The United Nations Security Council recently passed a resolution with even tougher penalties and regulations on North Korea as a result of its defiant testing of nuclear bombs and ballistic missiles earlier this year. Briefly, what makes this round of sanctions different from previous ones? Which countries in the 15-member council had the most leverage and interest in passing such a resolution?

Stephan Haggard: Passing U.N. Security Council resolutions ultimately centers on the so-called P5; it's an odd decision-making body because the Council has 15 member states but five of them hold a veto over any joint Security Council action. What that means effectively is that the United States and other members of the council that are interested in securing support for such a resolution have to write the resolution in such a way that it avoids a veto by Russia and China. Consequently, the negotiations on these sanctions resolutions typically involve the United States and China, and depending on whether Japan and Korea are on the Security Council at any given moment, they would play a behind-the-scenes role because they have an interest in the issue. The answer to the second question is that this is kind of a negotiation that involves primarily the United States and China but with other parties playing a role. Nothing that is passed in such a resolution can be included without Chinese acquiescence. Because the Chinese have the veto power, they have the capacity to shape the nature of the resolution. This kind of political dynamics went on for over a month this time because it started in the wake of the nuclear test in early January and extended after the satellite launch. There are a lot of things that are distinctive about this resolution, but I'd say the most significant one is that it has started to go after North Korea's commercial trade.

All the prior resolutions typically made strong links to the weapons and missiles program, so they were designed to control North Korea’s access to technologies, weapons systems, and other materials, by designating particular firms involved in illicit trade with Pyongyang. What's different about this resolution is there are a number of measures that go after North Korea's commercial trade, most notably its exports of minerals and coal. The resolution is written with some substantial caveats, and there are two that are significant. One is its exemption for firms and activities that are primarily "for people's livelihood," and the second is this question of whether the activities in question are actually funding or financing the nuclear and missile programs. The North Korean economy is a state-socialist system so it's impossible to know where any given dollar goes, and of course, any economic activity that has a worker attached to it is connected to "livelihood." My interpretation of this is that the Chinese have written up a sweeping resolution to be written in principle but then they're going to exercise some discretion on how they interpreted its interpretations. The game is really about Chinese discretion. They seem to be acting. Chinese notice was just put on one of the ministry's websites a few days ago and it basically said, here's how we define these sanctions, but we retain wide discretion to how aggressively it will act. My suspicion is that they're taking some actions to signal to North Korea their intent but that doesn't necessarily mean that these things will be implemented. China's objective is to get the North Koreans back to the negotiating table because China's whole point of the resolution is all about negotiations, as specified in the latter paragraphs of the resolution. Of course, we think the resolution is all about sanctions. We just don't know exactly how far the Chinese plan to go. They say they're going to implement in full, but they've written the resolution in such a way that that could mean cutting off absolutely everything or virtually nothing.

One major component of the resolution is that all countries are to inspect all cargoes passing through their territory to and from North Korea. How does this affect North Korea’s trading ability, and to what extent does this deter its nuclear program from developing?

There's a nuisance element in just making sure that a cargo is not carrying illicit materials and so forth. Depending on how aggressively this is enforced, it could slow down North Korea’s trade. It's not a resolution which says that North Korea is prohibited from shipping anything, but it does place the onus on member states, if they take it seriously to assure that their cargos which fall under the stipulations of the resolution are not being shipped. This includes the exports of minerals and coal from North Korea. There's another feature of the resolution which is a little trickier and has generated some controversy recently. That is the resolution itself designating a number of vessels as constituting assets subject to seizure. In some ways, the more telling issue is what's going to happen to the North Korean merchant marine more generally as a result of these ships being so designated. You might have heard about a little flap that the Chinese had pressed to remove several ships from that designation process. It's possible that those have been transferred or sold at some point to Chinese owners in which case they would no longer be North Korean vessels. But it does raise the question about how serious China is going to be in enforcing this. There are a number of vessels which are actually designated as part of an entity which is subject to asset freezes and seizures. In principle, if those ships show up somewhere, they could be seized. Now that the North Koreans are aware of that, they're obviously only going to operate in jurisdictions where the risk of such seizure is low. The more general problem here is that the North Koreans are perfectly capable of reading the sanctions' legislation and making judgments about where they're going to trade, invest, park assets, bank, and so forth. Marcus Noland and I call this the "wack-a-mole"problem because you hit one of the moles that pops its head up and then another one rises. 

There are many loopholes in carrying out the resolution. For one, North Korea can still buy oil and trade iron and coal (their main exports), if the revenue does not go into their nuclear weapons program. What are some ways that North Korea could circumvent this issue and continue to raise revenue for its nuclear program? Can the U.N. prevent such measures?

