Archive for Sunshine

Why legal investments in North Korea are a money laundering risk

You’ve often seen me write about the importance of “financial transparency” in transactions with North Korea. For a decade, economic engagement has mostly been done by one of two models: (1) controlled interactions with members of the elite, the actual effects of which are negligible at best; and (2) barbed-wire capitalism, where a few North Korean officials relay orders from foreign managers to hand-picked workers, and where the regime seals the whole enterprise off to prevent it from influencing the local community.

The former are, for the most part, of little financial significance. The latter may represent a significant source of income for illegitimate uses, and may also help the regime hide its flows of dirty money.

It wasn’t supposed to be this way by now. The idea behind economic engagement was to gradually draw North Korea into compliance with the rules that the civilized world lives by. Yet ten years later, the South Korean Unification Ministry can’t tell us how much (if anything) Kaesong’s workers receive after the regime takes its cut from their wages, and the Undersecretary of the Treasury recently expressed his concern about just how North Korea is spending that money.

The U.N. Panel of Experts now expresses a related worry — that North Korea could be using its ostensibly legal businesses to conceal and launder the proceeds of illicit activity:Screen Shot 2015-03-03 at 7.32.53 AMScreen Shot 2015-03-03 at 7.33.11 AMA few days ago, we saw that North Korean diplomats have been smuggling gold to earn hard currency for Pyongyang. That’s not just of concern because of how North Korea spends the earnings, but also because of concerns about conditions in which the gold is mined. As noted here, however, North Korea continues to run most of this business through the dollar system.

Screen Shot 2015-03-03 at 7.33.23 AM

Hence, the renewal of FATF’s warning about “countermeasures.”

Recently, a scholar friend emailed me that his opponent in a debate had criticized the effrontery of blocking North Korean assets that are the co-mingled proceeds of legal and illicit activity. In fact, that is standard law enforcement practice, because co-mingling is the essence of how criminal organizations conceal the illicit origin of their earnings.

Defendants often commingle SUA proceeds with legitimate funds. The government need not prove that all proceeds in a transaction were unlawfully derived, but must be able to trace some of the proceeds to a SUA. Criminally derived proceeds deposited with legal funds are considered to be withdrawn last unless the account/business is deemed to be permeated with fraud. This implies that the business operations are so intertwined with fraud that to segregate the legitimate operation and profits is impossible. Special agents should work closely with the attorney for the government when investigations involve commingled funds to ensure the elements of the crime are met. [IRS]

That’s why Congress, and many third-country parliaments, have long given their law enforcement agencies the authority to seize co-mingled funds.

The Treasury Department could do a great deal to regulate transactions with North Korea — and perhaps, put more food into empty bellies and drive the development of a true market economy — simply by requiring OFAC to license them. As a condition of each license, the Treasury Department could ask the applicant for assurances that the ultimate end-use of the funds would be for items that would benefit the people: food, clothing, medicine, consumer goods, materials for civilian construction projects, or electronic items like desktop computers that help to open up information flows.

To make this requirement truly effective, the EU Central Bank could impose similar requirements for Euro-clearing transactions. If Canada, Britain, Australia, and Switzerland joined, they would collectively cover just about all of the world’s convertible currencies, leaving only trades in Chinese Yuan unregulated. Of the latter, the Treasury Department could still target the most egregious with secondary sanctions.

In his paper about labor conditions in Kaesong, Marcus Noland called for investors in North Korea to adhere to a single set of minimal standards, akin to the Sullivan Principles. What I’m calling for here is a financial analogue to the Sullivan Principles — a requirement that investors ensure that their money will be used to better the lives of the North Korean people, rather than being wasted on weapons and luxury goods.

The real flaw in the engagement argument today, ten years after it began, is that it can’t show any significant, enduring, positive impact on North Korea, its treatment of its people, or its relations with the wider world.

It’s unfortunate that so many advocates of engagement are too focused on making nice with their minders to insist that the regime make any of the changes they once promised. Two good places to begin would be transparency in their labor and financial arrangements. If they did, they might strengthen their argument by showing that they’ve made legitimate, positive change in how North Korea does business.

Somehow, I don’t think this will encourage Kim Jong Un to engage with us.

I think Marzuki Darusman is a good man who means well, but it’s difficult to derive a coherent policy from this:

“This is a new thing, spotlighting the leadership and ridiculing the leadership. In any authoritarian, totalitarian system, that is an Achilles’ heel,” Darusman said in an interview in Tokyo, where he held talks with the government on an investigation into North Korea’s abductions of Japanese citizens.

If this kind of ridicule seeps into North Korea, it could become lethal for the regime, he said. “If they want to preserve their system, the only way to do that is not to close themselves off from the international community but to actively engage,” he said. [Washington Post, Anna Fifield]

OK, so they need “engagement”–presumably, trade–to preserve the system, which we all agree should not be preserved. So should we cut off trade?

But the world also should be actively engaging with the Kim regime to draw it out of its self-imposed isolation, Marzuki Darusman said Friday, calling the United States’ increasingly aggressive approach toward North Korea “unfortunate.”

“In the overall picture, I think much hinges on the way the U.S. acts,” said Darusman, a former attorney general of Indonesia. A harder line against North Korea could “stall or delay the process that needs to be put into place,” he said.

I don’t get it. If ridicule of His Porcine Majesty scares the bejeezus out of the little gray men in Pyongyang, and if we’re supposed to use engagement to mock His Porcine Majesty mercilessly, why does Marzuki suppose that Kim Jong Un would widen engagement rather than stick with the current, controllable kinds of engagement that are serving North Korea’s priorities rather nicely? Meanwhile, Kim Jong Un continues to succeed at smothering the penetration of real capitalism.

