Stephen Haggard on China-North Korea trade

The Friendship Bridge which spans across the Yalu River from Dandong, China and Sinuju, North Korea. At night, the bridge on the Chinese side is completely lit up, but as it extends into North Korea it descends into darkness.

Stephan Haggard is the Lawrence and Sallye Krause Professor of Korea-Pacific Studies, director of the Korea-Pacific Program, and distinguished professor of political science at the School of Global Policy & Strategy. He is a go-to expert on current developments in the Asia-Pacific region, particularly the Korean peninsula, and on the politics of economic reform and globalization.

Haggard has written extensively on the political economy of North Korea with Marcus Noland, including “Famine in North Korea: Markets, Aid, and Reform” (2007) and “Witness to Transformation: Refugee Insights into North Korea” (2011) and co-authors the “North Korea: Witness to Transformation” blog at the Peterson Institute for International Economics. Haggard is the current editor of the Journal of East Asian Studies and a member of the Council on Foreign Relations. He spoke to Marcia Yang CMC ‘18 on September 21, 2017.

Photo and biography courtesy of Professor Stephan Haggard and the School of Global Policy & Strategy.

Can you briefly describe the trade between China and North Korea?  How much trade are we talking about?

The two-way trade is now about 6.5 billion and there is a current account deficit in China’s favor. Trade peaked in 2013 in terms of North Korean exports, but has since fallen. That’s a result in part of the slowdown of the Chinese economy and partly the sanctions. What will happen over the course of this year is really important. It will be hard to track, though, because the Chinese don’t report their oil exports to North Korea and there are issues of smuggling. But, it looks like we will see some effects from the sanctions in 2017.

China has restricted North Korea's coal imports in February 2017 in line with the U.N. sanctions. However, the sanctions did not succeed in changing Pyongyang’s behavior. How will these new U.N. sanctions on oil and textiles affect North Korea?

No one really knows the answer to that question. The North Koreans appear to be responding to the sanctions that followed the missile and nuclear tests of this summer with more bravado and what we have come to call “provocations.” But we don’t really know what their intentions are with respect to talks. I have at least some intelligence that the North Koreans are not completely averse to talks, but they don’t think that the United States is interested and President Trump’s tweets confuse the matter. They think that the United States is continuingly putting preconditions on any talks that might take place. More attention has been given to outlining sanctions but less work has been done by the U.S., South Korea, Japan, and even China on defining what talks would look like.

How will sanctions affect North Korea-China relations in general, and China’s economic interests in North Korea in particular?

From the perspective of the Chinese economy, North Korea is a rounding error. It’s tiny. It’s irrelevant. Now, that’s not entirely true because in the northeast of China, some firms especially along the border do have a vested interest in bilateral trade with North Korea. If you were to take a macroeconomic perspective, the answer to your question would be that North Korea has very little effect on the Chinese economy. But, if you look regionally, there are some regional interests and those could be playing a role in evading sanctions.

At the political level, it’s very clear from my conversations with Chinese colleagues that the relationship between Beijing and Pyongyang has deteriorated badly. China is currently very much concerned that it is losing influence in Pyongyang. That said, the commentary in the U.S. has been overly critical of the last two U.N. sanctions resolutions. To me, they’re quite strong departures on the Chinese part, and they reflect severe disaffection with the nuclear tests in particular.

China along with Russia have resisted the call for a complete oil embargo.  What would be the impact of such an embargo if China and Russia were to agree to it?

We don’t know all the crucial parameters and variables here, including how much fuel the North Koreans might have stockpiled in anticipation of this eventuality. North Korea is a garrison state with a a strong emphasis on the military. Thus, we can expect that there is some inventory of crucial fuels that the regime believes it needs for military purposes. Those will clearly be drawn down as sanctions hit, so it may appear that there is no immediate effect.

But the criticism of China is probably too stark in this regard. China is concerned about the implosion of North Korea, so we should expect only incremental moves. Most importantly, the fact that China is willing to accept embargos at all on particular categories of commercial exports and fuel is really striking. There is a psychological effect at work as well. If you believe that the international community should embargo oil to North Korea completely, and then the Chinese don’t do that, then it’s viewed as a loss. But if you think it’s a surprise that the Chinese have gone as far as they have, then I think the administration actually has gotten a win. The president’s comments undercut his own diplomatic victory by badmouthing the resolutions that they’ve gotten.

