Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

Author Yong Sueng Dong

By Yong Sueng Dong

Introduction
Recently, global economic uncertainty has been growing due tothe US-China trade war and Japan-South Korea dispute. Such
clashes can develop into the form of economic sanctions. Economic
sanctions are a step that the party imposing the sanctions takes
against the receiving party in order to push through their demands.
The US trade tariffs imposed on China are a measure to achieve
policy change in China. The country imposing sanctions imposes themost effective ones by taking into considering the economic
interdependence between the two countries. In the country on thereceiving end of the sanctions, the inconvenience and disadvantages
to the general public arising from the sanctions function as politicalpressure. Policy-makers calculate the cost benefit of maintaining
power and decide whether to change policies or not. This is thegeneral theory on economic sanctions.
Powerful economic sanctions are also being imposed on North
Korea. However, rather than changing policies, North Korea is further
strengthening its opposition. While we can interpret this reaction tomean it will take more time until its policies change, considering
North Korea’s past pattern of behavior, it is highly likely that
opposition will escalate rather than its policies changing. The reason
for this assumption can also be drawn from the general theory of
economic sanctions. In the following paragraphs, I would like to lookat the impact that the economic sanctions have had on the North
Korean economy. After considering the general theory of economic
sanctions, I will begin with a discussion on whether the sanctions
imposed on North Korea by the international community are actuallyfunctioning and the changes that have emerged in the North Korean
economy and society through analysis focusing on recent events.
Then I will consider why a phenomenon that does not match theprimary goal of economic sanctions is being observed in North
Korea.

General Theory of Economic Sanctions
Academically, it is difficult to find an analysis that shows thegeneral theory that economic sanctions are effective. This is because
the effect of sanctions may differ according to the situation of thecountry in question. The results may also differ depending on theeconomic interdependence of the imposing party and receiving party,
and the level of political stability within the country in question. I
have summarized the general theory in the flow chart below (Chart
1).
Economic sanctions are used by the imposing party against thereceiving party to push through the imposing party’s demands.
Therefore, whether to impose sanctions or not is determined by the
degree of the relevant parties’ benefits and disadvantages rather thanby the legitimacy of the action. Thus it can be said that the imposing
party is not always righteous, as well as the receiving party did notnecessarily do something wrong. We must consider sanctions on thepremise that we cannot apply right-or-evil values.
The form of sanctions can be largely classified into multilateralsanctions and bilateral sanctions. Multilateral sanctions are mainly
measures taken by a resolution of an international organ such as theUnited Nations (UN). When a country in question takes action that
goes against international standards, the international community
decides to impose sanctions on that country in order to control orcorrect it. However, because the UN does not have the power to force
implementation, individual member countries choose to orchestratebilateral sanctions against the target country. Member countries
report their degree of implementation of UN resolutions to the UN

CHART 1

Flow chart of economic sanctions
Economic Sanctions- Multilateral sanctions- Bilateral sanctions

Effect of Sanctions

Changes in Political Actions- Types of sanctions- Degree of participation in sanctions- Economic scale and degree of external
dependence of the sanctioned
countries- Political pressure from the public- Policy-makers consider social costs andbenefits to make decisions