Marzuki is a distinguished jurist who has done a great service to humanity by the facts he’s helped to establish. Maybe that’s enough for one man for one lifetime.

President Park’s unification plan is missing a Phase 2

For months now, we’ve heard Park Geun Hye telling us about how reunification would be a “jackpot” for both Koreas, but we’ve never heard her explain just how she intends to achieve this result. This left some rather important questions unanswered.

Having heard so much from President Park about Phase 3 (profit!) and so little about Phases 1 or 2, at least we know that she’s asking us to resume the collection of underpants:

South Korean Unification Minister Ryoo Kihl-jae said Wednesday that Seoul and Washington should make greater efforts to engage North Korea, saying that dialogues would make pressure on the communist regime more effective. [….]

Until now, Seoul and Washington focused on inducing Pyongyang to change by cooperatively putting pressure upon it. [Yonhap]

Oh, no they haven’t. They’ve simultaneously pursued the mutually inconsistent objectives of economic sanctions and economic subsidies, chasing talks without acquiring the leverage for those talks to succeed.

However, to make the pressure more effective, dialogues and cooperation are also necessary,” Ryoo said during the forum at the Center for Strategic and International Studies (CSIS).

Wow. I can’t believe no one ever thought of that.

“Our two countries should therefore strengthen our coordination for engagement as well. We will need to show Pyongyang clearly what it can earn by giving up the path of provocation and isolation and choosing the path of dialogue and cooperation,” he said.

WADR, Minister Ryoo, I think the North Koreans know exactly what they’d earn, which explains why they continue to choose the path of isolation.

Well, I’ll say this much—I understand Park’s plan better now; after all, how different is it from the same plan we watched Kim Dae Jung and Roh Moo Hyun waste a decade and seven billion-plus dollars on? And just look how far that got us. Of course, some of us observed these Sunshine Lite ideas in Park nearly a decade ago, and her North Korea policy has been a triumph of maddening consistency over experience. I’ll predict, with high confidence, that these plans will end just as well as they have before.

I don’t disagree that the efforts of the U.S. and South Korea to engage the North have often been poorly coordinated. I’m not opposed to bilateral or multilateral talks with North Korea, so long as the terms are strictly coordinated among allies, the positions firm, and the expectations realistic. I’m all for engagement — so long as it doesn’t profit the regime we’re ostensibly pressuring — although I think we’ve mostly been engaging the wrong people and wish we’d engage the right ones.

My suspicion (you could even say hope) is that Ryoo’s position isn’t really about those things, and that it’s really about Park’s current political weakness, and her desire to protect her political flanks from the Northern Wind ploy, than it is about having a coherent vision for changing North Korea’s behavior.

Ryoo also said that it is important to help North Korea actually see the benefits of cooperation with the outside world. That will be a way to “pragmatically improve the quality of life and the human rights situation of the North Korean people,” he said.

What do you mean? They have ski resorts! Problem solved!

Ryoo arrived in Washington on Thursday on a trip aimed at broadening U.S. understanding of South Korean President Park Geun-hye’s trademark push for preparations for unification with North Korea. He is the first South Korean unification minister to visit the U.S. since 2011.

But on the other hand, if Park’s true goal was to tell a weary domestic audience what it wants to hear, why would she send Ryoo to deliver these remarks in Washington, while calling on our government to support this wildly unoriginal vision?

On the face of it, the Obama Administration sounds supportive, except for the immovable object that stands in the way of everything:

U.S. Assistant Secretary of State Daniel Russel expressed staunch support for Park’s unification vision, saying it provides a vivid picture of the benefits the North could reap from reconciliation and denuclearization, as well as the benefits that reunification will bring to South Korea and the region as a whole.

“The U.S. firmly supports this vision. We will never accept a permanent division of the Korean peninsula,” he said. “The ROK (South Korea) and the U.S. will continue to do everything we need to do to keep the peace on the peninsula through a combination of deterrence, and a strong allied defense.”

He also urged the North to give up its nuclear program, stressing that Pyongyang won’t be able to achieve security and prosperity it wants while pursuing nuclear weapons. The North’s “byeongjin” policy of simultaneously seeking economic and nuclear development will never succeed.

“It’s not a policy. It’s a pipe dream. It will not happen. North Korea can’t have its cake and eat it too,” Russel said of the North’s policy. “Our strategy raises the cost of continued defiance and ultimately leaves the DPRK no viable alternative but to honor its commitments and to come into compliance with its international obligations, first and foremost, with its obligations to irreversibly and verifiably denuclearize.”?  [Yonhap]

Is there a single politician in South Korea who remains in firm contact with reality? Unfortunately, U.S. policy toward North Korea has almost always been deferential to Seoul. It’s not hard to guess why that might be.

Max Fisher’s criticism of the Sunshine Policy is spot-on

Washington Post alumnus Max Fisher, now writing at Vox, presents a graph and data showing how, despite all of its abhorrent behavior, North Korea’s trade (most of it with China and South Korea) has grown, and how that leads to more abhorrent behavior.

The way it’s supposed to work is that North Korea’s belligerence, aggression, and horrific human rights abuses lead the world to isolate it economically, imposing a punishing cost and deterring future misdeeds. What’s actually happening is that North Korea is being rewarded with more trade, which is still extremely small, but growing nonetheless, enriching and entrenching the ruling Kim Jong Un government, even as it expands its hostile nuclear and missile programs. [….]

But it turned out that North Korea was just exploiting the Sunshine Policy as a con. The greatest symbol of this was the Kaesong Industrial Complex, a big production center just on the North Korean side of the border, where South Korean companies and managers contract with North Korean workers. The idea was that this daily contact would ease cultural tension and that the shared commercial interests would give the countries a reason to cooperate. In practice, though, the North Korean government stole most of the workers’ wages, big South Korean corporations exploited the ultra-cheap labor to increase profits, and North Korea didn’t ease its hostility one iota.