Obviously, any time you have restrictions on trade, it incentivizes smuggling. No one thinks that every hole can be plugged; that's not realistic. There's going to be increased smuggling, including across the Chinese borders. Chinese authorities may be "looking the other way" in some of these cases. In other cases, those engaging in these acts really want to circumvent the intent of the Chinese. There's no way to predict how aggressively that will happen. Each of these resolutions has tried to close down some ways that North Korea raises such revenue. For example, one of the more interesting features of the last two resolutions, including this one, is calling on member countries to exercise particular vigilance with respect to North Korean officials who are engaged in generating cash income through labor exports, restaurants and so forth. We suspect because of the restrictions on banking that have taken place in this resolution and in the last two resolutions, that North Korea's economy is running on cash. That itself is an incredible constraint on a modern economy. Imagine what your life would be like if every transaction you did, you didn't have a credit card and had to carry cash around for everything including large purchases. You can imagine the inconvenience and dangers that are associated with that kind of cash economy. So that's been both an effect of the sanctions and also a way in which North Korea can evade some of these restraints, and each resolution has made it more difficult.

The world is divided these days, so there are jurisdictions which may just not have much interest in enforcing these sanctions. You can imagine small Russian banks turning a blind eye on a North Korean deposit, small city banks in China accepting deposits by Korean-Chinese who are acting on behalf of North Koreans. There are many ways in which they can circumvent these resolutions, and the panel of experts reports which come out periodically are a guide to circumvention, providing a number of stories and examples of things that are caught. So the North Koreans are going to be trying to do all that, but the question is when you start talking about restraints on something that is as visible and obvious as coal or aviation fuel, it's easier for outside parties in principle to see that those transactions are taking place.

The Chinese have subsequently have taken down data on their trade with the Democratic People's Republic of Korea. They've done this in the past with respect to certain product categories, but this is extremely interesting because it reveals that they're not interested in being transparent about what the nature of their relationship with North Korea actually is. 

China, which accounts for 90% of North Korea’s trade, plays a decisive role in the effectiveness of these sanctions. Chinese ambassador, Liu Jieyi, has said that the sanctions “cannot fundamentally resolve the nuclear issue on the Korean Peninsula.” What are the priorities of the Chinese when dealing with these sanctions on North Korea?

I take the Chinese very much at their word. I think sometimes the Chinese are posturing and it's difficult to know what they think, but on this issue, I take them at face value. They see a nuclear Korea as creating a whole series of strategic problems for them. It means the U.S.’s relations with Republic of Korea will be strengthened, and you've got ongoing tensions and potential of provocations by North Korea, even if we set aside the issues of Chernobyl-like situations, such as fallout from tests and groundwater contamination. To China, many non-security trans-border issues make North Korea a headache. Refugees is one that the Chinese are obviously worried about. So frankly, I take the Chinese at face value with respect to their objectives. They would prefer to see a denuclearized North Korea, but the question that they face is just how hard to push and whether they think sanctions will have an effect. They are worried about the "stability" of the Korean peninsula, and they use that term in a vague way which hints that two kinds of stability: stable military relations between North and South and the implied stability of the North Korean regime. They don't see regime change as a legitimate objective, and I have some sympathy with that from their perspective. Even if you set aside the questions of disagreements about whether authoritarianism is a good thing, the Chinese are at North Korea's doorstep and vice versa. They have a more immediate material interest in what happens in North Korea, so I take their objectives at face value with respect to their stated interest in seeing the country denuclearize but the disagreement is really about tactics. How far is China willing to go? I think if it exercised the leverage it has, that it would force the hand of the North Korean regime without necessarily toppling it. All you have to do is send an adequate signal (no oil, for example), and the North Koreans have to do the thinking. It's not as if that would topple the regime, but it would have the effect of forcing Kim Jong Un to rethink his position and open up to the negotiations. At the moment, the Chinese are not willing to do that. 

Why do you think they're not willing to do that? Would you say that the Chinese value their relation with North Korea more than with the U.S.?

China is a complicated system with lots of contending interests in it: conservative views, cosmopolitan views and so on. There are people who think that North Korea is a strategic liability, others that think North Korea is a strategic asset, there are old communists that think this is a regime that is one of them. Another way to think about Chinese policy is not just in terms of what its national interest is but in terms of a compromise between competing views of what should be done. There's no single Chinese view on this, but there's a consensus position that's revealed in their actions; one possible interpretation is that this is the result of some political process in China which is somewhat opaque because we don't have access to decision-making but it's in between doing nothing and doing something. I suspect that what they're doing represents a compromised position.

If the Chinese are so interested in maintaining North Korea’s stability, what are some reasons that they approved of such a resolution? It has been suggested that they want to be on Washington’s “good side” in order to prevent the deployment of the antiballistic missile system (THAAD) in South Korea. What are your thoughts on that theory?