Policy changes in the
sanctioned countries

Source: Compilied by the author

https://www.jef.or.jp/journal/

Japan SPOTLIGHT • January / February 202069

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

and it then evaluates them. The disadvantages faced by a member
country that does not implement sanctions by a resolution of the UN
can also be regarded as sanctions in a broader sense. Representative
examples of such sanctions in modern society are the UN
resolutions for sanctions against North Korea and Iran and theimplementation thereof by respective countries.
Economic sanctions can be categorized into trade sanctions,financial sanctions, and sanctions against individuals. Trade
sanctions are cases in which trade with the receiving country is
prohibited or restricted. In modern society, in which economic
exchange in the international community is active, not being able toconduct trade is an extremely large disadvantage. The higher an
economy’s external dependence, the higher the degree of
disadvantage is due to sanctions. Financial sanctions are a method torestrict financial transactions with the receiving country. When
comparing it to the human body, finances in modern society are likeblood. The main function of blood is to carry various substances
throughout the body. Finances also have the function to make thetransportation of goods possible in the international community. To
restrict financial transactions is to naturally restrict thetransportation of goods. Therefore, it is recognized as a powerful
sanction.
Financial sanctions also include investment restrictions. Sanctions
against individuals are cases that restrict the travel and residency ofpeople. They limit the dispatch of workers from abroad as well as
restrict the overseas visits and stays of people from sanctionreceiving countries. Conversely, they include cases in which visits tothe sanction-receiving country by citizens of the sanction-imposing
country are restricted as well. In this way, the types of sanctions can
be classified by targets: people, goods, and the currencies that linkthem.
The effects of sanctions manifest in different ways depending on
the economic scale and dependence of the sanction-receiving
country. With regard to economic scale, the economic sanctions
between the United States and China are a representative example.
The US and China boast the first and second most powerful
economies in the world respectively. If the US imposes trade
sanctions on China, the economy of China – called the world’s
factory – may face atrophy. However, we cannot underestimate thedisadvantages the sanctions may cause to the US as well as to theinternational community. Because the US-China trade war would
cause turmoil in the global economy, the two countries as well as theinternational community are concerned about the US-China tradewar. That is the reason the two countries cannot head in a drastic
direction. Iran and North Korea can be mentioned as representative
examples of the degree of economic dependence. Iran’s economic
structure depends on exporting oil and importing industrial goods.
Its external dependence is extremely high. On the other hand, North
70 Japan SPOTLIGHT • January / February 2020

Korea’s economic structure depends on exporting goods in order toimport goods that are not produced or are lacking in North Korea.
Thus its external dependence is extremely low. Therefore, while Iranis highly susceptible to economic sanctions, North Korea’s
susceptibility is relatively low.
Susceptibility to sanctions is influenced in general by the politicalenvironment within the country in question. If the political voice ofthe people of the country in question rises as their inconveniencegrows due to sanctions, and if the government can overcome thissituation, it will not accept the demands of the other party regardlessof sanctions. On the other hand, the weaker the political structure to
the demands of the people, the less susceptible it is to sanctions.
However, because sanctions have a relative effect, the sanctionreceiving country is not the sole affected body. The citizens of the
sanction-imposing country may also face disadvantages due to the
sanctions, which may stumble as they continue. In such cases as
well, the situation is swayed by the political voice of the citizens.
Overall, the reason we still cannot consistently organize the effects ofeconomic sanctions is that it is difficult to maintain sanctions
continuously because of numerous variables existing due to theinterconnection of the sanction-imposing and sanction-receiving
parties, internal political environments, and so on.

Powerful Economic Sanctions Against North Korea& Their Impact
The economic sanctions imposed on North Korea span all areas:
trade, finance, and people. It is no exaggeration to say that the mostpowerful methods that the international community as a whole andrespective countries can mobilize are being employed. North Korea
cannot export its biggest export goods such as coal, iron, textiles,
and fisheries products. These account for over 70% of North Korea’s
exports. Because of the export bans, naturally, imports also become
difficult. The import of crude oil is restricted to 2 million tons per
year. Because China, which accounts for about 90% of North Korean
trade, is also participating in these economic sanctions against North
Korea, difficulties in trade are on the rise.
Financial sanctions are even more powerful. Foreign financial
institutions conducting financial transactions with North Korea aresubject to a secondary boycott by the US. Because of this, foreign
financial institutions have revoked agreements with North Korean
financial institutions and North Korea cannot conduct internationalbank transactions. Furthermore, North Korean corporations as wellas individuals of North Korean nationality cannot open accounts at
foreign banks. Therefore, most transactions in North Korea must be
conducted in cash, more or less making transactions impossible.
North Koreans residing overseas cannot conduct financialtransactions either, making trilateral transactions difficult as well.