The Sunshine Policy ended in 2007, correctly rejected as a failure by South Korean voters. But the trade continued, as did the work at Kaesong. South Korean corporations, which have even more political power there than do American corporations in the US, have come to enjoy this trade as a source of revenue and cheap labor, and push to maintain it. That drop you see in 2013 is actually because North Korea shut down Kaesong for a time as a political provocation — it was the South Koreans, paradoxically, who wanted to reopen the facility that directly funds the North Korean weapons occasionally used to kill South Koreans. [Vox, Max Fisher]

Those South Korean corporate profiteers have since allied themselves with “progressive activists,” who vary from the anti-anti-North Korean to the pro-North Korean, to call on President Park to lift sanctions on the North. It must be the most unlikely alliance since 1939.

I’m not sure how Fisher’s analysis of the problem could have been better, unless he’d driven home the point that the Sunshiners justified their policy by predicting that this preferential trade would catalyze economic reform and liberalize North Korean society. Clearly, that hasn’t happened; in fact, I could make a strong case that the opposite is closer to the truth. In their desperation to catalyze reform, Sunshiners have perpetuated the status quo instead.

This is why no rational person would invest in Kaesong

North Korea has unilaterally raised those “wages” that South Korean companies pay the North Korean regime for labor at Kaesong—wages that the workers probably never see, and that for all the Unification Ministry knows, are used to buy iron maidens, centrifuge bearings, and 300-millimeter rocket fuses. The Unification Ministry isn’t happy, but only because wage hikes are bad for business:

“Our firm position is that it’s impossible to revise the wage system without consultations between the South and North,” the unification ministry official told reporters on background. The government will soon deliver the position to the North in writing, he added. He pointed out that wages are an important element of the complex’s competitiveness. [….]

The two sides have a 49-point agreement on the working conditions for them. The North abruptly informed the South of its plan to revise 13 of the stipulations last week. The measure includes the scrapping of a 5-percent cap on the annual increase rates in their minimum wages and hikes in overtime payment. [Yonhap]

Remember, these are the people our State Department expects to make and keep a nuclear freeze deal.

I can’t imagine why any sensible investor, lured by the promise of low wages and taxes, would plow his money into one of the world’s most politically risky places, knowing full well that those low wages can unexpectedly turn not-that-low, that the taxes can unexpectedly turn high, and that the products can’t legally be imported into the United States. Knowing all that, doesn’t choosing Kaesong over Thailand or the Philippines seem rather irrational?

Oh, so this is what pissed the North Koreans off.

Speaking at the International Democrat Union last Friday, Park said this:

In a luncheon meeting with the party leaders, President Park Geun-hye said North Korea’s pursuit of nuclear weapons had resulted in the country’s isolation and dire human rights conditions.

“Now the North Korean people are faced with hunger and a tragic humanitarian situation as the North sticks to the path of… isolation by developing nuclear arms,” Park said during the luncheon at the presidential office Cheong Wa Dae.

“I request consistent attention and support from IDU members as international support and cooperation are vital for improving the North Korean situation and bringing about unification of the two Koreas,” she said. [Yonhap]

So that explains that.

Suki Kim recalls a “good student” in Pyongyang

Writing in The New York Times, Kim recalls a young North Korean student who made her uncomfortable with his risky questions about government in America:

What I had just described was, more or less, democracy. I could not read his expression, but he thanked me and excused himself.

That evening, I discussed my growing fears about the student’s motives with my teaching assistant. There was nowhere we would not be overheard, so we took a walk around campus, hoping it would look as though we were discussing the day’s lesson, stopping occasionally to take pictures of each other. Maybe, I said, he was on a mission to earn some sort of reward by trading information about us.

“But what if that’s not the case?” my assistant asked. “What if he’s genuinely curious?”

The second possibility made us both grim. What if we were the instigators of his doubt? What if he was starting to think that everything he had known thus far was a lie? [N.Y. Times]

If the student wasn’t a counterintelligence plant, Kim would make one of the more credible cases I’ve yet seen for permissive engagement. Still, there must be other ways of reaching young North Koreans–both inside Pyongyang and beyond–that are less risky for both the teachers and the students.

To know whether the benefits of PUST are worth the risks, I’d have to know how much money PUST is pouring into the regime’s bank accounts, how many other teachers are propagating equally subversive views, how many students get to hear those views, and just how open the students really are to different forms of government. All of those things are unknowable to us.

It’s hard to imagine that PUST has a more favorable cost-benefit ratio than leaflet balloons, much less radio broadcasting.

Another Kaesong firm folds

An unidentified small manufacturer for watch and mobile phones cases on Wednesday submitted an application for dissolution to the committee handling affairs at the joint park, according to officials from Seoul’s unification ministry.

It marked the second case since June 2009 that South Korean firms operating at the Kaesong Complex have closed their businesses. It also marked the first time since the operation of the park had been halted briefly last year.

The company, which had employed about 100 North Korean workers, has been suffering from business setbacks since 2012 as its annual sales fell to US$300,000 from its peak of some $700,000. [Yonhap]

The other firm referenced is Skinnet, an apparel manufacturer. Another company, LivingArt, the maker of the much-ballyhooed “peace pots,” went bankrupt in 2006. Its head was subsequently indicted for embezzlement.

