

If Treasury begins to enforce those rules, banks will skimp on AML and KYC compliance (such as) at their own peril. If you click those last two links, you’ll see that I just cited examples of Chinese banks that got away with lax compliance in the past. The Agricultural Bank of China (ABC) is an example of one that didn’t:

After the branch opened in August 2012, Yu worked to boost the ABC’s interbank-transaction business through trade financing and other services. His goal was to quickly expand assets at the branch, which was ABC’s only operation in the United States.

But Yu’s strategy apparently exposed the branch to compliance risks, as his favorite businesses involved transactions executed on behalf of other banks’ customers. And ABC had limited access to information about those customers.

Yu maintained his strategic focus despite a 2014 warning by the central bank pointing to risks associated with overseas banking services.

Until a whistleblower came along, anyway.

But that same year, Taft’s allegations landed on investigator desks at the New York Fed, triggering a probe that led to a Fed order in September: ABC was given 60 days to deliver a plan for fixing risk management flaws and enhancing money controls at the New York branch.

The fines were levied two months later after New York state regulators determined ABC had deliberately failed to scrutinize dubious money transfers.

Now for the part where the bank rolls over, cooperates, and promises to get its compliance act together to reduce its penalty.

Sources close to the matter said an original fine of $500 million was eventually cut by more than half following negotiations between regulators and ABC-New York. The branch also agreed to hire an independent, regulator-approved monitor to assess its business.

“After the incident, ABC (headquarters in China) held several meetings emphasizing managing overseas branches and subsidiaries,” said a source at the bank.

Nevertheless, the bank’s reputation had taken a major hit. In November, for example, the credit rating agency Moody’s said the regulatory penalty had highlighted oversight failures at ABC and would have a negative effect on the bank’s credit rating.

Political subversion and human intelligence can be another wedge to incentivize banks to make better choices. Every arrest or defection of a North Korean diplomat or financier has the potential to expose more parts of Pyongyang’s financial network and implicate the banks that skirted the law to do business with them. If banks begin to see North Korea itself as unstable, more of them will begin to see North Korean customers as legally risky. The best possible way for a bank to mitigate that risk? File a Suspicious Activity Report with the Treasury Department and cooperate.

All of which is a long way of saying that China’s generals and diplomats almost certainly won’t cooperate on North Korea, at least not voluntarily — and not yet. That will make it harder to enforce sanctions (especially trade sanctions) but by no means impossible, because the Chinese banking industry has to cooperate. China’s generals and diplomats may not want commercial banks to be AML compliant, but China’s central bank does. Banks in Malaysia, Russia, Vietnam, Singapore, and Tanzania will face the same choice, of course, but China is the lynchpin, the Abbottabad of North Korea’s illicit finance. That finance is absolutely essential to Kim Jong-un’s capacity to buy, sell, import, export, pay, fuel, repair, and sustain. The Workers’ Party almost certainly keeps most of its money in Chinese banks. After all, what are you going to buy with all the money in Pyongyang, especially now that correspondent relationships with North Korean banks are banned by both the U.N. and the U.S.? Answer: stuff imported from China, bought with dollars held on deposit in a Chinese bank.

Freeze those dollars and Pyongyang is living on borrowed time. Sure, you can smuggle bulk cash a few million dollars at a time. Sure, you can run uninsured rust-buckets across the Yellow Sea with their lights and transponders turned off, carrying away whatever wares that cash buys, at least until all the (uninsured) ships smack into rocks, get T-boned by oil tankers, or get seized at the entrance to some canal or another. Drug cartels can run that way for years, but that isn’t a sustainable model for ruling over 23 million increasingly informed and resentful people.

Now that I’ve laid this foundation, you’ll understand the legal and policy implications of my upcoming post about what U.N. Panel of Experts report, and what it just told us about China, North Korea, and money laundering.

Continue Reading

UN report finds extensive evidence that China hosts N. Korea’s proliferation networks

A new report from the Wall Street Journal, quoting “U.S. and Asian officials,” says that the Trump Administration is considering “increasing financial penalties on Chinese companies in response to growing evidence of their support for North Korea’s weapons programs.” Such as:

In a case that particularly alarmed the Trump administration, a North Korean businessman attempted to use Pyongyang’s embassy in Beijing to export a lithium metal that is used to miniaturize nuclear warheads, according to the U.N. report. [Wall Street Journal, Jay Solomon]

As for that “growing evidence,” this year’s report from the U.N. Panel of Experts monitoring the (non-) enforcement of sanctions against North Korea is packed with so much of it that I couldn’t even jam a Cliffs Notes summary into one post. This post will cover the evidence that China is allowing known, U.N.-designated North Korean proliferators to operate from its territory, often openly. We’ll turn to China’s tolerance for (and abetting of) North Korean money laundering later this week, as soon as I find the time to write it up. Bear in mind, this post itself is a sequel to other posts I’ve written in previous years, also documenting China’s flagrant cheating on the sanctions, or its simple refusal to enforce them.

[“Logging vehicles” made by a state-owned company in China, via the U.N. Panel’s 2013 and 2015 reports]

Solomon’s report also adds to the leaks I discussed here, suggesting that the Trump administration will opt for a harder line, including secondary sanctions, against Chinese companies that aid and abet those violations.

But Trump administration officials have signaled there will be even greater financial pressure placed on Beijing if it doesn’t cut off North Korea, a step that risks Chinese retaliation. “We are putting the world on notice: The games are over,” Commerce Secretary Wilbur Ross said while announcing the sanctions on ZTE last week. [….]

U.S. officials said Mr. Tillerson would be discussing North Korea at all his stops in Asia, including the issue of “secondary” sanctions against non-North Korean companies that have been aiding Pyongyang. “All of the existing tools that we have to try to bring pressure on North Korea are on the table, and we’ll be looking to try to see what the most effective combination is,” said a senior U.S. official briefed on the Asia trip.

Republican senators wrote Treasury Secretary Steven Mnuchin last month and called for an investigation into the Bank of China and other Chinese firms for their alleged roles in helping North Korea. [Wall Street Journal, Jay Solomon; link to senator’s letter here]

More on that here, via the New York Times. To be clear, some of this cheating is willful, but most of it is what I’d call willful blindness, where the Chinese authorities knowingly permit North Korean proliferators to operate on their territory, even when the front companies and their agents were designated by the U.N. years ago, and often long after being put on clear notice by the U.N. Panel. In a few cases, China clings to obtuse interpretations of the resolutions to avoid complying with them. What all of these cases have in common is that U.N. experts were able to find violations on Chinese soil, in plain sight, that Chinese government officials somehow could not.

Nuclear Proliferation

Kumsan Trading. Member states are supposed to freeze the assets of, and expel the representatives of, companies involved in North Korean nuclear, missile, and other WMD proliferation. According to the Panel, the Korea Kumsan Trading Corporation is a front for North Korea’s General Bureau of Atomic Energy and helps it procure materials and fund its operations. Kumsan advertises itself online openly as dealing in sanctioned products, including vanadium and precious metals, with locations in both Moscow and Dandong. (Paras. 18-20.)

Korea Mining Development Trading Corp. (KOMID) is North Korea’s main arms dealer. It was designated in 2009 for WMD proliferation, but probably earns most of its revenue through violations of an embargo on conventional arms sales, by selling to governments in Africa and the Middle East. KOMID operates through multiple front companies that do business more-or-less openly in China. China is required to expel the representatives of these companies, but it almost never does. When one of them is exposed, it may revoke a business license or registration, but the operative goes right back into business under a new name at a new address. The Panel also found that at least nine KOMD representatives traveled through China in 2016, despite a requirement that member states deny them entry. (Table 8, Page 68.)

One of KOMID’s fronts is Namchongang Trading, which was designated by the U.N. in 2009 for procuring nuclear-related items. It operates openly in Beijing and Dandong, China, through several Chinese commercial websites. (Para. 156.) Namchongang has also operated as (or in cahoots with) Taeryonggang Trading, Namhung Trading, and Sobaeksu United Corporation, which operates in Beijing, Yingkou and Dandong. The EU designated Sobaeksu in 2010 for “the research and acquisition of sensitive products and equipment.” The Panel suspects that this entire network is involved with KOMID. (Paras. 156-59.) KOMID also does business through a front company called Beijing New Technology. (Para. 163.)

Another KOMID front, Korea Heungjin Trading, which was designated in 2012, for nuclear, missile, and other WMD proliferation, also operates openly in Dandong and Dalian. A North Korean diplomat posted at the embassy in Beijing serves as its director. (Para. 187-89.)