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

Expat North Koreans whose primary business is intermediary trade
have lost their source of income. Most North Koreans working
abroad have been sent back to North Korea. Even China and Russia
plan to stop reissuing most of the work visas to North Koreans after
their current employment term expires by the end of 2019. Of
course, new applications for work visas for North Koreans foroverseas stays will not be issued either. Because of this, the numberof North Korean workers returning to North Korea through China isincreasing. Maritime transactions are also difficult due to elaborate
monitoring. In this way, North Korea is facing international sanctions
in all areas.
Due to such circumstances, North Korea’s foreign trade, which
had been on a steep rise since 2010, has fallen by nearly 50%.
Immediately after the collapse of the Eastern Bloc in the early 1990s,
the scale of North Korea’s foreign trade fell drastically from about $4
billion to under $2 billion. The current situation is reminiscent ofNorth Korea’s serious economic difficulties following this fall.
Looking at the situation in terms of numbers or chronologically, it isclearly a similar situation to that of the early to mid-1990s.
Therefore, if a little more pressure is applied, there should bechanges in North Korea’s policies. This is the view of the US and theinternational community.
While we cannot conclude that it is due to the impact of the
sanctions, North Korea has set out to improve its relationship with
the US. Taking the opportunity of the Pyeongchang Winter Olympic
Games held in South Korea in February 2018, North Korea has also
started to improve inter-Korean relations. In order to impress upon

the international community the suspension of nuclear experiments,
North Korea closed the Punggye-ri Nuclear Test Site and suspended
the testing of long-range missiles. In June 2018, a US-North Korea
summit was held in Singapore. The US and North Korea agreed tomake efforts towards establishing a new relationship between thetwo countries. Based on this agreement, North Korea returned theremains of US soldiers. With such shifts by North Korea, an
optimistic view became dominant that maximum pressure had
started to influence North Korea and that its denuclearization would
be achieved as long as US-North Korea relations normalized.
However, negotiations broke down at the US-North Korea summit
held in Hanoi in February 2019 and the situation started to change.
While North Korean leader Kim Jong Un professed that he was nolonger fixated on ending the sanctions, he also resumed the testingof missiles (Chart 2).

The Dilemma of Economic Sanctions Against
North Korea
The international community has not eased up on economic
sanctions against North Korea. Around the time of the US-North
Korea summit, North Korea explored changes in its policies
internally. However, an inexplicable phenomenon has emerged within
North Korea. That is to say that no major fluctuation in market prices
has been seen and an emphasis on self-rehabilitation has emerged
once again recently.
It is widely known that in North Korea, the market became

CHART 2

Economic sanctions & changes in North Korea
Trade Sanctions- Trade embargo on major exports from North Korea(Coal, textile products, fisheries products, etc.)- Restriction on the export of petroleum to North Korea (2 million
tons annually)- Export embargo on luxury goods, metals, etc., to North Korea
Financial Sanctions- Embargo on international financial trading (secondary boycott)- Freeze of overseas assets (US, Japan, etc.)- Embargo on direct and indirect investment to North Korea
Sanctions Against Individuals

Impact on the North Korean Economy- Shrinking the scale of trade- Return of workers employed overseas- Restrictions on trilateral trade
Changes in North Korean Policies- Halt on nuclear experiments and launch of long-range
missiles- Negotiations aimed at improving its relationship with theUS- Embargo on overseas employment- Restriction on overseas travel
Source: Compilied by the author

Japan SPOTLIGHT • January / February 202071

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

TABLE

Price trends in the Pyongsong Market in Jan.–Aug. 2019 (North Korean Won/kg)
April

May

June

July

Aug.