Overall, I don’t see much evidence that Kaesong is growing, attracting significant foreign investment, or declining. The reports about the health of its rebound from the 2012 shutdown have conflicted, but I’m always suspicious that the South Korean Unification Ministry has spun reports from Kaesong to make it look more successful than it is, in order to entice more third-country hostages to the complex. My best guess is that it has bumped against its ceiling, but I’ve been surprised by its resiliency. I guess subsidies will do that.

I’d tell you what I think of North Korea’s sudden mini-summit …

but Robert Koehler has already told you roughly what I think, so I can save most of the keystrokes. North Korea has had more false rehabilitations than Linsday Lohan, Robert Downey Jr., and the entire membership of Grateful Dead, combined. It would take nothing less than the announcement of a coup d’etat for me to take this at all seriously.

I wonder if Pyongyang’s Southern Wind ploy means that its Hostage ploy with Japan is about to blow up, as predicted. For now, Park Geun Hye continues to resist domestic political pressure to lift sanctions until the North actually does something to deserve that.

~   ~   ~

Update: OK, fun’s over. Back to your bunkers:

The defence ministry said the South’s patrol boat had initially fired a warning shot after the North Korean vessel penetrated half a nautical mile inside the South’s territorial waters.

Instead of retreating immediately, the North patrol boat opened fire, so “our side fired back,” a ministry spokesman said, adding that there neither vessel had directly targetted the other and “no damage” was sustained.

The South’s patrol boat fired “around 90″ rounds in total.

The incident took place at 9:50 am (0050 GMT) near the South Korean border island of Yeonpyeong, and the North patrol boat retreated to its side of the border 10 minutes later.

“We are now watching North Korean troop movements and tightening vigilance against any additional provocations,” the spokesman said. [AFP]

Prediction: the Kaesong worker safety inquiry will be a whitewash.

You may recall that several weeks ago, some North Korean workers at Kaesong fell ill with symptoms of benzene poisoning. The bad news is that we still haven’t heard a peep of protests on the workers’ behalf from the Korean Confederation of Trade Unions, for some reason. The good news is that the Korean government cares enough about appearances to have ordered a safety inquiry:

The South Korean government began a two-month probe Thursday into the working conditions at 33 factories in the Kaesong Industrial Complex following reports of a suspected benzene poisoning case there.

All of the selected factories use a relatively large amount of chemical materials, according to the unification ministry.

The ministry commissioned the (South) Korean Industrial Health Association to conduct the probe, which is scheduled to last through Nov. 30. The association’s experts are making an on-site inspection to assess the safety and security of the working conditions “through an objective survey” and take measures for systemic management, said the ministry.

In August, North Korea claimed a number of its workers at two car parts makers operating in the industrial park suffered some symptoms of exposure to benzene and other toxic chemicals. [Yonhap]

But the usual problem of transparency in North Korea is already interfering with the investigation’s integrity. Yonhap reports that although “[t]he South has suggested medical checkups to determine the exact cause,” the North Koreans have refused to allow them.

An “investigation” based on incomplete evidence might deceive a few gullible investors, but wouldn’t do much more for the welfare of the workers than the World Food Program’s monitoring has done to end hunger in North Korea. If South Korea really cared about the workers’ welfare, it would close down any enterprises that use toxic chemicals in their processes for which it’s unable to complete a thorough and objective safety review. Better yet, it would also investigate how much of their nominal wages the North Korean workers receive at all.

Australia-Korea FTA causes Kaesong backlash

I couldn’t have said it any better than this, and Jay Lefkowitz may be the last person who did:

“We can’t see how the Australian government in good conscience could bring such goods into the country,” he said. “It’s absolutely appalling, it basically would make the Australian government and Australian consumers complicit in the exploitation of North Korean workers by their government, and would ensure that Australian dollars are going directly into the pockets of the North Korean regime. Let’s be clear: it’s aiding and abetting exploitation.”

Mr Robertson said conditions in the GIC were “nowhere near basic international standards for labour rights or human rights”.

“They’re not free at all. What is happening in the Gaesung Industrial Complex is you essentially have workers who are controlled by North Korea being provided to the South as cheap labour.

“The payment doesn’t even go to the North Korean workers — it goes to an intermediary and the North Korean government takes a cut. Any sort of expression or effort to demand more rights from the workers would of course face retaliation. The only reason they stand for this kind of thing is because they’re from North Korea and they’re getting access to foreign currency.” [news.com.au]

Fortunately, that’s not going to happen without another negotiation and Australia’s agreement, and given the recent influence of Justice Kirby’s report on Australia’s public opinion and foreign policy, the obstacles to such an agreement seem considerable, to say the least.

The Australian deal on “outward processing zones” sounds a lot like the arrangement that was worked out in the U.S.-Korea FTA. Years later, Kaesong products still can’t be sold in U.S. markets … at least not legally. That isn’t likely to change anytime soon, because Kaesong remains intensely unpopular in Congress.

Seoul to Pyongyang: Let’s talk about human rights.

“Not only in high-level talks but also in any occasions of inter-Korean dialogue in the future, (Seoul) expects to have comprehensive discussion on all sorts of humanitarian issues including human rights,” unification ministry spokesman Lim Byeong-cheol said in a briefing.

“If high-level talks are held (between Seoul and Pyongyang), I think it is desirable that they discuss all the issues they want to discuss including this (human rights) issue,” Lim said. [Yonhap]

I’m not terribly impressed with Park Geun-Hye’s attention to human rights in North Korea overall, but this does represent progress when compared to the Roh Moo Hyun / Chung Dong-Young Die-in-Place Policy.

What if the capitalist North Korea is just as bad as the communist North Korea?

There are many reasons why the Sunshine Policy failed, most of them rooted in the character of the men who rule in Pyongyang, and in the character of the men in Seoul who conceived and executed it. And in that conception, the flaw that was obvious to some of us from the very beginning was that Sunshine — and its surviving derivatives — invested its monotheistic faith in economic reform, yet in practice (and to a large extent, in theory, too) it was agnostic about political reform and disarmament.