Green Pine Associated was designated by the U.N. in 2012 for its involvement in North Korea’s nuclear, missile, and other WMD programs. It’s still doing business openly in both Beijing, Shenyang, and Hong Kong as Green Pine, Natural Resources Development Investment Corporation, King Helong International Trading, Korea Unhasu Trading Company, and Saeng Pil Trading Corporation. (Paras. 166-83.) Green Pine is the company behind the attempted sale of the lithium from … guess where:

24. The Panel investigated the 2016 attempted online sale of lithium metal by the Democratic People’s Republic of Korea. The enriched lithium-6 isotope, and products or devices containing it, are on the list of prohibited nuclear-related items adopted by the Security Council (see annex 4-4). According to IAEA, lithium-6 is used to produce tritium, an isotope found in boosted nuclear devices. This sales attempt suggests that the Democratic People’s Republic of Korea has access to remaining quantities of the material.

25. Li-6 is advertised for sale by a company of the Democratic People’s Republic of Korea, General Precious Metal, which the European Union has identified as an alias of Green Pine Associated Corporation (Green Pine). Mr. Chol Yun was listed as the contact person of General Precious Metal for sale of the mineral and has an address and phone numbers in Beijing (see annex 4-5). The same name appeared as third secretary of the embassy of the Democratic People’s Republic of Korea in Beijing on an official diplomatic list dated 24 September 2012 (see annex 4-6). The Panel notes a pattern whereby the Democratic People’s Republic of Korea has accredited Green Pine overseas representatives as diplomats. The Panel continues to investigate this diplomat’s involvement in prohibited activities and his possible connection with another prohibited activity (see para. 91).

Korea Ryonha Machinery Joint Venture was designated in 2013 for WMD proliferation, mainly for buying, selling, and manufacturing machine tools used for making both conventional weapons and WMDs. It shows up in POE reports year after year because it continues to operate, and to display its wares at trade shows, in both Russia and China. In 2016, a Chinese company exported several machine tools to North Korea, and the Chinese government was reportedly investigating (!) Ryonha’s involvement. (Para. 196.)

[From the U.N. Panel’s 2014 report]

Training of scientists. The resolutions ban member states from training North Koreans in sensitive technology that could be used for North Korea’s WMD programs. The North Korean universities that train the country’s nuclear and missile scientists have exchange agreements with universities in Russia and China. The Panel asked the Chinese universities to explain, but they never responded. (Para. 135.)

Missile Proliferation

Kwangmyongsong missile parts. Someone, presumably the U.S. Navy, recovered the pieces of a Kwangmyongsong missile North Korea launched in February 2016 and found that it contained “ball bearings and engraved Cyrillic characters … identical to those from the 2012 Unha-3, and a “camera [and] EMI filter” from a “Chinese manufacturer, Beijing East Exhibition High-Tech Technology Co. Ltd.” (Paras. 57-58.) That “someone” also discovered the Pyongyang had imported pressure transmitters from the U.K. and Ireland, via the manufacturer’s distributor in China, via middlemen in China. (Para. 59.) This suggests several layers of violations — China’s failure to expel North Korean representatives of sanctioned entities, to enforce export controls, or to inspect cargo going to North Korea.

Shipment of Scud parts to Egypt. Paragraphs 71-77 of last year’s report discuss a shipment of Scud missile parts to Egypt. Since then, the Panel has determined that the whole scheme was run out of the North Korean embassy in Beijing. (Paras. 88-89.) The shipper was Ryongsong Trading Company, and the seller was Rungrado Trading Company, which you may remember for its human trafficking in Europe. Rungrado was designated by the Treasury Department last year for “the exportation of workers” from North Korea to earn foreign currency for Pyongyang, some of which went to North Korean agencies that were designated for supporting WMD programs. South Korea considers Rungrado to be an alias for Ryongsong. (FN.99.) Although the U.S. Treasury Department routinely designates aliases, it has not designated Ryongsong.

Weapons Trafficking

North Korea is subject to a U.N. embargo on the import, export, sale, or purchase of weapons, including weapons components, technology, services, training, and dual-use items. Since March, China has been required to inspect all cargo “that has originated in the DPRK, or that is destined for the DPRK, or has been brokered or facilitated by the DPRK or its nationals, or by individuals or entities acting on their behalf or at their direction, or entities owned or controlled by them, or by designated individuals or entities, or that is being transported on DPRK flagged aircraft or maritime vessels.”  (Para. 18.) Pretty clearly, that isn’t happening.

Syria rocket shipment. You’ve already read my post on this, right? Last August, Egyptian authorities seized a record haul of North Korean weapons, mostly PG-7 antitank rockets, hidden under iron ore aboard the M/V Jie Shun. I guessed that Syria was the destination because of the geography, but it’s possible that the client could have been Hamas or Hezbollah (which have also been Pyongyang’s arms clients).

This transaction also relied heavily on North Korean agents based in China. The bill of lading lists a shipper whose address is a hotel room in Dalian, a city often used by North Korean operatives. (Para. 63.) The holder of the ship’s compliance document was one Fan Mintan. A second man, Zhang Qiao, was its emergency contact, arranged for the ship’s insurance, and registered the ship’s operator in the Marshall islands. (Paras. 65-66.) Zhang is also involved in the coal trade with North Korea (para. 68), and thus played a role in violating UNSCR 2270 and 2321. He is also linked to another suspected North Korean smuggling ship, the M/V Light. A third man, Li Anshan, whom the Panel links to Ocean Maritime Management, a North Korean shipping company designated by the U.N. for arms smuggling, helped arrange for the Jie Shun’s Cambodian registration.

Eritrea radios shipment and Glocom. I previously posted about Glocom, the Reconnaissance General Bureau front company that manufactured sophisticated military radios and was based in Malaysia. Glocom made headlines after it was exposed just after the assassination of Kim Jong-nam. Starting at Paragraph 72 of its report, the Panel described how Glocom shipped radios to Eritrea. According to the Panel, that shipment “originated in China.”

75. The air waybills listed the shipper as Beijing Chengxing Trading Co. Ltd. According to the Chinese business registry, the company is still active, mainly trading in electronics, mining equipment and machinery (see annex 8-3). Mr. Pei Minhao (???) was listed as a legal representative until 26 February 2016 and still owns most shares in the company (see para. 164).

Glocom had North Korean representatives based in both Malaysia and China; had bank accounts, front companies, and procurement agents in both Malaysia and China; used mostly Chinese suppliers; and shipped its components to Beijing or Dandong for assembly (the report didn’t specify where). (Para. 77-84, 164.) Glocom did most of its business in U.S. dollars or euro through a sanctioned bank, Daedong Credit Bank, “to transfer funds to a supply chain of more than 20 companies located primarily on the Chinese mainland; in Hong Kong, China; and in Singapore.” (Paras. 233-25.)

Naval vessel repair & construction. Last year, the Panel reported that Green Pine had refurbished military patrol boats for Angola in violation of the arms embargo. The parts were shipped from China, the Panel has asked China for an explanation, and China still hasn’t given one. (Para. 103.)

North Korean UAV that crashed in South Korea. A Beijing company, Microfly Engineering and Technology, made it. After that, the trail leads to another Chinese company and two middlemen, who either point fingers at one another or deny all involvement. The Panel asked China to investigate, but China hasn’t responded. (Para. 107.)

Conclusion

When reporters try to make sense of China’s inconsistent and shifting explanations for why it won’t enforce sanctions against North Korea, they often settle on the consensus that China doesn’t really want North Korea to have nukes, but that it’s afraid that strict enforcement of sanctions will cause North Korea to collapse. This evidence should cause us to question that consensus. When China hosts all of these entities that spend scarce North Korean resources on nuclear components instead of food and consumer goods that might stabilize the regime, you have to look beyond regime preservation to explain China’s motives. Frankly, I can’t buy the consensus that Beijing doesn’t want North Korea nuked up when I see this much evidence that it’s helping to make that happen. Maybe the scholars our scholars are talking to don’t want a nuclear North Korea, but I’m not sure those scholars necessarily speak for China’s defense establishment.

Continue Reading

China is waging economic war against S. Korea. We must stand by our ally.

Less than two years ago, I wrote of the coming Korea missile crisis. That crisis has now arrived. As I’ve documented at this site, that crisis is, in large part, a crisis of China’s making. North Korean missiles are made in part from Chinese technology, in large part from components purchased in or smuggled through China, and that are almost always procured by North Korean agents who operate more-or-less openly on Chinese soil. North Korea’s missiles ride on Chinese trucks. North Korea’s nukes and missiles were paid for by dollars laundered through Chinese banks, by commerce (much of it illicit) that passed through Chinese ports. 

