U.S. Weighs Iran-Style Sanctions on North Korea, Risking a Rift With China

The Obama administration is heatedly debating whether to trigger harsh sanctions against North Korea that would target Chinese companies doing business with the hermit regime, in a crackdown like the one that crippled Iran’s economy, Foreign Policy has learned.

But some White House officials worry that the tough economic penalties, which have already been approved though not deployed, would cause a serious rift with Beijing.

Officials told FP that the approach would be similar to the sweeping secondary sanctions that were slapped on global banks handling transactions with Iran. Those sanctions are widely credited with bringing Iran’s economy to its knees in 2013 and forcing Tehran to the negotiating table over its nuclear program.

But a decision to go after Chinese banks and trading companies that deal with Pyongyang could rupture Washington’s relations with Beijing, which bristles at any unilateral sanctions imposed on its companies or drastic action that could cause instability in neighboring North Korea.

The push for possible tougher action in U.S. policy stems from growing alarm over North Korea’s bid to build more capable ballistic missiles and potent nuclear weapons, as illustrated by last month’s fifth nuclear test by Kim Jong Un’s regime — its largest to date. Some experts believe North Korea already has succeeded in building nuclear warheads that could be placed on a missile, and a series of test launches demonstrates that the North has developed medium-range missiles that could strike Japan or Guam. U.S. intelligence officials believe it is only a matter of time before Kim’s regime produces a long-range intercontinental ballistic missile that could reach the United States.

“In the past two or so years, there’s a general appreciation that the situation has become worse and that we, the United States and the responsible nations of the world, need to up our game,” said a senior government official, who spoke on condition of anonymity.

As a result, the administration is “looking at a more active and more aggressive use of the authorities” for sanctions, the official told FP.

The political calendar in the United States also is shaping the internal discussions, with some officials arguing that President Barack Obama would be better placed to order the move in his final months in office, rather than leaving it to a new administration to enter into a heated dispute with China.

“Looking at the calendar, all the players on North Korean policy are acutely aware that there is a need, and we have a chance to solidify this robust policy so that the next administration is working on a higher platform,” the senior official said.

Alarmed by Pyongyang’s relentless pursuit of a nuclear-armed missile arsenal, South Korea and Japan also are pressing for a more aggressive approach to the North. U.S. lawmakers from both parties have urged the White House to embrace hard-hitting sanctions.

U.N. resolutions and new legislation adopted by Congress in February give the administration far-reaching legal authorities to block assets, file criminal charges, and cancel visas for individuals or organizations violating sanctions rules on North Korea. But so far, the administration has yet to wield those authorities in a decisive manner, taking action in a relatively small number of cases while it seeks to persuade China to take a more assertive role.

With China as North Korea’s only economic partner of consequence, any sanctions strategy aimed at squeezing Pyongyang will involve punitive measures against Chinese companies and banks. And Washington would much rather have Beijing lead the effort against those companies instead of taking unilateral action that would almost certainly touch a raw nerve in the Chinese leadership.

China has repeatedly voiced support for U.N. Security Council resolutions barring any commercial backing or supplies for North Korea’s nuclear weapons or missile projects. But Beijing also has made clear that it opposes unilateral sanctions by other governments, and Chinese officials are wary of any penalties that would create a food shortage or energy crisis that triggers upheaval in its impoverished neighbor.

“We’re willing to cooperate with relevant countries under the condition of mutual respect and on equal footing, but at the same time oppose any country’s so-called long-arm management of Chinese entities or individuals according to its internal laws,” the foreign ministry said in a statement to Bloomberg News this week.

In a move welcomed in Washington as a potential sign that China was ready to clamp down on companies linked to North Korea, Beijing authorities last month announced a criminal investigation against Dandong Hongxiang Industrial Development Co. and its owner. The company had maintained deep ties to North Korea, conducting $500 million in business over five years, and even had alleged commercial links to a Kim regime group that hacked Sony Pictures. The U.S. Treasury Department last week announced criminal charges against the company and several individuals, accusing the company of links to a notorious North Korean bank, Kwangson Banking, and alleging that it had set up shell companies and offshore tax havens to hide its illegal activity.

It’s unclear if China’s criminal inquiry against Dandong Hongxiang represents a more aggressive tack by Beijing against companies flouting U.N. sanctions, or is merely an isolated event. But experts say China has not changed its fundamental calculus on Pyongyang — that stability on the Korean peninsula must be preserved at all costs.

U.S. diplomats are in discussions with China at the U.N. Security Council on a new resolution that would possibly close remaining loopholes in the international sanctions against North Korea. A Security Council resolution adopted in March — two months after a nuclear test by Pyongyang — included a “livelihood exception” that allows Chinese companies to buy coal and other items from North Korea as long as the proceeds are not used for prohibited weapons programs. The resolution also allows China and other states to maintain financial accounts or bank offices inside North Korea unless there is “credible information” showing the business relationship is being used for illicit activity.