5,250

4,780

4,600

5,000

4,850

4,800

4,920

2,237

1,950

2,120

2,200

2,350

2,400

2,470

2,300

3,986

3,625

3,580

3,500

3,520

3,430

3,500

3,500

3,250

Cooking oil

12,150

9,387

9,765

11,00013,50013,10012,80012,600

11,100Wheat flour

3,550

4,662

5,500

4,300

4,300

4,000

4,100

4,250

3,750

Gasoline

14,76014,65013,125

13,20015,00016,70016,70016,20015,100

Diesel

8,610

8,692

8,725

8,800

9,700

9,400

9,100

8,900

8,700

Sugar

4,180

4,687

4,654

4,700

4,610

4,350

4,150

4,200

4,100

Chinese cabbage

985

965

898

1,200

1,200

1,350

850

920

950

Coal

150

175

165

170

230

190

180

180

210

Pork

14,70015,10018,75017,90017,000

8,500

9,500

14,00016,000Exchange rate
(North Korean
Won/US$)

8,075

8,100

8,125

8,250

8,400

8,300

8,310

8,350

8,330

Jan.

Feb.

Rice

4,794

4,875

Corn

2,091

Soy

March

Sept.

Source: Compilied by the author

widespread and established. Due to the amendment to its
constitution, North Korea put into statutory form a socialist
corporate responsible management system that in essence permits amarket. This indicates just how much of an absolute position themarket has in the lives of North Koreans. However, the market isstarting to fall into dysfunction. According to North Koreans, they
can no longer even think about new enterprises. It has come to thepoint that there are more people who want to sell things than people
who want to buy things. The supply of goods, which provides thebasis for market dispersion, was being fulfilled by Chinese-madegoods. Additionally, even as many goods supplied on the market inrecent years were replaced with North Korean goods as domestic
production advanced – mainly food and clothing – from the supply of
raw materials to final goods, Chinese goods still play an importantrole. However, the economic sanctions caused the inflow of goods tomarkedly decline. With the inflow of goods decreasing, the people
who had been making money in the intermediary distribution stage
fell into a difficult situation, and finally the diversity of products on
the market fell. The market scale could not help but shrink.
However, market prices, which should naturally rise withdecreased supply, did not show any major changes. Excludingchanges in pork prices due to African swine fever (ASF) which brokeout in China, changes in the price of other goods remained mostly atemporary phenomenon. This was due to withering demand, but thecharacteristics of North Korea’s distribution structure also played a
72 Japan SPOTLIGHT • January / February 2020