I have always held something closer to the opposite priorities. Personally, I believe that capitalism, with just enough regulation to maintain a peaceful society, is a superior economic system to any form of statism, but I’m not messianic or Hegelian about it, as long as the system doesn’t deny its people the right to live. Of course, North Korea does deny its people the right to live, but things like privatizing agriculture and local markets have never been the principal focus of Sunshine advocates, either. They have always invested their passion in top-down capitalism — specifically, projects like Kaesong, Kumgang, and any sign that the regime was interested in trade and money.

Which, of course, it has been all along. Pyongyang has consistently allowed just enough trade to feed, equip, and maintain the military, and buy swag for the elite. The Washington Post‘s Anna Fifield reports from Pyongyang that the elite are getting more swag, but this does not mean that North Korea is reforming.

Cars, for instance. A recent visitor, in the capital for the first time since 2008, found many more of them on the streets — and not just the locally produced “Pyonghwa” brand or Chinese BYDs, but Lexus sport-utility vehicles and late-model BMWs and Audis.

And shoes. Many women are dressing more fashionably, and brightly colored, shiny high heels, often with jewels, appear to be the trend du jour.

Changjon Street, in the heart of the city, near Kim Il Sung Square, is unrecognizable from a few years ago. Rows of round apartment towers line the street. Lit up at night, they are festooned with neon bands, giving them the appearance of giant fireworks. By day, the towers are reflected in the glittering river, making the city look “just like Dubai,” in the words of one government-appointed minder. [Washington Post, Anna Fifield]

I’m far more likely to accept these representations from Fifield than from, say, Jean Lee, because Fifield is no one’s cheerleader.

But the situation in the cities outside the capital, and even more so in the countryside, remains extremely dire. The state does not provide anything like the kinds of rations it once did, and hunger remains widespread.

Even in Pyongyang, there are still many more signs of extreme poverty than wealth. Bent-over elderly women carry huge sacks on their backs, men with weathered faces sit on their haunches by the roadside, and North Korean children appear noticeably smaller than their South Korean peers.

Foreign visitors to Pyongyang are driven along the same routes from their hotels, no matter where they are going, leading them to conclude that only certain streets are fit for foreign consumption.

We see reflections of the same thing in Pyongyang’s military belligerence, its continued weapons development, its spurning of the U.N. Commission of Inquiry, its retrograde crackdowns on information, agriculture and trade by non-elite North Koreans, and its new foray into hostage-taking. The rich are getting richer, but the people in charge are still psychopaths.

The most interesting question Fifield’s report raises is where all that money is coming from. An easier question to answer is where North Korea is getting all the luxury goods that it’s banned by U.N. resolutions from buying.

But indirectly, Fifield raises a more fundamental policy question. What if we accept, for the sake of argument, that Kim Jong Un has abandoned socialism for state capitalism, without disarming or altering its essential contempt for humanity? Did economic reforms in China necessarily equate to political reforms? Was Nazi Germany less of a menace despite being state-capitalist? If North Korea’s de facto abandonment of socialism means that Sunshine has succeeded, it’s an awfully hollow victory.

Derivatives of Sunshine still live, of course, as do a surprising number of die-hard adherents. But whenever I ask them why they adhere, they confess that it isn’t really because they believe, but because they can conceive of no better ideas.

 

And this is big news — and something I should care about — why, exactly?

”Reversing its earlier decision, North Korea said Thursday that it will not send a cheerleading squad to accompany its athletes who will compete in the upcoming Asian Games in South Korea.”

That’s probably very good news for the cheerleading squad, considering what happened to the last one.

North Korean workers at Kaesong show symptoms of exposure to toxic chemicals …

including benzene. If you wonder why people such as myself rail against slave labor and the lack of labor rights at Kaesong, this is why. A real independent union would have stood up for the workers and raised this issue long ago. I can’t say I have much confidence in the desire of either of the governments involved — much less the employers — to tell the truth about the exposure of help the victims; after all, that wouldn’t serve the financial or political interests. People go into North Korea full of promises to change its system. North Korea’s system always changes them instead.

The natural default candidate to advocate for these workers would be South Korean unions. Sadly, South Korea’s largest labor group behaves like Pyongyang’s wholly owned subsidiary.

~   ~   ~

Update: More here, via AFP. And according to this article, Kaesong is suffering from deteriorating facilities, nervousness by potential investors, and (surprisingly) labor shortages. Why? Despite the high premiums the regime extracts from South Korean investors, the regime is increasingly renting out its workers to Chinese factories instead. According to the article, however, the regime can’t raise those premiums even more because Kaesong labor already costs more than it does in Southeast Asia. Interesting.

RFA: N. Korea tells overseas trade reps not to use the internet

In our latest of edition of North Korea Perestroika Watch, Radio Free Asia, citing identified sources speaking on condition of anonymity, reports that Pyongyang has instructed its overseas money-men to stop using the internet. The regime is even threatening to seize their work and personal laptaps to enforce the order. The trade workers tell RFA that the order, which even includes the use of e-mail, is impeding their ability to do their jobs and earn foreign currency.

A source living in China along the border with North Korea said the order was issued verbally by senior officials in Pyongyang recently. It is causing great inconvenience to the trade officials, most of whom are based in China with others living in Europe, Russia, and Africa, the source said.