Now that those missiles have matured into a grave threat to our allies in South Korea and Japan, and to the Americans (and their family members) stationed on allied soil, the U.S. has deployed defensive missiles to both countries. Now, China has the unmitigated gall to object to South Korea defending itself against a made-in-China threat from North Korea, presumably because missile defense weakens China’s own capacity to bully those allies, Taiwan, and perhaps even the United States.

Since 2006, China has voted for seven U.N. Security Council resolutions (1695, 1718, 1874, 2087, 2094, 2270 and 2321) and proceeded to violate all seven of them almost immediately. Why? Probably because China’s long-term strategic objective was to use North Korea to intimate South Korea, drive a wedge into the U.S.-South Korean alliance, push U.S. forces out of Korea, and then apply the same strategy to Japan. China probably realizes that by backing Kim Jong-un it’s riding a tiger, but it still prefers coddling a Caligula with nukes to allowing one free Korea to arise on its border. China’s grand strategy stands a strong chance of succeeding. Many South Koreans would sacrifice some of their personal freedom and national independence for fear of war or recession. Right now, the people of South Korea are looking to us. They wonder if they can still count on us.

That’s because China, which is opposed to unilateral sanctions except when it isn’t, has just started a trade war with South Korea to disarm the wrong Korea — the one that’s trying to defend itself against the missiles it helped North Korea build. China is closing South Korean stores on administrative pretexts, canceling group tours by Chinese tourists to South Korea, imposing pretexual inspections on South Korean agricultural products, and disrupting other South Korean investments in China. Militarily, we are standing by our ally. THAAD, though by no means a defense against all of North Korea’s threats to Seoul, can stop the largest missiles that carry the most dangerous (read: nuclear) warheads. Diplomatically, we’re saying we stand behind South Korea, and the Secretary of State has just announced a visit to Seoul. Those are good first steps toward showing U.S. resolve in standing by its ally. But if the U.S. isn’t just as prepared to stand by its ally economically as it is militarily and diplomatically, South Korea may well be finlandized as a Chinese satellite under a future President Moon Jae-in, who is no friend of America

To prevent this, the U.S. must send Beijing a strong message of economic deterrence. A trade war with China would be bad for both countries, but worse for China, with its heavy reliance on exports to the U.S. and the dollar economy. Beijing is using its economic power to attack U.S. security interests and those of our allies. We can’t stand for this. As with any other war not of our choice, economic war would come with costs. The question is whether the costs of not fighting back exceed the costs of fighting back. In this case, the cost of not fighting back could include the breakdown of the security system that has freed and enriched billions of people in northeast Asia, the U.S., and (indirectly) around the world. It would include a significant setback in our efforts to prevent North Korea from irreversibly defeating the cause of global nonproliferation. Measures to mitigate the impact on South Korea are only a partial answer. We must also deter a China that is testing a new president’s resolve with a strategy that is at least as dangerous as anything it has done in the South China Sea. That is worth bearing significant economic costs. And there are ways we can, and should, respond.

1. The first and most obvious target should be the Chinese banks that are breaking U.S. law to finance Kim Jong-un’s proliferation. That’s something we should be doing regardless of China’s bullying of South Korea, so arguably, it doesn’t belong on this list at all. Still, China’s bullying might affect the strategy we use and the aggressiveness with which we implement it.

2. U.N. Security Council resolutions require all ports to inspect cargo going to or coming from North Korea. China’s ports clearly aren’t doing that. Under section 205 of the NKSPEA, Customs and Border Protection has the authority to increase inspections of cargo coming from those noncompliant ports. Ports in China’s economically depressed northeast, particularly those that import coal in violation of U.N. sanctions, should be at the top of our target list (but only one or two smaller ports, initially). The effect of such a sanction would be greatly magnified if the South Korea and Japan join it; after all, the U.S., South Korea, and Japan are China’s three largest trading partners. As they might say in New Jersey, it’s time for some traffic problems in Dandong. 

[Hey, it’s Donald. I think I have a job for you after all.]

3. China’s protectionism, censorship, and hacking make its IT companies good targets for sanctions, particularly through a more aggressive posture by the Committee on Foreign Investment in the U.S. and the aggressive policing of technology transfers. Yesterday’s actions against ZTE industries, which included the imposition of a $1 billion fine, are an example of the actions the U.S. could take to prevent China from stealing and selling U.S. technology to our enemies. Importantly, those actions suggest that the Trump administration has revoked China’s de facto immunity from the consequences of breaking U.S. law. As with our money laundering laws, we should enforce our export control and intellectually property laws regardless of how China treats North Korea, but China’s behavior against South Korea can influence our prosecutorial discretion in how aggressively we enforce those laws.

4. As mentioned, the U.S., South Korea, and Japan are China’s top three trading partners. Does China really want a trade war against all three of those economies when its banking sector is teetering under mountains of debt, when it’s trying to deflate a real estate bubble, and when it’s struggling to retain control of its currency and its stock market? Again, a trade war would be bad for everyone; the strategy is to deter China and force it to retreat by making sure it knows it would get the worst of one. The three allies share a strong interest in keeping the U.S.-Korea alliance strong to protect them from a common North Korean threat. For Japan, joining that economic alliance would have the advantage of balancing its villainous image in South Korea with the reality that it can also be a strong ally for South Korea’s security. By identifying appropriate targets in China for sectoral sanctions and combining their economic weight, the three allies can force China to back down and behave reasonably. Some of those targets might include products that include North Korean labor or materials, including seafood, textiles, and precious metals. Targets should be chosen to cause the maximum amount of economic and social unrest in China.

South Korea’s response to China has a political component, too. Its political right should play the anti-China nationalist card as shamelessly the political left played the anti-American nationalist card in 2003. It has criticized the left for cozying up to China in the midst of China’s economic bullying, and should intensify that criticism, making any preemptive capitulation to China an election-year liability for the political left. Both sides in Korea have long played the anti-Japan nationalism card, which continues to put distance between two natural allies over events that concluded 72 years ago. Not one comfort woman can still be saved from the predations of imperial Japan, but thousands of (North) Korean women who are sold as sex slaves in China still can be. I wonder if it might finally occur to Beijing that its bullying is backfiring if human rights activists put a statue of one of those trafficked women in front of the Chinese Embassy in Seoul. At the very least, it might make a few South Koreans stop to think about how China treats North Korean women, and whether that treatment is a metaphor for what China thinks of Koreans generally.

Continue Reading

China’s latest cheating on North Korea sanctions is a test for Trump

Like most people, I would prefer that the new President of the United States refrained from conducting diplomacy by Twitter. Without endorsing the medium, I gave a qualified endorsement to the message President Trump sent to China when he accused it of not helping to reign in His Porcine Majesty. Trump was right about this, of course. Over the last several years, the U.N., no less, has published a wealth of evidence that China has (almost certainly willfully) violated the North Korea sanctions it voted for in the Security Council. Here’s the latest example:

26. Decides … that the DPRK shall not supply, sell or transfer, directly or indirectly, from its territory or by its nationals or using its flag vessels or aircraft, coal, iron, and iron ore, and that all States shall prohibit the procurement of such material from the DPRK by their nationals, or using their flag vessels or aircraft, and whether or not originating in the territory of the DPRK, and decides that this provision shall not apply with respect to:
. . . .
(b) Total exports to all Member States of coal originating in the DPRK that in the aggregate do not exceed $53,495,894 or 1,000,866 metric tons, whichever is lower, between the date of adoption of this resolution and 31 December 2016 …. [UNSCR 2321, Nov. 30, 2016]

Just eight weeks later, the inestimable Leo Byrne cites customs data showing that China imported twice the amount of North Korean coal permitted for the remainder of 2016:

Customs figures show Chinese traders imported over 2 million tonnes of coal in December, up from 1.9 million the previous month. North Korea’s received $168 million for the commodity, a figure over three times that outlined in Resolution 2321. [NK News, Leo Byrne]

So yesterday, a reporter asked the Chinese Foreign Ministry’s mouthpiece to explain herself.

Q: [I]t is stipulated in Resolution 2321 of the UN Security Council that the imported coal from the DPRK by 31 December 2016 should not exceed one million ton or 54 million US dollars. Statistics recently released by China’s customs shows that China’s volume of coal imports from the DPRK in December 2016 exceeded the cap. What is China’s comment on that?