The North Korean economy appeared to be doing well before the recent rounds of sanctions.  How would the new sanctions affect the North Korean economy?

Clearly adversely, particularly to the extent that there are needed inputs that come only from abroad. Some of the growth that you’re seeing of the North Korean economy is the result of what I call “de facto reforms.” By “de facto reforms” I mean that the leadership hasn’t identified particular reform measures and announced them from the top. But, it’s very clear that they’ve allowed the marketization process to proceed and it is now quite advanced. A recent report suggested that there are literally hundreds of thousands of stalls now in the various markets across North Korea, each of those supporting a household. There are large swathes of the population that are effectively in the market economy. So, some of the growth is being caused by these purely internal developments. But there is very little doubt that some of the growth depends on the trade with China because the retail markets are fed in part by Chinese goods. Cutting back on North Korean exports deprives the country of the foreign exchange needed to pay for growing imports.

The Chinese government claims that it does not hold “the key” to the North Korean problem. Why do the U.S. and many of its allies believe that if China took a harsher stance on North Korea, North Korea would moderate its behavior?

That gets to the question of how sanctions are supposed to work. The idea of sanctions is that the costs that are imposed lead to a recalculation of the cost-benefit ratio of pursuing the nuclear program. This may lead back to negotiations because the regime realizes it is worse off, not better off, with a nuclear program.

My view is that China is entirely right. China is clearly a key economic player, but in the end, there is going to have to be some sort of negotiated settlement that involves both the United States, South Korea, and maybe Japan. Ultimately, that takes us back to the six party talks because the Russians believe that they have a role as well.

The sanctions are supposed to have an effect, but they don’t have an effect separate from some kind of negotiated settlement. No one thinks that North Korea is going to give up its nuclear weapons unilaterally. It’s going to happen in some sort of multilateral context through negotiation.

The U.S. government has imposed secondary sanctions against Chinese entities doing business with North Korea and may expand these sanctions.  Will secondary sanctions force China to be more cooperative with the U.S.?

This is the most crucial question as of today. It appears that there is a correlation between the aggressive pursuit of secondary sanctions on the part of the United States and China agreeing to tougher U.N. Security Council resolutions. The historians will have to find out if this was the case or not. But you can certainly imagine China thinking that it will be hit by these secondary sanctions anyway because the Trump administration seems intent on using them. (By the way they were initially considered under the Obama administration, which chose not to use them).

But you can imagine a scenario in which the United States institutes more secondary sanctions, and the Chinese say, “we’re opposed to these secondary sanctions, and if you want to cooperate with us you have to allow us the scope to approach this problem in a way we see as appropriate.” Then, the secondary sanctions actually become counterproductive because the Chinese go back to supporting and underwriting the North Korean regime. China may even be doing that to a certain extent now in ways we don’t see. There’s a delicate diplomatic balance here where the United States has to be careful to keep China on board because the Chinese, in fact, have been quite cooperative. The Russians could also have vetoed these resolutions if Putin had chosen to do so. The diplomacy is complicated because the U.S. will need China both on the diplomatic front and to maintain the integrity of the sanctions.

What needs to happen to force China to fundamentally change its current stance?

It depends if the premise of the question is right. Overwhelmingly, the view is that China has been uncooperative with respect to North Korea. I don’t think that’s true. I think they’ve been cautious. They’ve been maddeningly equivocal on some points, such as on the question of who bears responsibility. But, there’s just no way you can look at the succession of resolutions beginning with the response to the fifth test in 2015 and not see that the Chinese have incrementally but nonetheless sharply increased sanctions pressure on Pyongyang.

The other thing about sanctions enforcement is that it is ever going to be airtight. It’s absurd to think that there isn’t going to be smuggling, corruption, individuals slipping across the border, or a spare ship that gets through, and so forth. That’s not true only of China. It’s also true of the Philippines, Malaysia, India, and others. These countries are a small share of North Korea’s overall trade, but the enforcement problem is everyone’s problem. I’m not sympathetic with China on many things, but I do think China has been maligned somewhat. American diplomacy has to be very cautious in this regard because Beijing appears to be trying to cooperate on North Korea. The fact that there have been unanimous U.N. Security Council resolutions—two of them in a month—means the U.S. has to be cautious and not push Beijing away by appearing overly aggressive.

Marcia Yang CMC '18Student Journalist

Featured Image by Roman Harak (North Korea – View from Dandong, China) [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

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