“The order discouraging trade workers abroad from using the Internet by the North Korean government is actually a warning to not [disseminate] outside information,” said the source, who is linked to trading of goods with North Korea. “Trade workers abroad are used to contacting the North Korean authorities at home by email,” the source said. [Radio Free Asia]

According to the report, most of the North Koreans overseas save enough to buy laptops, which they then use to access South Korean web sites. Presumably, many of these people understand enough English to all kinds of sites, including this one. Which could mean I’m going to stop getting all those hits from Cambodia, Singapore, Malaysia, Tanzania, and Ethiopia.

If the report is accurate — and it seems like something that could be confirmed through multiple sources — then it suggests that the regime must have enough fear of the internet’s subversive power to incur some economic harm from the imposition of this inefficiency.

The regime has gone so far as asking trade workers to communicate by fax, presuming anyone else still has a fax machine.

The U.N. Panel of Experts recently printed documents showing that North Korean trading companies used e-mail with .silibank domains to facilitate the weapons transactions with Cuba that were uncovered by the seizure of the Chong Chon Gang last year. Years ago, Sili Bank was the false-dawn perestroika sighting of the week when it set up a pay-for-message e-mail system for foreigners. Curiously, and unlike many other North Korean banks, Sili Bank does not have a SWIFT number, suggesting that if it really does operate as a bank, it doesn’t operate internationally.

Personally, it’s hard for me to imagine that this order will last much longer than North Korea’s ban of the U.S. dollar, or South Korean clothing. It will be a huge hassle for a few weeks, after which all those affected will have that much less respect for the state’s authority.

If Kaesong “wages” aren’t used to pay workers, what are they used for? (The Unification Ministry won’t comment.)

In yesterday’s post about Kaesong, I argued that by any reasonable definition, its North Korean workers are forced laborers, and that the best evidence we have suggests that the vast majority of their “wages” are probably stolen by the Pyongyang regime, through a combination of direct taxation and confiscatory exchange rates. My argument relied heavily on a recent study by the economist Marcus Noland, who has done an excellent job researching questions that most journalists have overlooked, addressing the ethical implications of the answers, and arguing for a voluntary code of ethics that could go a long way toward address those implications.

Noland has done a good enough job discussing the ethics of Kaesong’s labor arrangements that I see no need to add to it. I do, however, see some important legal implications that no one else has addressed in depth.

The first set of legal issues arises from long-standing suspicions that Kaesong manufacturers are sneaking components or finished goods from Kaesong into U.S. markets, a benefit that the South Korean government sought when it negotiated its Free Trade Agreement with the United States, and which it raised again as recently as last October. Because the two sides couldn’t agree on the inclusion of products from Kaesong, they agreed instead to Annex 22-B of the FTA, on “Outward Processing Zones.” Annex 22-B, however, is nothing more than an agreement to keep talking. It’s fair to say that Congress would not have ratified the FTA without the understanding that Kaesong products were excluded from it.

That means that despite the FTA’s ratification by the Senate, by its own terms, it lacks supremacy over a statute that specifically excludes goods that are “mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor.”

You’re entitled to question the administration’s determination to enforce this law, but as it turns out, an obscure Customs regulation at 19 C.F.R. 12.42 allows private petitioners to oppose the landing of goods made with forced labor in U.S. ports. The U.S. cotton industry has been especially effective at using this provision to tie up Uzbek cotton in customs warehouses, and to raise political pressure against the import of cotton from Uzbekistan. If human rights organizations became aware of specific Kaesong-made goods being imported into the United States, Noland’s study now gives them a strong evidentiary basis to tie those products up in customs warehouses, too. This, by itself, might be enough to make the export of those products to the United States unprofitable.

Finally, depending on the amount of Kaesong labor embodied in a product, its import to the United States could violate complex country-of-origin labeling rules, or could be receiving a lower-tariff status under the U.S.-Korea Free Trade Agreement, from which Kaesong products were ostensibly excluded (after much contentious negotiation).

Nor does the administration seem inclined to defend Kaesong imports. In 2011, President Obama signed Executive Order 13,570, which banned North Korean imports from the U.S. market. Any violation of that executive order carries the severe penalties of Section 206 the International Emergency Economic Powers Act — 20 years in prison, a fine of $1,000,000, and a civil penalty of $250,000. Despite a recent spike in suspicious travel by U.S., South Korean, North Korean, and Chinese diplomats, the North Koreans are a no-show, tensions with North Korea are back on the rise, and the Obama Administration is hinting about strengthening sanctions, not weakening them.

~   ~   ~

These still aren’t the questions that cause the greatest discomfort at the South Korean Unification Ministry. That question is this: If the money paid into Kaesong isn’t going to the workers, just where is that money going? As Treasury Undersecretary David Cohen recently said, “Precisely what North Koreans do with earnings from Kaesong, I think, is something that we are concerned about.”

Cohen is concerned because his department enforces the regulations and executive orders that implement U.N. Security Council sanctions against the North’s WMD programs. Those resolutions limit unrestricted cash flows to North Korea, in order to deny its WMD programs of funding. The latest of those resolutions, U.N. Security Council Resolution 2094, was passed in 2013 and says this:

“11.  Decides that Member States shall, in addition to implementing their obligations pursuant to paragraphs 8 (d) and (e) of resolution 1718 (2006), prevent the provision of … any financial or other assets or resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution ….;

[….]