A: On your first question, it is a shared obligation of UN member states to implement resolutions of the Security Council. According to Chinese laws, it is required for the Chinese government to issue a statement for actions taken to implement Resolution 2321. This is a regular practice of the Chinese side. The statement by relevant Chinese ministries is one such step. The list of dual use items and technologies annexed to the statement is a verbatim quote of the list in the resolution.

The mouthpiece is referencing this belatedly updated list of things Chinese companies aren’t supposed to export to North Korea, unofficially translated here, at NK Pro.

On your second question, let me point out that Resolution 2321 should be implemented in a comprehensive and balanced manner. And it is not only China who should implement the resolution. The resolution called for solving the issue of the Korean peninsula through political and diplomatic means. I would like to ask, what efforts have been made by other relevant countries? [ChiCom Foreign Ministry]

The mouthpiece implies that China’s compliance with the sanctions resolutions is conditioned on “other relevant countries … solving the issue of the Korean peninsula through political and diplomatic means.” But the resolutions impose no such obligation or condition. The argument is spurious. It’s also circular, because North Korea’s first demand in negotiations will surely be that we stop enforcing sanctions, meaning that China’s de facto position is that it won’t comply with sanctions unless we lift sanctions.

Specifically on your question, competent authorities of China issued a statement on 9 December, immediately after the adoption of Resolution 2321 by the Security Council, ordering the suspension of coal imports from the DPRK until 31 December 2016. The Chinese side have taken measures in line with the requirements of the resolution and fulfilled its own international obligation. [ChiCom Foreign Ministry]

China’s obligation under Resolution 2321 does not end with issuing a statement and then forgetting about it. Surely China, which can have Jingjing and Chacha at a dissident’s doorstep 20 minutes after an offending Weibo post, can’t expect us to believe that it can’t enforce its laws. Surely China, whose customs authorities know how to detect and hold up shipments when doing so serves Beijing’s interest in bullying its neighbors, can’t expect us to believe that it can’t enforce its customs laws. When confronted with evidence of a violation of a U.N. sanctions resolution China voted for eight weeks ago in a clear, blue question, China’s mouthpiece gave a vague, red answer. That answer shows contempt for the United Nations and the United States.

For eight years, Barack Obama mostly kowtowed in the face of a whole course of aggressive Chinese conduct. Obama’s passivity pleased many “China hands” in academia, but worried our military, shook the confidence of our allies, and yielded some grave setbacks for peace and security in an economically vital part of the world. The most menacing of these is Kim Jong-un’s alarming progress toward nuclear breakout. Beijing acts as if it does not understand the risk of war if sanctions fail, or the risk that this war would involve China. Either that, or China sees a nuclear North Korea as useful for China’s plans to dominate northeast Asia.

For all that was wrong with the Obama administration’s North Korea policy, the former President did lay down a marker in blocking the assets of the North Korean military-controlled companies responsible for most of the coal exports. To the extent that Chinese importers purchased from those designated suppliers or failed to limit North Korean coal imports as required under U.N. resolutions and Chinese law, the U.S. has the authority to freeze the Chinese importers’ dollars. Alternatively, it could invoke section 205 of the NKSPEA to increase the inspection of cargo arriving at U.S. ports from Chinese ports that facilitated violations of the coal cap. This is a test for the new Trump administration. We’re about to find out if Donald Trump’s tough talk is more than just talk.

Continue Reading

Trump’s tweets show the right instincts on North Korea.

Kim Jong-un’s New Year speech turned out to more interesting than I’d predicted. No, he isn’t going on Atkins; he’s threatening to fire an ICBM that can hit the United States with a nuke. One wonders how the usual suspects at 38 North will spin this speech into predictions of glasnost and perestroika, but for now, consistent with another prediction I made, Kim Jong-un’s transition-year provocations are molding the President-Elect’s policy at a critical moment, and not to Kim Jong-un’s advantage:

For the last several months, Korea watchers have speculated which Donald Trump we’d see making our North Korea policy. Would it be the deal-maker who, in one breath, suggested he’d withdraw our troops from South Korea, sit down with a mass-murderer over hamburgers, and cut a deal? Or would it be the one who, in the next breath, called His Porcine Majesty “a maniac” and suggested that China should kill him? The two tweets Trump posted last night have given us the clearest vision of his North Korea policy since Election day. 

Whatever you may think about trade policy, Trump is unquestionably right about North Korea. China has done much less than nothing to help us in North Korea; it has actively undermined sanctions against it. Its companies sell North Korea the trucks that haul its missiles, its ports let WMD components and weapons pass through on their way to the Middle East and Africa, and its banks are laundering the money that ships North Korean weapons and enriches North Korean proliferators. If the Chinese government hasn’t been willing to help until now, it isn’t going to help unless it faces a much higher cost for its conduct. In fact, it probably won’t be swayed to help at all, but China’s banks and trading companies can be. In the short term, they should be our first targets.

In the long term, our strategy should be to put the North Korean government into something like financial receivership. We should identify and freeze every North Korean account, releasing only as many dollars as necessary for North Korea to import food, medicine, fertilizer, and humanitarian necessities. That strategy must be pursued unblinkingly — subject only to temporary and partial waivers — either until North Korea’s disarmament is verified and it makes fundamental humanitarian reforms, or until the regime no longer exists. We cannot afford to repeat the errors of 1994 and 2007 by throwing away our leverage before North Korea is disarmed, one way or another.

Lest anyone accuse me of proposing a “sanctions-only” policy — and I have never proposed one — our next targets should be the North Korean elites in Pyongyang. We must persuade them that they have no future with Kim Jong-un — that their salvation from purges and a bleak future for their children lies in reunification. How, exactly? Well, read this strategy paper.

We must also reach out to North Korea’s poor, beyond the limits of Pyongyang. We should advocate for their human rights at the United Nations, bilaterally, publicly, and at every opportunity — and we should tell them we doing so. We should help them build the clandestine banks, churches, schools, unions, factories, farms, clinics, newspapers, relief agencies, and police forces — a clandestine civil society that could also become the political foundation of both a national resistance movement and a reunified Korea.

Finally, if North Korea goes through with launching that missile, Trump should tell the military to shoot it down.

Before Donald Trump even ran for President, my wife and I had an involved conversation about what makes presidents effective. We concluded that Reagan was effective, whereas Obama and Carter, despite being much more intelligent men, were not. Why? Because an effective president doesn’t necessarily have to master the details of policy. All an effective president really needs are good instincts about policy, good judgment about appointees, the decisiveness to pick policies and stick with them, and the judgment to know when he’s about to cripple himself with a bad ethical or policy decision. To my liberal friends, and to my friends who are reluctant conservatives, hold that last thought. In fact, hold all of them until we see what the new cabinet and policies look like.

For now, in two tweets, Donald Trump has shown better instincts about the nature of our problem in North Korea, and how to address it, than Barack Obama (undoubtedly a fine man and a highly intelligent one) displayed in eight years in office. When Trump decides to make policy of the instincts he displayed in his tweets, the first man he should turn to is Senator Cory Gardner.

While the Obama administration has implemented portions of the North Korea Sanctions and Policy Enhancement Act, I encourage the Trump administration to continue with the full implementation and more importantly, the enforcement of the sanctions outlined in the legislation.

In particular, I urge the new administration to utilize the so-called “secondary sanctions,” which target outside entities, or companies, that help Pyongyang engage in illicit behavior. Many of these companies are based in the People’s Republic of China, and the US must not be afraid to anger Beijing by going after them. While the Obama administration has sanctioned and indicted four Chinese nationals and one Chinese-based company for its business tied to North Korea’s weapons program, there are many more that the Treasury Department can — and should — target with financial sanctions. [CNN]

Whether you voted for Trump or not, you should be rooting for him to get North Korea right. So much depends on that. We only get one president at a time. For the next four years, this is the president we are going to have. At this point, if Trump has any designs on making a North Korea deal, the indications are pointing more toward the parody I wrote nearly a year ago than “just another walk in Central Park.”

Continue Reading

Trump is right: China isn’t helping us disarm N. Korea

The Chinese government and the anti-anti-Beijing commentariat in the U.S. are apoplectic over Donald Trump again — this time, because Trump questioned the sacrosanct one-China policy and China’s cooperation in disarming North Korea:

Trump’s latest foray into East Asian affairs came when he was asked by “Fox News Sunday” about the planning for the Dec. 2 call. He said he learned about the call “an hour or two” before it took place but said he understood the stakes.