U.S. officials hope the talks with China will produce a stricter sanctions resolution to ensure Beijing’s cooperation and pile pressure on North Korea by choking off its access to hard currency through coal, iron ore, and other exports. But the talks are moving at a glacial pace, and it remains unclear if Beijing is ready to alter its approach. Without U.N. backing, Washington will face a difficult choice.

Pursuing Iran-style sanctions would almost certainly ratchet up tensions with China, with potentially damaging economic and other unpredictable consequences.

Yet no change in course would mean tolerating North Korea eventually building a stockpile of sophisticated nuclear missiles aimed at the United States, enabling Pyongyang to engage in nuclear blackmail on an unprecedented scale.

“It could become the defining issue in the U.S.-China relationship. It could push Beijing and Washington into a very unhappy place,” said Evan Medeiros, who served as Obama’s top advisor on Asia affairs at the White House National Security Council until last year.

Pursuing Iran-like sanctions against North Korea would mean “hardcore secondary sanctions in ways that the Chinese aren’t going to like,” he said.

“But the U.S. is simply going to have to be willing to countenance friction in the U.S.-Chinese relationship that the U.S. hasn’t been willing to accept to date, because the North Korean threat is becoming too serious,” said Medeiros, now at the Eurasia Group since leaving the White House.

Obama has tended to avoid confrontation with China on most issues, including over the South China Sea and economic disputes. The administration, however, did take a forceful stance against Beijing-backed cyberhacking in the United States.

“They have placed a premium on trying to manage the relationship with China in a constructive way and to contain areas of friction or competition,” said a congressional staffer.

No decision has been taken on whether to trigger the harsher sanctions, and the administration may in the end opt to take a more incremental approach, avoiding a major clash with China. But as North Korea continues to advance toward its goal of building nuclear-tipped, long-range ballistic missiles, pressure will inevitably build on the next American president to back a tougher line on sanctions despite resistance in Beijing.

Since approving new sanctions legislation in February, U.S. lawmakers from both parties have complained that relatively few companies or individuals have been blacklisted and charged.

“You have sanctioned no Chinese banks at the end of the day, and they are probably the major financial institutions for North Korea,” Sen. Bob Menendez (D-N.J.) said at a hearing last week with top State Department officials.

Republican Sen. Marco Rubio, speaking at the same hearing of the Senate Foreign Relations Subcommittee on East Asian and Pacific Affairs, accused the administration of timidity when it comes to sanctions that could antagonize the Chinese government.

“We know who these companies are. We haven’t moved fast enough on it. There’s no reason not to have moved faster. There’s plenty of targets of opportunity and plenty of information out there about them,” Rubio said.

Asked about future sanctions enforcement against North Korea, White House spokesman Josh Earnest told reporters Wednesday that “we don’t want to telegraph our intentions.”

If the United States decided to turn the screws against large numbers of Chinese companies trading with North Korean state enterprises, experts in and outside the government disagree as to whether the case of Iran sanctions can be applied successfully to Pyongyang.

“There are some tempting parallels, but there are very distinct differences,” said John Park of the Harvard Kennedy School, who co-wrote a recent study of North Korea’s sanction-busting methods.

Unlike North Korea, Iran is heavily dependent on the international oil market and has to rely on the international financial system, including the SWIFT financial transaction network, to sell its oil. “They were vulnerable. You could block these type of activities outside of Iran,” Park said.

But North Korea operates in a gray zone of illicit companies and trade, and almost all of its business is done inside China’s economy.

Beijing is wary of any international measure that would usurp its authority on its territory. If Washington pressed ahead with secondary sanctions, it would “hit the wall of sovereignty right away,” Park said.

About 70 percent of North Korea’s trade runs through China, including most of its food supplies.

North Korea has adapted its tactics over the years and proved savvy at circumventing sanctions. It pays lucrative fees for skilled Chinese middlemen who handle finances and logistics while concealing Pyongyang’s involvement in transactions, said Park, who cited accounts from North Korean defectors. Instead of adopting cloak-and-dagger methods, managers from the Kim regime’s enterprises operate openly, integrating themselves in the expatriate business community in China in provinces near North Korea while exploiting consulates to buy prohibited or dual-use goods for weapons programs.

Apart from coal and iron ore, North Korea profits from the export of small arms and cheap labor. North Korean workers are sent to factories in China and the timber and construction industries in Russia. The wages are transported back to Pyongyang, with the North Korean workers reportedly receiving only about 10 percent of the money.

Unlike Washington, Beijing promotes trade with North Korea as a way of preventing instability, even as it criticizes Pyongyang’s pursuit of nuclear weapons.

About a year ago, China and North Korea launched a cargo and container shipping route to bolster the North’s coal exports to China. The project appears to have paid off. North Korean coal exports to China hit a record monthly high of about 2.46 million tons in August, according to the Korea International Trade Association. Coal exports to China generate more than $1 billion in income for the regime annually and roughly a third of North Korea’s export income, U.S. officials said.

When coal and other commodity prices spiked between 2007 and 2010, North Korea secured large sums of cash from its coal exports and probably still has funds left over from the boom, Park said.

“They’re living off of the proceeds from a hit record from years ago,” he said.

Photo credit: KCNA/AFP/Getty Images