“14.  Expresses concern that transfers to the DPRK of bulk cash may be used to evade the measures imposed in resolutions 1718 (2006), 1874 (2009), 2087 (2013), and this resolution, and clarifies that all States shall apply the measures set forth in paragraph 11 of this resolution to the transfers of cash, including through cash couriers, transiting to and from the DPRK so as to ensure such transfers of bulk cash do not contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution;

“15.  Decides that all Member States shall not provide public financial support for trade with the DPRK (including the granting of export credits, guarantees or insurance to their nationals or entities involved in such trade) where such financial support could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution;

The use of the words “could contribute” is burden-shifting language, like the language in Paragraph 8(d) of Resolution 1718 (2006) that required member states to “ensure that any funds, financial assets or economic resources are prevented from being made available” to persons and entities involved in North Korea’s WMD programs. You can’t “prevent” unless you know where the money is going in the first place, and if you aren’t asking, you aren’t preventing. The Security Council’s clear intent was to force member states and companies under the jurisdiction of their laws to move beyond feigning ignorance and make reasonable inquiries. The Unification Ministry’s Sergeant Schultz act doesn’t work anymore.

Past precedent gives us reason to share Undersecretary Cohen’s concern. As early as October 2000, Noland wrote here that North Korea’s revenues from the Kumgang Tourist project, which he estimated at $450 million per year, were being deposited into a Macau bank account controlled by the notorious Bureau 39, for “regime maintenance,” despite the lack of “real systemic implications for the organization of the North Korean economy or society.” For all we know, North Korea could be using its Kaesong revenues for even more sinister purposes.

There is also the broader problem that a steady stream of cash dulls the economic pressure that is the outside world’s principal lever for disarming North Korea.

“The fact is, South Korea and China are providing North Korea with a considerable amount of unconditioned economic support,” said Marcus Noland, a Korea expert at the Institute for International Economics in Washington. “As long as that support is forthcoming, North Korea will not feel as much of a need to address the nuclear issue, and attempts to isolate the North economically will have less and less credibility and effect.” [WaPo 2005]

The Congressional Research Service also discusses the tension — some would say, schizophrenia — attendant in alternating between economic subsidy and economic pressure. No wonder South Korea has clung so dearly to the pretense that Kaesong wages really are paid to the workers. Unfortunately for the Unification Ministry, the evidence contradicts this cherished falsehood — it’s impossible to deny that Kaesong is a subsidy to Pyongyang. The U.N. Security Council, however, has chosen economic pressure, most recently with the active support of South Korea’s Ambassador to the United Nations (at the time UNSCR 2094 passed by a vote of 15-0, South Korea was a non-permanent member of the Security Council).

But what does South Korea know about what Pyongyang is doing with its money? I posed the question to the Unification Ministry in an e-mail and on their Facebook page. Here, in relevant part, is what I asked them:

Recently, I read a report by the economist Marcus Noland indicating that most South Korean investors at Kaesong don’t actually know how much of their nominal wages the North Korean workers there actually receive, and that the North Korean government likely keeps most of the money. First, can the Ministry comment on that? If you deny this assertion, can you explain the basis for your denial?

Second, this assertion also raises the question of where the money is going. A series of U.N. Security Council resolutions requires Member States to ensure that their money isn’t being used to finance North Korea’s WMD programs. A senior U.S. Treasury official and a report by the Congressional Research Service recently raised concerns about how North Korea uses its revenue from Kaesong.

Can you describe what if any financial checks, precautions, and transparency are in place to ensure that North Korea isn’t using Kaesong earnings for illicit purposes, to facilitate human rights abuses, or to buy weapons to threaten people, including U.S. troops, in South Korea?

Also, I’m wondering if you’ve sought an advisory opinion about Kaesong from the U.N. 1718 Committee’s Panel of Experts.

So far, the Unification Ministry hasn’t responded. I’ll update this post if they do, but I’d be astonished if they had extracted enough financial transparency measures from the North to answer the question in good faith.

Incidentally, one of the interesting points I gleaned from the last U.N. Panel of Experts report is that the POE gives advisory opinions on transactions with North Korea. If the Unification Ministry isn’t asking for one, it may be because it doesn’t want to know the answer.

Largely because of South Korean domestic politics and government subsidies, Kaesong has outlasted a few of my predictions of its demise. It will face more challenges this year and next, as we appear to be entering a new cycle of North Korean provocations, and as South Korea’s present leader appears unusually disinclined to tolerate them. The fact that Kaesong’s workers are functionally slaves deserves to be one of those challenges. So does the likelihood that the entire enterprise consequently violates a series of Security Council resolutions designed to protect South Korea’s own security.

Dear President Park: He’s not that into you (updated with N. Korea’s rejection)

In every successful relationship, there are certain things one must not ask the other party to the relationship. No matter how much you may desire it, the answer will never be “yes.” The request itself will not be received well. Depending on the request, the special equipment it would require, and the identity of the other participants, it may even lead to the destruction of property or violence.

In the relationship between North and South Korea, it is apparently no longer OK to ask the other party — that party being North Korea — for nuclear disarmament. One strong indication of this is the fact that as of this morning, both Koreas are shelling each other’s territorial waters, and residents of Yeonpyeong Island are hiding in shelters. (Update: David Chance of Reuters says “[t]here was no fleeing to shelters.”)

What are we to take from this? Perhaps the most obvious is what North and Korea have is not a relationship at all, which makes the idea of cohabitation seem blithely unrealistic. But that is what President Park proposed during a visit to Dresden, where she announced her long-awaited plan to reunify Korea. You can read the full text of her speech here.

Much of Park’s proposal consisted of things most of us would call unobjectionable — the idea that reunification of Korea is ultimately desirable, and that the eventual marriage of South Korea’s technology and capital with North Korea’s labor, natural resources, and favorable geography would catalyze the rapid economic development of the North and greater prosperity throughout Korea.

In theory, the North might even join Park in deploring the cultural, economic, and ideological divisions between North and South, and in aspiring to reduce the mutual isolation and distrust across the DMZ. What that would amount to in practice sounds like Sunshine 2.0:

[T]hose from the south and the north must be afforded the chance to interact routinely. We will encourage exchanges in historical research and preservation, culture and the arts, and sports — all of which could promote genuine people-to-people contact – rather than seek politically-motivated projects or promotional events. [….]