“I fully understand the One China policy, but I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade,” he said.

“I mean, look,” he continued, “we’re being hurt very badly by China with devaluation; with taxing us heavy at the borders when we don’t tax them; with building a massive fortress in the middle of the South China Sea, which they shouldn’t be doing; and, frankly, with not helping us at all with North Korea.”

“I don’t want China dictating to me,” he said. [Washington Post, Emily Rauhala]

A point of order at the outset: the U.S. has never formally accepted China’s creed that there is no China but China and that Xi Jinping is its prophet, although China hands have exercised their proxy to submit to it on our behalf.

The criticism of Trump’s statement that’s hardest for me to take seriously concerns North Korea. For example, the White House has said that U.S. acceptance of “one China” is the price of Beijing’s cooperation on North Korea, to which I ask, “What cooperation?” Although it’s a mild overstatement that China isn’t helping us “at all,” Trump also understates the problem. For years, China’s North Korea policy has been a long and (mostly) unchecked series of flagrant violations of U.N. sanctions to prop up the regime in Pyongyang and negate the pressure the members of the Security Council had agreed to exert on it. If it can be said that China “cooperated” with those sanctions by voting for them in the Security Council, those votes were also Beijing’s inducements to prolong negotiations over each resolution’s provisions and water them down before inevitably violating them.

Similarly, concerns that China could ignore North Korea sanctions if Trump plays the “Taiwan card” ring hollow. Beijing isn’t going to enforce North Korea sanctions voluntarily, but we might achieve that effect if its banks and trading companies are penalized for their dealings with Pyongyang. That will undoubtedly do short-term harm to U.S.-China relations, but given the escalating nuclear crisis in Korea, that cost may be worth paying.

Some China hands have taken their alarmism to ridiculous extremes. James Fallows has even pointed to a threat to sever diplomatic relations by that modern-day Mencius, Shen Dingli — the same Shen Dingli who green-lighted North Korea’s first nuclear test and compared the four South Koreans killed in the Yeonpyeong bombardment to fish (Shen also predicted that Trump would be easy to handle). Fallows calls Shen “the opposite of a hothead,” but if that’s so, I’d hate to see what the hotheads are writing. I incline to the view that Shen is a hothead, a nationalist, and bluffing. For China to sever relations would be bad for both countries, but it would be much worse for China, which has a shaky, export-oriented economy and a rapidly aging population.

Both Trump and Shen are impulsive nationalists who appeal to constituencies of hot-heads, but they rise from different environments. In the U.S., most academics and politicians discourage confronting China’s nationalism and expansionism; China’s establishment indoctrinates its subjects with anti-American nationalism. Trump voters reflexively reject “the establishment.” In China, the establishment is known as “the Chinese Communist Party,” no one votes for it, and no one is free to reject it. The CCP plucks hotheads like Shen Dingli from obscurity and lifts them to high office and global prominence where they act as quasi-official mouthpieces for state policy. Shen is no moderate by our standards, but he isn’t an outlier by China’s:

A Monday editorial in the Global Times, a state-controlled newspaper known for its strident nationalism, suggested Trump ought to read some books on U.S.-China ties. It also warned that if the United States abandoned the One China policy, Beijing would have no reason to “put peace above using force to take back Taiwan.” [WaPo]

As far as I know, Xi Jinping doesn’t tweet, but the Global Times doesn’t print editorials unless Xi Jinping’s censors approve them. It may be less staid and authoritative than the People’s Daily, but the Global Times is probably a better reflection of Xi’s nationalist views. Its threat of war validates that our deference to China has not bought more than an illusory and temporary peace. But keeping our commitments to Taiwan serves the U.S. interest in showing its reliability as an ally and deters war. Sidelining Taiwan is a formula for a slow strangulation of the best evidence that Chinese people are capable of self-government. And if the U.S. abandons Taiwan, from Taipei’s perspective, given its already advanced state of diplomatic isolation, it would make sense for it to acquire nuclear weapons.

“China needs to launch a resolute struggle with him,” the editorial said. “Only after he’s hit some obstacles and truly understands that China and the rest of the world are not to be bullied will he gain some perception. “Many people might be surprised at how the new U.S. leader is truly a ‘businessman’ through and through,” the paper said. “But in the field of diplomacy, he is as ignorant as a child.” [WaPo]

For Americans who find Trump’s statements to be emotionally satisfying, and for Chinese who find Global Times editorials to be emotionally satisfying, it’s wise to question the tactical utility of each side’s rhetoric. Taking these in inverse order, surely the editors of The Global Times have learned by now how well Donald Trump responds to criticism. Their editorials can make James Fallows call for his smelling salts, but other than that, the best possible outcome they can have is if Donald Trump never reads about them on Twitter.

The utility of Trump’s statements is more complex, because one could view those statements as corrections of the opposite extreme — the deferential policies of his predecessors. In accord with Trump’s statement, it has often seemed that China did, in fact, dictate to American presidents, who overlooked a series of actions by Beijing that damaged U.S. interests, disrupted the international order, violated international law, or were calculated to insult our leaders. Examples include China’s seizure of the South China Sea and its defiance of an international arbitration; its bullying of Taiwan, Vietnam, Japan, and the Philippines; its international abductions of Taiwanese and anti-“Western” show trials of dissidents; its hacking of OPM’s files; forcing President Obama to exit through the back door of Air Force One; and of course, its many violations of U.N. sanctions against North Korea.

Barack Obama indulged all of this without attaching serious consequences to any of it. And just as proponents of appeasing Pyongyang err by assuming that asking nicely is our only policy option and ruling out more coercive alternatives, proponents of appeasing China cannot see any policy options beyond asking nicely. What if asking nicely isn’t enough? It’s not an unreasonable question, given that the results of asking nicely speak for themselves. In any negotiation, unless you’re prepared to walk away and impose some penalty on an uncooperative adversary, you aren’t negotiating, you’re supplicating. The trick is to impose consequences without unduly escalating the problem.

Trump’s unpredictability frightens people near DuPont Circle and in Manhattan, which may eventually weaken him (though such predictions have had a poor track record so far). It won’t play well with many U.S. allies, who don’t want to be tied to an erratic ally, and who will need to be reassured that this is an act (and by all means, beseech the deity of your choice that it is). For that matter, it sometimes frightens me. But although Trump’s words sound impulsive and often are, in this case, they’re rooted in the coherent and well-thought-out views of those who are schooling him, whether you agree with those views or not. Support for closer relations with Taiwan extends to thoughtful, moderate conservatives who haven’t always supported Trump, but who reject the counsel of those who would have him indulge China’s arrogant expansionism. In recent years, China’s predations have only grown more extreme as American presidents have indulged them.

Unpredictability can also have tactical advantages for dealing with adversaries. Richard Nixon called his strategic unpredictability “the Madman Theory.” If Trump can take a methodical and minimally disciplined approach to what costs he’s willing to impose on China for its misconduct — and admittedly, that’s asking a lot — the result may be more U.S. leverage, more effective diplomacy, and a prevention of the very war that China hands are raising panic about. It’s not without its own risks, of course. In the end, this may be the strongest criticism of Trump on Taiwan:

“Trump’s call with President Tsai may signal a possible readjustment of the U.S. policy toward Taiwan and China respectively,” he said. “But from the perspective of the Taiwanese people,” he said, “the legitimate principle should be that Taiwan should not be used as something for trade between the great powers.” [WaPo]

Taiwan is not a card; it’s a country. It’s a vibrant democracy of 24 million people besieged by a repressive and illegitimate dictatorship whose legitimacy we nonetheless acknowledge for pragmatic reasons. Far be it from me to concede the importance of defanging Kim Jong-un, but if the price of protecting one ally is to sell the freedom and independence of another, that price is too high. The Taiwan-North Korea linkage can become a dangerous trap if taken too far. Our message to Beijing must be that while the U.S.-Taiwan relationship will not ebb below a certain minimal level, it might crest well above China’s present expectations if China continues to destabilize the region.

I’ll close with a qualified apologia for Trump, whose critics raise the concern that he may give Russia free reign to achieve its territorial ambitions forcefully. It would not excuse Russia or Trump to recall that the Clintons have had a series of foreign influence scandals of their own, including over their campaign contributions from donors linked to China. Hillary Clinton and Barack Obama, for whatever reasons, gave China license to achieve its territorial ambitions forcibly. Trump is now standing up to China on Taiwan and North Korea just as his critics expect him to stand up to Russia on Ukraine and the Baltic states. Give him credit for getting it at least half right for now, and hope he gets the other half right very soon. One can only hope that by 2020, our democracy will offer us better choices than picking the candidate whose patron dictator we fear the least. 