part. For example, when importing Chinese products, the money forthe products is paid after delivery. First, the products are sent to andsold in North Korea. The money is then paid to China from the salesof the products. The import price is decided before importing goods.
North Korean merchants add their profit margin on to that price andsell the goods. This is why they cannot lower prices even if thegoods do not sell. In the end, all they can do is return the goods toChina or keep them in inventory until they sell. Most of the importers
who paid in advance went bankrupt (Table).
On the other hand, the North Korean authorities are still holding
up. While implementing the socialist corporate-responsible
management system and field-responsibility system, the authorities
have made an agreement with cooperating organizations to pay 30%of their production. However, this means 30% of the planned volume
rather than 30% of the final products. So even if production
decreases, the reality is that 30% of the planned volume must be
paid to the authorities. Therefore, if corporations pay the government
according to the planned volume, the amount they keep to eat
decreases. This is the reason for the shortage of food – because
currently, corporations are made responsible for the living of theirworkers. Additionally, in order to move forward with the large-scale
projects directed by Kim, the government has implemented a quota
system for each organization. Due to this, the North Koreanauthorities have yet to recognize the need to consider policy change.
Furthermore, during the time when North Korea maintained aPerspectives on Global Risks: the 3rd JEF Global Risk Symposium 3planned economy, its external dependence remained around 6–7%.
In recent years, its external dependence has risen to around 30%,
but that is not relatively high. It means that North Korea is able toproduce that much goods internally, and because the payment ofplanned volume is fixed there is relatively little difficulty. Looking at
the situation comprehensively, the supply of goods that the North
Korean authorities require is being secured by squeezing it out oforganizations and citizens under the pretext of self-rehabilitation.
Next, let us look at smuggling. North Korea has been facing
sanctions since the Korean War. Economic sanctions target normaltransactions rather than illegal and abnormal transactions.
Paradoxically, North Korea has been very familiar for a long time withinternational methods and routes to circumvent sanctions. A balloon
effect is emerging in illegal external transactions. Because the scaleof illegal transactions is expanding, North Korea has begun to receive
VIP treatment in the global black market. Representative
commodities are gold and human activity.
While it is difficult to estimate the scale of the black market forgold in the world, it is common knowledge that it is considerable. It
is difficult to look for a breakdown of gold transactions even looking
at North Korean trade statistics. North Korean gold mines are mostly
controlled by the Workers’ Party of Korea and the military (inprinciple, the Party, military, and government own a third each).
North Korean bullion has long maintained transactions on theinternational black market, but recently it has come to the point thatthey have been forced to increase volume. The more the economic
war between the US and China intensifies, the higher theinternational gold price will rise. Gold is the biggest source of foreign
currency for North Korea.
As for human activity, computer hacking and arms dealing are
typical examples. The US Treasury placed major North Korean hacker
groups on the sanctions list, but the viability of the sanctions is
unknown. While North Korea’s cyberattack capabilities grow stronger
on a daily basis, defensive abilities have not yet caught up. Most
financial transactions including virtual currencies take place incyberspace. North Korean hackers are the cream of the crop selected
at a national level and are already recognized internationally as
having considerable skills. As for arms dealing, we should consider
that what is being traded is instruction on techniques provided byexperts, rather than actual weapons. These are mainly related tomissile technology. It is an open secret that North Korean missile
experts are being dispatched to countries such as Iran and Syria.
Such transactions are not conducted as normal financialtransactions, but rather as various methods of money laundering.
Therefore, they can circumvent the economic sanctions imposed on
normal transactions.
In this way, the North Korean authorities are capable of securing
the foreign currency they need through various routes. Internally as

well, they are securing goods by exploiting the people. While there
are inconveniences due to the sanctions, it is not to the extent that
North Korea would abandon its policies. Furthermore, it is not an
exaggeration to say that there are no movements in the market tooverthrow the government, which maintains a powerful centralized
rule. So the sanctions do not function as pressure on thegovernment. Rather, North Korea emphasizes self-rehabilitation andencourages the people to endure pressure from foreign powers. In
fact, Kim says while giving onsite guidance that he often felt that theeconomy would make a turnaround as soon as North Korea’s
relationship with the US improved. The second US-North Korea
summit held in Hanoi at the beginning of 2019 ended unsuccessfully
and Kim blames the US for this. Because the market is in such asituation, the North Korean government can take an even more
hardline stance against external pressure.
Additionally, the outside world has been paying close attention to
the North Korean market, considering it is the driving force to change
North Korea. However, a dilemma has emerged with the power of themarket weakening due to the sanctions instead and the central
government becoming comparatively stronger. Amidst this situation,
the cost to the North Korean people and difficulties are increasing.
This is the dilemma of sanctions. The aim of the economic sanctions
against North Korea is its denuclearization. The choice ofdenuclearization is up to the North Korean authorities. However,while the power of the North Korean authorities is becomingstronger following the sanctions, the force of the North Koreanmarket to raise a voice against the government is becoming weaker.
The complete opposite of the general theory on economic sanctions– that the power of the market would grow and the North Koreanauthorities would face political pressure and change their policies –is occurring in North Korea. This might suggest that the strength of
the sanctions imposed on North Korea should be adjusted
accordingly. Perhaps we are still not at the stage to discuss the effectof the sanctions. However, in order to solve the dilemma of
weakening the power of the market which should change North
Korea from the inside with hardline economic sanctions, a more
effective application of economic sanctions against North Korea isnecessary.

Yong Sueng Dong is director of Good Farmers Inc. Association (Good
Farmers Research Institute). He is former leader of the economic security teamat Samsung Economic Research Institute and former advisory committee
member of the Blue House.

Japan SPOTLIGHT • January / February 202073