International Sanctions and North Korea’s Economic Future Sanctions and North Korea’s External Trade March 20, 2023
International Sanctions and North Korea’s Economic Future
Sanctions and North Korea’s External Trade
March 20, 2023
Sanctions and North Korea's External Trade
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LEE Jongkyu
Korea Development Institute
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March 20th, 2023
The objective of this paper is to analyze the contents and effectiveness of sanctions and their impact on North Korea's external trade. In addition, this study aims to examine the statistical significance of the sanctions' effects and estimate the direct damage inflicted upon the country. This paper contributes to the ongoing discourse on the consequences of sanctions against North Korea, and it aids readers in comprehending the secondary effects of the sanctions on other sectors, such as industries and regional economies, the foreign exchange balance, and the informal sector. The initial stage of this investigation involves establishing three parameters, which are as follows.
The first parameter pertains to the period of analysis. The consensus is that the imposition of truly "tough" sanctions occurred after the 2017 United Nations Security Council resolutions, the consequences of which were observed in 2018 and 2019. The outbreak of the COVID-19 pandemic in 2020 further complicated the situation. The resulting border closure had a direct impact on North Korean trade, making it challenging to differentiate between the effects of the sanctions and the pandemic.
The second parameter concerns the scope of external trade analysis. While it is meaningful to consider the country's external trade comprehensively, this study concentrates on North Korea's trade with China. This focus is justified by the significant influence that China exerts on the North Korean economy, accounting for more than 90% of its external trade. Bilateral trade has long been considered the sole reliable indicator of the effectiveness of North Korea sanctions. Supplementary data pertaining to external trade changes is provided in the annexes at the end of this paper to enable a broader perspective on the subject matter.
The third parameter encompasses the analysis of individual export and import items. The vast majority of North Korean sanctions have been aimed at the country's trade and have targeted specific goods. Consequently, the effects of sanctions became apparent first in the exports and imports of these items. Therefore, the direct effects of sanctions can be ascertained by scrutinizing the changes in the trade of designated items and comparing them to those of non-designated items. The analysis mainly involves examining the exports and imports of individual items. This approach is also beneficial for analyzing the changes in trade during the pandemic. Clarifying the effects of the COVID-19 trade suspension on the import of items that continued normally despite the strengthening of sanctions in 2018 and 2019 will illuminate which sectors of the economy have been affected by the pandemic and how.
The initial segment of this paper presents a comprehensive outline of the international sanctions imposed on North Korea and, specifically, their contents regarding the country's external trade. The subsequent discussions revolve around the effects of sanctions at the individual item level and an empirical analysis of their effects using the difference-in-differences method. The study also examines the changes that occurred during the pandemic and concludes with an overall assessment and implications.
Section 1. International Sanctions on Trade
Resolution 2321, adopted on November 30, 2016, in response to North Korea's fifth nuclear test on September 9, 2016, is deemed markedly distinct from prior related resolutions. Notably, it was specifically aimed at North Korea's coal exports, mandating UN member states to adhere to the $400 million or 7.5 million ton cap. Furthermore, it suspended the trade of statues and the supply of new helicopters or vessels to North Korea. The resolution is also dissimilar from its precursors in that it excluded the exemption clause on livelihood purposes.The first parameter pertains to the period of analysis. The consensus is that the imposition of truly "tough" sanctions occurred after the 2017 United Nations Security Council resolutions, the consequences of which were observed in 2018 and 2019. The outbreak of the COVID-19 pandemic in 2020 further complicated the situation. The resulting border closure had a direct impact on North Korean trade, making it challenging to differentiate between the effects of the sanctions and the pandemic.
The second parameter concerns the scope of external trade analysis. While it is meaningful to consider the country's external trade comprehensively, this study concentrates on North Korea's trade with China. This focus is justified by the significant influence that China exerts on the North Korean economy, accounting for more than 90% of its external trade. Bilateral trade has long been considered the sole reliable indicator of the effectiveness of North Korea sanctions. Supplementary data pertaining to external trade changes is provided in the annexes at the end of this paper to enable a broader perspective on the subject matter.
The third parameter encompasses the analysis of individual export and import items. The vast majority of North Korean sanctions have been aimed at the country's trade and have targeted specific goods. Consequently, the effects of sanctions became apparent first in the exports and imports of these items. Therefore, the direct effects of sanctions can be ascertained by scrutinizing the changes in the trade of designated items and comparing them to those of non-designated items. The analysis mainly involves examining the exports and imports of individual items. This approach is also beneficial for analyzing the changes in trade during the pandemic. Clarifying the effects of the COVID-19 trade suspension on the import of items that continued normally despite the strengthening of sanctions in 2018 and 2019 will illuminate which sectors of the economy have been affected by the pandemic and how.