Continue Reading

The U.S. may (finally) be serious about capping North Korea’s coal exports

For almost three months after North Korea’s fifth nuclear test, the U.N. Security Council remained deadlocked over how to respond, with the U.S. and its allies pressing to limit Kim Jong-un’s access to hard currency and China trying to shield its belligerent protectorate from the consequences of its behavior.

Among the most hotly debated questions was how to limit North Korea’s coal exports to China, one of His Porcine Majesty’s most important sources of hard currency. Although UNSCR 2270, passed in March after the fourth nuke test, banned most of Pyongyang’s mineral exports, there was a gaping loophole allowing exports of coal, iron, and iron ore for “livelihood” purposes. Unfortunately, it soon became clear that “livelihood” translated into Chinese means “whatever.” The exception soon swallowed the rule, and coal exports did not fall; they rose … by a lot. By September, China’s coal imports from North Korea had risen 12.8 percent over the same period last year, to a record high. The Obama administration clearly felt that China was cheating. (See also my posts from March, July, and October and Stef Haggard’s post from yesterday.)

The eventual compromise the U.S. and China reached in UNSCR 2321 was disappointing, to say the least. Rather than take any plausible steps to ensure that Pyongyang really used its coal money to provide for the livelihoods of its hungry people, the resolution simply capped coal exports at $400 million or 7.5 million metric tons a year, whichever is less. (In 2015, North Korea exported $1 billion worth of coal to China) On paper, Chinese power companies were also prohibited from buying any amount of coal from entities associated with North Korea’s WMD programs.

The flaws in this “solution” are obvious. How will we know how much coal North Korea exported, and at what price? By relying on Chinese customs statistics? How will we know which North Korean entities really sold the coal? And more fundamentally, given that cash is fungible and North Korean despots have consistently prioritized their arsenals and their own high lifestyles over the survival of their people, how can anyone verify how the world’s most financially opaque society spent the money? If China really gave a whit about the “livelihoods” of North Koreans — in fact, it holds the lives of North Korean men, women, and children in utter contempt — it would have agreed to pay for “livelihood” coal in the form of food, or to the World Food Program. An unverifiable cap is a license to cheat.

~   ~   ~

But Treasury’s announcement last week of bilateral sanctions against certain North Korean coal exporters, who Treasury believes “may benefit the Government of North Korea or the Workers’ Part (sic) of Korea,” could go far to swallow the “livelihood” cap exception to the coal ban that swallows the rule.

OFAC designated Daewon Industries and the Kangbong Trading Corporation for having sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea, metal, graphite, coal, or software, where revenue or goods received may benefit the Government of North Korea or the Workers’ Part of Korea.  The Kangbong Trading Corporation’s parent is the Ministry of People’s Armed Forces.  Daewon Industries also operates in the energy industry in the North Korean economy, and may be subordinate to the Munitions Industry Department, which is sanctioned in UNSCR 2270, designated by the U.S. pursuant to E.O. 13382, and responsible for overseeing the development of North Korea’s ballistic missiles, including the Taepo Dong-2. [U.S. Treasury Dep’t Press Release]

With that action, Treasury’s clear message to Chinese buyers is that certain North Korean sources are off limits, cap or no cap. The recent example of the Dandong Hongxiang indictment and forfeiture complaint hovers over all of this, posing a credible threat that Chinese buyers could have their dollar assets frozen. And in case anyone thinks Dandong Hongxiang was a one-off, our diplomats have said it isn’t.

The United States has warned China it will blacklist Chinese companies and banks that do illicit business with North Korea if Beijing fails to enforce U.N. sanctions against Pyongyang, according to senior State Department officials. The tougher U.S. approach reflects growing impatience with China and a view that it has not strictly enforced existing sanctions to help curb Pyongyang’s nuclear program, which a U.S. policy of both sanctions and diplomacy has failed to dent.

U.S. Deputy Secretary of State Antony Blinken gave the message to Chinese officials in meetings in Beijing in October after North Korea conducted its fifth and largest nuclear test, the officials said. U.S. National Security Adviser Susan Rice and Secretary of State John Kerry stressed the importance of choking off financial flows to Pyongyang during a meeting with Chinese State Councilor Yang Jiechi in New York on Nov. 1. [Reuters]

There are some early signs that Chinese industry may have gotten that message, although it’s typical for Chinese companies to slow their trade with North Korea temporarily after the U.N. passes new sanctions. As I’ve pointed out here more than once, there is undeniable evidence that China has violated North Korea sanctions frequently and flagrantly for years. China will not wait long to resume its cheating and test our resolve. With demand for North Korean coking coal high, we’ll need a strong deterrent to enforce sanctions. If our President-Elect has done anything right, he has sent a clear (and apparently calculated) message that China’s sensitivities will not prevent him from acting decisively to protect U.S. interests. After all, it’s not as if our sensitivities have had much visible effect on China’s behavior.

This wasn’t the only energy sanction Treasury imposed last Friday:

OFAC designated the Korea Oil Exploration Corporation for operating in the energy industry in the North Korean economy.  The Korea Oil Exploration Corporation is a state-controlled enterprise of the North Korea Ministry of Oil.  The Korea Oil Exploration Corporation has reportedly worked to establish contracts with Iranian oil entities, in part to supply crude oil to two refineries in North Korea. [U.S. Treasury Dep’t Press Release]

Among others, that’s probably bad news for James Passin, a hedge fund manager who gambled his shareholders’ money on a refinery and oil exploration in North Korea. U.N. sanctions ban exports of aviation and rocket fuel to North Korea, but not crude. Until recently, China continued to export petroleum products to North Korea. (For the record, I oppose banning exports of gasoline, diesel, and heating oil to North Korea, for humanitarian reasons.)

~   ~   ~

The Obama administration’s designation of the North Korean companies consolidates a U.S. shift to a harder line on sanctions enforcement, reflecting a bipartisan consensus for tougher action in Congress. It’s also satisfying to me personally, because the administration has adopted the strategy I advocated here in October.  Note that the language in the Treasury Department’s press release (“revenue [that] may benefit the Government of North Korea or the Workers’ Part of Korea”) does not match the language of UNSCR 2321 (“entities that are associated with the DPRK’s nuclear or ballistic missile programmes or other activities prohibited by [applicable U.N.] resolutions”), because the administration relied on the domestic legal authority of Executive Order 13722 instead:

Sec. 2. (a) All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in: any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

   (i) to operate in any industry in the North Korean economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be subject to this subsection, such as transportation, mining, energy, or financial services;

   (ii) to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs;  [EO 13722]

Those provisions, in turn, implement sections 104(a)(8) and 104(b)(1) of the North Korea Sanctions and Policy Enhancement Act. They may have also reflected Treasury’s interpretation of the coal export ban as passed in March, in UNSCR 2270. U.N. resolutions don’t enforce themselves. They require U.N. member states to implement their sanctions through legislation. Member states that want U.N. sanctions to work benefit from a U.N. imprimatur to globalize sanctions enforcement. Each level of authority needs and complements the other.

Tactically, it was wise of the administration to wait for the (undoubtedly difficult) negotiations with China to conclude before it acted. The clear message it sent at the conclusion of that negotiation is that, for the time it has left, it will hold China to its word. Let’s hope the next administration is equally serious.

Continue Reading

Why Seoul’s blacklisting of Air Koryo & Dandong Hongxiang matters

South Korea is the first of the Free Three (the U.S., South Korea, and Japan) to announce independent multilateral sanctions on North Korea following the approval of UNSCR 2321. Some of the measures, such as the blacklisting of Choe Ryong-hae and Hwang Pyong-so, will probably mean almost nothing until some future left-wing president tries to give one of them a ticker-tape parade along the Chongro.

An extension of South Korea’s ban on ships that have entered North Korean ports within the last 180 days will do more, by forcing shipping companies to choose between the modest trade with North Korea and the much more significant trade with Japan and South Korea. With North Korea’s own ships already under rising pressure even pre-2321, and now facing a loss of access to insurance, North Korea may soon find itself increasingly isolated from its export markets.