This would consist mostly of exchange and education programs that various NGOs have pursued on a small scale for decades. The fact that North Korea allows these limited programs suggests that they’ve helped North Korea accumulate wealth for its various priorities, but they’ve failed to make any apparent favorable change in Pyongyang’s world view. Oh, and Park is still promoting that “international peace park” along the DMZ.

Park also called for more humanitarian and development aid to North Korea:

The Korean Government will work with the United Nations to implement a program to provide health care support for pregnant mothers and infants in North Korea through their first 1,000 days. Furthermore, we will provide assistance for North Korean children so they could grow up to become healthy partners in our journey toward a unified future. [….]

[W]e must pursue together an agenda for co-prosperity through the building of infrastructure that support the livelihood of people. South and North Korea should collaborate to set up multi-farming complexes that support agriculture, livestock and forestry in areas in the north suffering from backward production and deforestation. [….]

[South] Korea could invest in infrastructure-building projects where possible, such as in transportation and telecommunication. Should North Korea allow South Korea to develop its natural resources, the benefits would accrue to both halves of the peninsula. [….]

In tandem with trilateral projects among the two Koreas and Russia, including the Rajin-Khasan joint project currently in the works, we will push forward collaborative projects involving both Koreas and China centered on the North Korean city of Shinuiju, among others. hese will help promote shared development on the Korean Peninsula and in Northeast Asia. [….]

If South and North Korea could shift the adversarial paradigm that exists today, build a railway that runs through the DMZ and connect Asia and Europe, we will see the makings of a genuine 21st century silk road across Eurasia and be able to prosper together.

None of this is particularly new, either. Expect the North’s reaction to be, at best, to accept as much of this as it can easily control and still profit from.

There were also things that Park’s failure to mention would have caused worldwide consternation — so she did mention them, ensuring swift rejection from Pyongyang:

Ladies and gentlemen, It pained me to see a recent footage of North Korean boys and girls in the foreign media. Children who lost their parents in the midst of economic distress were left neglected out in the cold, struggling from hunger. Even as we speak, there are North Koreans who are risking their lives to cross the border in search of freedom and happiness.

And this:

North Korea must choose the path to denuclearization so we could embark without delay on the work that needs to be done for a unified Korean Peninsula. I hope North Korea abandons its nuclear aspirations and returns to the Six Party Talks with a sincere willingness to resolve the nuclear issue so it could look after its own people.

Should North Korea make the strategic decision to forgo its nuclear program, South Korea would correspondingly be the first to offer its active support, including for its much needed membership in international financial institutions and attracting international investments. If deemed necessary, we can seek to create a Northeast Asia Development Bank with regional neighbors to spur economic development in North Korea and in surrounding areas.

Park did not clarify how many of these benefits are conditional on North Korea’s disarmament, which is an essential point. If they aren’t conditional on disarmament, this is little more than a recycled list of Sunshine projects. If it is conditional, judging by Pyongyang’s reaction, it’s dead on arrival.

As an aside, I wonder how many Germans shifted in their seats uncomfortably when Park said, “Wir sind ein Volk!”

Since Park’s speech at last week’s nuclear security summit — which North Korea denounced at length — North Korea has published calls for Park’s resignation, called her “a faithful servant and stooge of the U.S.” for calling for North Korea to give up its nuclear weapons, and insisted that its missile tests, prohibited by multiple U.N. Security Council resolutions, are “justifiable.” It continues to repeat that it will never give up its nuclear weapons and threatened to “bolster” its “war deterrent,” usually understood as a reference to its nuclear weapons. It even threatened to carry out a new kind of nuclear test, presumably one using enriched uranium.

There is more. Referring to the South’s seizure of a North Korean fishing boat that entered South Korean waters, the North is vowing revenge against “military gangsters.” The North continues to deny its responsibility for sinking the ROKS Cheonan.

Can someone as smart as Park Geun-Hye really be naive enough to believe that these proposals are plausible in the near term? Although they are very much in line with the Sunshine Lite policies that Park has advocated for at least a decade, I doubt it. It seems more likely to me that Park is issuing these proposals now, while keeping the conditions for their realization vague, with an eye on South Korea’s approaching mid-term elections. The North’s escalation of its rhetoric suggests that Park’s vision has about as much chance of being realized as Lee Myung Bak’s strikingly similar vision.

As Park herself has said, “It takes two hands to clap.” The sound that can be heard from the Yellow Sea today isn’t applause.

Update: As I expected, the other hand isn’t clapping:

The North’s main Rodong Sinmun newspaper called [Park] an eccentric old maid, an idiot and a hen over her comments on North Korea’s economic difficulties and its homeless children. Park’s comments “are an unpardonable insult” to the North, the newspaper said.

I knew they wouldn’t like this part:

The Rodong Sinmun, an official mouthpiece of the North, said Park’s comments on pregnant women and infants in North Korea are “disgusting,” noting that Park hasn’t even been able to get married.

The newspaper also claimed Park’s policy on unification with North Korea is designed to hurt the North’s ideology and its socialist system.

Stop me if I’m out of line here, but if Pyongyang doesn’t want to keep hearing this sort of thing, maybe it should consider feeding its people.

KCNA has also published a lengthy defense of its nuclear weapons, and it’s still harping on the “pirates” and “gangsters” who seized that North Korean fishing boat, and denouncing President Park by name. It may be preparing to carry out large-scale military exercises near Pyongyang, and it has also declared a no-fly/no-sail zone in the Sea of Japan, suggesting that more fireworks will follow.

It seems we’ve entered a new cycle of provocations.