The initial segment of this paper presents a comprehensive outline of the international sanctions imposed on North Korea and, specifically, their contents regarding the country's external trade. The subsequent discussions revolve around the effects of sanctions at the individual item level and an empirical analysis of their effects using the difference-in-differences method. The study also examines the changes that occurred during the pandemic and concludes with an overall assessment and implications.
Section 1. International Sanctions on Trade
The United Nations Security Council instituted sanctions on North Korea following the country's first nuclear test on October 9, 2006, with the adoption of Resolution 1718 on October 14, 2006. This resolution aimed to ban military-related cooperation with North Korea and froze the country's funds and assets connected to weapons of mass destruction (WMD) or missile programs. It did not, however, extend beyond these measures. A second nuclear test on May 2, 2009, led to the adoption of Resolution 1874 on June 12, 2009, which prohibited North Korea from exporting materials related to arms and called for the inspection of departing vessels by UN members. Nevertheless, this resolution was considered ineffective as it allowed exemptions of exports for humanitarian purposes. The third nuclear test on February 12, 2013, was succeeded by Resolution 2094, adopted on March 7, 2013, which called for more stringent inspections of vessel suspected of transporting prohibited items, and expanded the range of luxury goods subject to sanctions. Nevertheless, the effectiveness of the sanctions for the entire North Korean economy remained low.
Resolution 2270, adopted on March 2, 2016, in response to North Korea's fourth nuclear test on January 6, 2016, marginally broadened the scope of the sanctions beyond the military sector and enhanced monitoring and inspection measures. The resolution urged UN member states to deny takeoff, landing, or overflight permissions for North Korean aircraft suspected of transporting prohibited items and mandated the inspection of all North Korean cargo. Furthermore, it barred UN members from registering, owning, operating, or insuring North Korean vessels and allowed them to apply catch-all provisions for WMD. The resolution, however, again contained exemption clauses for livelihood purposes that inevitably diluted the impact of the sanctions. For instance, although the resolution prohibited the sale or supply of aviation fuel to North Korea, it allowed exemptions for humanitarian purposes with the prior approval of the sanctions committee and for civilian aircrafts outside North Korea. Consequently, the resolution's collateral effects on other areas were naturally limited.
Resolution 2270, adopted on March 2, 2016, in response to North Korea's fourth nuclear test on January 6, 2016, marginally broadened the scope of the sanctions beyond the military sector and enhanced monitoring and inspection measures. The resolution urged UN member states to deny takeoff, landing, or overflight permissions for North Korean aircraft suspected of transporting prohibited items and mandated the inspection of all North Korean cargo. Furthermore, it barred UN members from registering, owning, operating, or insuring North Korean vessels and allowed them to apply catch-all provisions for WMD. The resolution, however, again contained exemption clauses for livelihood purposes that inevitably diluted the impact of the sanctions. For instance, although the resolution prohibited the sale or supply of aviation fuel to North Korea, it allowed exemptions for humanitarian purposes with the prior approval of the sanctions committee and for civilian aircrafts outside North Korea. Consequently, the resolution's collateral effects on other areas were naturally limited.
In 2017, North Korea proceeded with the launch of the Hwasong-14 intercontinental ballistic missile, less than a year after its fifth nuclear test. This event occurred on July 4, a holiday in the United States commemorating its independence from Great Britain, and garnered significant international concern. Subsequently, the international community imposed stringent sanctions through Resolution 2371, adopted on August 5, 2017. These sanctions are widely regarded as the most rigorous ever levied against North Korea, prohibiting the export of coal, iron, iron ore, lead, and seafood, which constitute the primary sources of the country's foreign currency income. Notably, no exemption clause was included in the resolution. Additionally, the sanctions banned new joint ventures and investments as well as any expansion of existing ventures, effectively precluding economic cooperation between North Korea and foreign nations.
Despite the implementation of the sanctions, North Korea conducted its sixth nuclear test in Punggye-ri on September 3, 2017. In response, the United Nations Security Council adopted Resolution 2375 on September 9. The resolution was aimed at depriving North Korea of its foreign currency income sources and imposed a ban on the export of textiles and clothes, which were the only major export items allowed at that time. The resolution prohibited UN member states from issuing new work permits to North Korean workers (while allowing existing permits to expire) and prohibited joint ventures with North Korea. The resolution also sought to impact North Korea’s general economy by limiting its import of essential energy. To achieve this, it imposed an annual cap of two million barrels on North Korea's petroleum imports from 2018 and a complete ban on the import of liquified natural gas.
The launch of Hwasong-15 by North Korea on November 29, 2017, was swiftly followed by the United Nations Security Council's adoption of Resolution 2397 on December 22 of the same year. The resolution constituted a comprehensive measure that effectively blocked all exports from North Korea and limited the supply of refined and crude oil products to the country. As such, it effectively eliminated any remaining opportunities for North Korea to evade sanctions.
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