South Korea’s blacklisting of Air Koryo, while not directly significant by itself (Air Koryo doesn’t fly to South Korea) may foreshadow a corresponding action by the U.S. Treasury Department, which would freeze North Korea’s national airline out of the dollar system and seriously crimp its operations. (Update: That turns out to have been a pretty good guess. OFAC just released a new round of designations that includes North Korean banks, slave labor merchants, the Korea National Insurance Corporation, and Air Koryo. I’ll have more to say after work.) It could also clear the way for South Korean diplomats to lobby middle powers like Malaysia, Thailand, Kuwait, and Singapore to deny Air Koryo landing rights. That would be a severe blow to Pyongyang. South Korea’s diplomatic campaign against North Korea’s foreign clients has been highly effective this year.

The most important and courageous move, however, was this one:

In particular, Dandong Hongxiang Industrial Development and four of its executives were included on the list, marking the first time that a Chinese firm is facing South Korea’s unilateral sanctions.

The company is under investigation on suspicions that it exported aluminum oxide — a nuclear bomb ingredient — to the North at least twice in recent years. In September, the U.S. blacklisted it along with its owner and other company officials.

With the latest action by Seoul, a total of 79 individuals and 69 entities will be subject to sanctions in connection with the North’s nuclear programs. The government announced a blacklist in March as a follow-up move to the UNSC’s Resolution 2270 adopted in the wake of the North’s fourth nuclear test in January.

Any financial transactions with them will be prohibited, while their assets in South Korea will be frozen. The blacklisted people will also be banned from entering the country, which is seen as a symbolic action given that there are no exchanges between the two Koreas. [Yonhap]

This could be the first sign that the three allies, acting outside the U.N. and beyond the reach of a Chinese or Russian veto, are forming a coalition to combine their economic power behind secondary sanctions against Pyongyang. If Japan joins in this, it will mean that the Chinese trading companies that prop up His Corpulency’s misrule will now face not only the freezing of their dollar assets, but the loss of their trade relationships with the two most important non-Chinese markets in northeast Asia. If those Chinese trading companies think they can mitigate the risk of secondary sanctions by insulating themselves from the dollar, Seoul has just added an additional layer of risk for those that continue to trade with Pyongyang. If the Free Three have coordinated their sanctions well, Tokyo will soon add its heft to that risk. Trading companies’ shareholders, officers, and bankers may find that risk increasingly unacceptable.

Beijing knows that while Dandong Hongxiang is itself a dead letter, this sort of Progressive Diplomacy represents a dangerous precedent for its interests. I expect it to react furiously. Even a year ago, I could not have imagined Park Geun-hye antagonizing South Korea’s greatest trading partner this way. Today, with all the noise about impeachment and the North Korean crisis, the Chinese reaction could be crowded out of the headlines. But with Park having conceded that she cannot hold onto power for long, she has nothing to lose.

Not only does Park have no reason not to burn bridges, she may have her own reasons to punish China. If she’s at least as paranoid as I am, she may suspect China, or its North Korean dependent, of directly or indirectly supporting the media frenzy that led to her downfall. It seems plausible in the age of Wikileaks that foreign governments give clandestine support to media hostile to leaders who oppose their interests. She may even suspect them of having planted the tablet that first broke the scandal. Personally, I see no direct evidence of it, nor do I think it’s more than 20 percent likely, but I’ve yet to see anyone explain (or even inquire into) the remarkable coincidence by which a discarded device just falls into the lap of a hostile press and topples a head of state. It seems easier to pull off than, say, throwing Wisconsin to Trump.

Either way, Park Geun-hye isn’t going quietly, and she’s gambling that the actions she takes on her way out the door will have the support of a future President Trump. No matter how much the Hankyoreh rages, that will make those actions even harder for her successor to undo than for her to do. What we may be seeing here is the first brick in a multinational sanctions coalition in which the members concentrate their collective power against Pyongyang’s enablers. For now, the Free Three are the core of that coalition, but with skillful diplomacy and time, that coalition may soon include other middle powers, other issuers of convertible currencies, and key members of an increasingly fractious European Union.

Continue Reading

China breaks N. Korea sanctions it says won’t work because it’s afraid they’ll work

In yesterday’s post, I linked to reports suggesting that China’s failure to agree on the terms of a new U.N. sanctions resolution responding to North Korea’s latest nuclear test may be motivated by a desire to wait out the end of President Obama’s administration. This theory would only make sense if China figures it can get better terms from President Trump next year, but my post pointed to evidence of the opposite of this — that what we know so far about the key people advising Trump is that some want to increase sanctions against His Supreme Corpulency and his Chinese backers, and others would prefer to terminate his command with extreme prejudice. 

First, I’ll offer an important caveat: it can be treacherous trying to divine President Elect Trump’s policy views by listening to his advisors.

With that caveat, then, if the present pattern of selections and nominations continues, differences between the U.S. and China over North Korea may have to get worse under a Trump administration before they can get better. Men like John Bolton, Mitt Romney, James Mattis, and Michael Flynn probably believe that President Obama’s deferential approach to China, rather than improving relations, likely contributed to China’s (correct) calculation that it could get away with grabbing vast areas of the South China Sea, bullying its neighbors, undermining North Korea sanctions, and doing other things to escalate regional tensions. They may see more pressure on China as a prerequisite to defanging North Korea. They may dismiss China’s explanations of its North Korea policy as mendacious and double-dealing, which is only natural, given that China actually has at least six of them — all of them risible, mutually inconsistent, or both.

First, there is China’s official diplomatic position, expressed in its vote for no less than six resolutions at the Security Council. Implicit in these votes are two ideas — that China wants a nuclear-free Korean peninsula, and that economic pressure is an important part of a policy for achieving that end.

Second, there is the reality of China’s material and financial support for the North Korean regime, often in violation of U.N. sanctions, including the sale of proliferation-sensitive technology (missile trucks, for example). China has spent the last decade violating the same sanctions it voted for because trade and engagement and all that. As I’ve pointed out more than once, those violations are much too extensive and long-standing to be anything less than willful state policy.

Third, there is the propaganda line advanced by China’s scholars and acolytes that sanctions — that is, the ones China has spent the last decade violating — never work. (Except, of course, when they do, but more on that in a moment.)

Fourth, when called on its years of flagrant violations, China says it’s afraid that sanctions will work so well they’ll destabilize the regime in Pyongyang. Here’s a typical example of something you’ve read at least a hundred times:

China fears that stricter measures against North Korea, such as cutting off provisions of oil and food, would lead to a humanitarian disaster with millions of refugees flocking across the border. The collapse of Kim’s government could also put soldiers from South Korea and its U.S. ally right on China’s border, a scenario Beijing’s leaders want to avoid. [Bloomberg]

A premise of that view is that China would rather have a nuclear-armed, genocidal North Korea along its border than a democratic one friendly to the United States, which it views with intense hostility. Usually, that premise goes unspoken, but not always.

“The United States cannot rely on China for North Korea,” said Shi Yinhong, a professor of international relations at Renmin University in Beijing. “China is closer to North Korea than the United States.”

China sees living with a Communist-ruled nuclear-armed state on its border as preferable to the chaos of its collapse, Mr. Shi said. The Chinese leadership is confident that North Korea will not turn its weapons on China, and that China can control its neighbor by providing enough oil to keep its economy afloat.

The alternative is a strategic nightmare for Beijing: a collapsed North Korean regime, millions of refugees piling into China and a unified Korean Peninsula under an American defense treaty. [N.Y. Times]

A fifth argument is that Beijing has little real influence over Pyongyang, which is spurious nonsense: 

China provides North Korea with most of its food and energy supplies and accounts for more than 70 percent of North Korea’s total trade volume (PDF). “China is currently North Korea’s only economic backer of any importance,” writes Nicholas Eberstadt, senior fellow at the American Enterprise Institute. [Council on Foreign Relations]

That argument looks especially spurious this year, as China uses trade as a blunt instrument against South Korea over its deployment of the THAAD missile defense system, and against the United States itself. China has made more threats against the U.S. and South Korea over missile defense this year than it has against North Korea in a decade over the missiles and nukes that gave rise to the threat itself.

Finally, China has a last line of defense: We are, too, enforcing sanctions!  If it comes under sufficient diplomatic pressure, for a few weeks or months, Beijing will encourage a few banks and companies to freeze a few accounts, arrest a few North Korean money launderers, or inspect some cargo entering or leaving North Korea. This compliance typically lasts for a few weeks or months until the trade returns to business as usual.