The whole cluster of issues about how North Korea affects the geo-strategic landscape in Northeast Asia. This is certainly something the Chinese are thinking about, and they're clearly opposed to THAAD. But it's not just that. There are U.S.-Korea military exercises that take place in close proximity to China. And there is American naval presence in the waters close to Beijing. China is also concerned about the U.S.-Japan alliance that is ultimately moving in a new direction as a result of not only China but also North Korea. I'm sure that China is looking at all of these issues. I don't think that the Chinese are altruistic or trying to be on the U.S.’s "good side." They are just concerned that North Korea poses these strategic risks because the more provocative North Korea is and the faster its weapons system develops, the United States, Korea, Japan, in various combinations are going to undertake military actions and develop military capabilities, including ballistic missile defense, that have adverse effects on China.,So those are all part of the calculation of China, and quite frankly, I think they're part of the calculation of the United States because there's some debate about how effective THAAD would even be in this context (South Korea already has an air defense system). But it does get the Chinese' attention, and that's part of the objective.

 If China were to enforce the sanctions fully, how could this affect the North Korean economy?  Which sectors would be hurt most?

If you look at the Iranian sanctions, you can see a set of dynamics that unfold in the context of severe balance of payments problems. Over the last several years, for reasons we don't understand very well, the North Korean government has managed to stabilize the black market price of the Won. One of the biggest effects of the European and U.S. sanctions on Iran's capacity to sell oil was a steep depreciation in the domestic currency. The thing about depreciation is that it doesn't just affect any one sector. In North Korea’s case, this is not just about affecting the coal sector, but if these sanctions were instituted and the shipping sanctions and the closure of Kaesong were put to effect, then North Korea will face a balance of payments crisis where it has got to either compress imports or expand exports and investment to finance the gap. Typically, what happens in those settings is that those adjustment processes are difficult, and you get depreciation of the local currency. What that means for North Korean households and businesses is that anything that is imported goes up in price, and anyone who is earning foreign exchange incomes in Won (as many households do) is going to face constraints including in purchasing basic necessities. There are good counter-arguments to this scenario. For one, the North Korean economy may already be adequately dollarized in which everybody is already in dollars, so the depreciation dynamic wouldn’t have the same effect as it did in a country like Iran. At a conference in Washington two weeks ago, a Chinese scholar pointed out that there's also the possibility that North Korea will adapt to these constraints. It'll expand exports, try to seek out foreign investment, smuggle, and do whatever it needs to adjust and not see the exchange rate effects. I think if there is no such distress, then it suggests that the Chinese are not implementing these sanctions in full because you can’t cutting off 30% of North Korea's exports and not see an effect on the economy. This is going to be the debate going forward. 

It is now an open secret that China has not lived up to its commitments regarding sanctions against North Korea.  What can the U.S. and its allies do?  Do they have any leverage left in forcing Beijing to honor its commitments?

I'm not sure whether China has not enforced sanctions. I think the issue is not that they haven't enforced sanctions, but that they've guaranteed that the sanction's resolutions get written in a way that they don't have much effect. The same is true of Resolution 2270. If they abided by every single caveat in 2270, then the sanctions would have no effect because you could claim that coal exports involve people's livelihood and that they're not funding the nuclear program. I'm not saying that the Chinese have enforced everything perfectly, but I don't think the problem is just enforcement. The big answer to your question is whether the United States is going to undertake secondary sanctions. There are technical issues as well as political issues here. The technical issue is that for the United States to undertake secondary sanctions, it has to identify firms that they believe are in violation of the primary sanctions. Those firms that are identified have also got to be vulnerable to secondary sanctions, which means that they have to have some financial business in the United States that can be cut off. The large, diversified Chinese big-four commercial banks are doing a ton of business with the United States' financial markets, so they have already pulled the plug on North Korea. But does Xiyang Mining corporation, which is a large private mining company, have exposure in the United States' financial market? I have no idea. If they do, then we should designate it, and then they'll have to adjust and have to shut down North Korean operations. But if they don't, then secondary sanctions are worthless because the firm doesn't have any assets or transactions through the U.S. The Treasury needs to hire people to do financial forensics; they need a staff of young people to track down these firms and figure out what kind of exposure they have. It's not easy, and it involves all kinds of intelligence-gathering operations, but unless you've got that kind of information, it's very difficult to implement these things. The political problem is the whole question of whether the United States wants to pick a fight with China. China has been very clear that they're opposed to secondary sanctions, so it's whether or not we're up for the fight. Korea is a pain to deal with, but there's lots of other things to consider -- South China Sea, economics, cyber, global warming -- so it’s a tough call. I think it might be worthwhile to try and see what the response is to some prominently placed secondary sanctions, but we don't know how they will respond. It may reduce the Chinese' willingness to cooperate, and obviously Chinese cooperation is central to this. The game for Chinese is to, at least, get North Korea to pretend to want to go back to six-party talks, so it could put the onus back on the United States. But as long as North Korea isn't doing anything, the U.S. doesn't have to do anything.