In 2013, and again this year, Chinese banks seemed (for a few weeks) to have frozen North Korean accounts right after a sanctions resolution passed. But by September, the Justice Department’s indictment and forfeiture action against Dandong Hongxiang proved that Chinese banks had gone right back to servicing His Porcine Majesty’s slush funds. At first blush, a new Washington Post report by Anna Fifield, indicating that Sino-North Korean trade dropped off suddenly in recent weeks, looks like the latest Chinese head-fake in response to pressure from the outgoing Obama administration.

[T]rading has become significantly harder in recent weeks, a dozen people involved in doing business with North Korea said in interviews, the result of a double-pronged attempt by Beijing to communicate its anger with the regime in Pyongyang. 

“Everything’s become tougher since September,” a Korean Chinese factory owner who employs North Korean workers here told The Washington Post. “This crackdown is because of the missile and nuclear tests, and it doesn’t look like it’s going to blow over.” [Washington Post, Anna Fifield]

This could be a head-fake, but it could also mean something entirely different and much more significant — Chinese companies may be showing their fear of U.S. secondary sanctions. Specifically, Fifield sees some evidence that the Dandong Hongxiang action had an in-terrorem effect on other Chinese trading companies. Indeed, she speculates that this action had a greater impact than the passage of U.N. sanctions:

But an equal or even bigger influence is the surprise detention of a prominent Dandong business executive, a member of the Communist Party no less, who stands accused of helping North Korea dodge sanctions and obtain materials for its weapons program.

“When business people hear this kind of story, of course we feel very constrained and it makes us very cautious,” a South Korean businessman trading in this area said on condition of anonymity. The atmosphere is so tense that none of the businessmen interviewed were willing to be publicly identified, even as they insisted everything was aboveboard.

Business is down, but no one knows how long that will last. And even now there are plenty of ambiguous signs: The annual trade fair here was canceled- yet coal exports from North Korea are breaking records. China holds the lever, and its intentions can only be speculated upon. [Washington Post, Anna Fifield]

This highlights a point that sanctions skeptics tend to miss or gloss over — that the goal of secondary sanctions isn’t so much to change the attitude of the Chinese government (probably a fool’s errand) but to threaten the divergent interests of the Chinese banks and business that are the instruments of Beijing’s sanctions-busting. Chinese banks and businesses are content to break sanctions if it’s profitable to do so, but not at the cost of their assets or their access to international markets, trade, or finance. 

Fifield treats these reports with justifiable skepticism, noting that the Chinese government’s interest in maintaining North Korea’s status quo (however horrific for North Koreans) probably hasn’t changed. Indeed, I see little clear evidence in Fifield’s report that this drop-off is the result of Chinese government action. What’s interesting and noteworthy is the timing of this change (in September). On September 9th, North Korea conducted its fifth nuclear test, which brought more diplomatic pressure on the Chinese government to enforce sanctions. The Dandong Hongxiang actions were announced on September 26th. One could argue that either event was a greater influence than the other.

Fifield and Andrei Lankov, whom Fifield quotes, then proceed to say that years of sanctions have failed, even as Fifield sees evidence that the Dandong Hongxiang action might have worked. But this is a false distinction. It misses the key point that U.S. authorities acted against Dandong Hongxiang for laundering money for Korea Kwangsong Bank, which was designated by both the U.N. and the U.S. for proliferation financing in violation of U.N. sanctions. This was an example of a Member State using its national laws to enforce U.N. sanctions, which is the only way U.N. sanctions can be enforced. Dandong Hongxiang is precisely what it looks like when someone bothers to enforce U.N. sanctions for once.

It’s difficult to believe that a single enforcement action — particularly one that failed to act against the Chinese banks behind Dandong Hongxiang’s violations — will be enough to put significant and lasting pressure on Pyongyang. Chinese businesses may be waiting to see how the new Trump administration responds. Or, we may be seeing the Chinese government’s latest head-fake. But for now, the report bears watching, and may eventually validate the effectiveness of secondary sanctions. 

Continue Reading

If China is gambling on Trump to blunt N. Korea sanctions, it could lose bigly*

By all outward appearances, President Obama never really had a coherent North Korea policy. While pursuing a deal that Pyongyang either didn’t want or wouldn’t keep, it reacted to each nuclear test by building on John Bolton’s work and nominally tightening the sanctions the U.N. initially imposed a decade ago, in Resolution 1718. The idea, apparently, was to deter Pyongyang by threatening its plans to develop Hamhung and Chongjin, something it no more intends to do than the Confederacy intended to institute a slave literacy campaign. Under President Obama, sanctions were always incremental, were never well-enforced, and never seemed to be part of any plausible broader strategy.

Still, if only to make a display of doing something after each test, the U.S. would expend much diplomatic energy on haggling with China (and Russia — let’s not forget Russia) over the terms of a new resolution. In due course, the Security Council would approve it, and for three or four months, everyone would pretend that this time was different before returning to business as usual.

As of today, 74 days have passed since September 9th, when North Korea conducted its fifth nuclear test, yet there is still no agreed draft resolution. For those keeping score, that’s the longest delay yet between a test and a resolution (the previous record of 56 days was set earlier this year, after the fourth nuclear test).

Three weeks ago, The Wall Street Journal reported that the P-5 were close to a deal on “[a] new sanctions package … that more effectively blocks the regime’s overseas funding sources,” and might narrow a “livelihood purposes” loophole that effectively nullified a ban on North Korea’s coal exports (see also). The U.S. side was also pushing China to agree to “crack down” on North Korea’s slave labor exports.

Meanwhile, Bureau 39 continues to rake in millions of dollars from higher coal prices, at the expense of military-controlled trading companies (but see this contrary report that coal prices are actually falling).

Reports today say that talks between the U.S. and China are in “their final stages,” but we’ve heard that before, and we still have no word that the two sides have agreed on a draft resolution. A few days ago, Obama had his last meeting with Xi Jinping. The meeting produced little more than a pro-forma agreement that the Korean Peninsula should be nuclear-free, a statement that increasingly becomes moot for North Korea as it gains relevance for South Korea. One of Obama’s priorities for that meeting was to push China to crack down on North Korea. If the result isn’t a significantly tougher resolution within a week, we can probably conclude that President Obama failed to achieve that goal.

That would lend credence to reports that China is stalling talks on a new resolution, perhaps until Obama leaves office. According to those reports, China is still smarting over the U.S. indictment of flagrant sanctions cheat Dandong Hongxiang Industrial Development (while sparing the banks that facilitated the violations). It may be calculating that a President Trump will be more focused on economic issues and won’t want to start off by antagonizing China over a low-priority issue like North Korea. That would be a big gamble.

trump-casino

If so, China may be miscalculating. Although the President-Elect has yet to name several key members of his national security cabinet, what we know so far doesn’t suggest that he’s likely to adopt a soft line or make North Korea a back-burner issue. The most talked-about contenders for Secretary of State are Mitt Romney and … John Bolton (enough said?). James Mattis, who recently spoke to the President Elect about North Korea and other issues, didn’t earn the nickname “Mad Dog” by calling for agreed frameworks. (Update: My favorite Mattis quote: “I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes: If you fuck with me, I’ll kill you all.”)

There is also direct evidence of what those close to President Elect Trump have said about North Korea policy. In a meeting with South Korea’s deputy National Security Advisor Cho Tae-yong, Michael Flynn, the selectee to be the next National Security Advisor, called the U.S.-South Korea alliance “vital” and said the new administration would make North Korea a priority. At the time, Flynn did not specify how, but Cho later said that Trump would adopt “stern measures,” and that his aides see “no momentum” for dialogue with North Korea. Flynn was previously quoted as saying, “We should not let the current North Korea regime … exist for a long time.” 

Despite Trump’s loose talk of talks with His Porcine Majesty, one Trump advisor, former congressman Pete Hoekstra, has already ruled them out for “the near future.” Heritage Foundation ex-President and Trump advisor Edward Fuelner has specifically said that the U.S. would impose a secondary boycott on Chinese firms that are propping up Pyongyang financially.

Even before Election Day, we knew that the next president could clash with China over North Korea. The result of the election doesn’t seem to have diminished the likelihood of that. I increasingly incline to the view that either the current President or the next one should signal to the Chinese that if they don’t agree to and enforce tough new sanctions, we’ll walk away from talks over a new resolution and act on our own. That strategy would use a combination of progressive diplomacy and the thinly veiled threat of Executive Order 13722 sanctions to get foreign governments to enforce UNSCR 2270. President Obama knows what he needs to do, but lacks the will. China would be ill-advised to assume the same of President Trump.

~   ~   ~

* Update: I couldn’t resist changing the title.

Continue Reading
1 2 3 21