With New North Korea Sanctions in Place, All Eyes Are on China

President Donald Trump released an executive order yesterday declaring, in effect, the time has come for the international community—China, in particular—to choose sides over North Korea. The order builds on an existing sanctions regime in a way that has the potential to alter the status quo in both China and North Korea, while guaranteeing the Treasury Department the flexibility to implement sanctions so it can take advantage of Chinese movements aligning with U.S. interests.

The Administration is working under the assumption that extreme sanctions will alter North Korean calculations, whether through primary sanctions or from indirect pressure via secondary sanctions aimed at forcing China to enact pressure on North Korea. In short, it rejects the notion that North Korea is “sanction-proof.” This E.O. represents an escalation of mandates under existing authorities, each intended to further isolate North Korea and push it closer to a state of weakness that might finally compel Kim Jong Un to embrace de-escalation.

Despite the fact that Administration makes claims to the contrary, many of the provisions in the E.O. appear aimed at China. For instance, it authorizes Treasury to sanction banks facilitating North Korean transactions, potentially blocking access to the U.S. financial system. On September 12^th, Treasury Secretary Steve Mnuchin warned (likely with the Iranian sanctions model in mind) that China could be cut off from the U.S. financial system if it did not act to constrain North Korea. Mnuchin has the authority to sanction financial institutions facilitating illicit North Korean activity, but targeted sanctions have not yet had a significant enough effect on the Chinese system to compel a reappraisal of the Chinese-North Korean relationship. Crucially, this E.O. expands this authority allowing Mnuchin, if he elects, to sanction “any foreign financial institution that knowingly conducts or facilitates any significant transaction in connection with trade” with North Korea or other designated individuals. The Secretary can inflict serious pain but has the option to exercise restraint where appropriate depending on U.S. priorities and Chinese actions.

The trade provisions could be harsh on China and could have serious negative implications for the U.S. financial system if implemented in the cursory way Mnuchin warned. That said, it’s important to keep in mind that halting trade with North Korea does carry the potential of finally alter the Hermit Kingdom’s behavior. During the September 7 Senate Banking Committee hearing, former Acting Under Secretary for Terrorism and Financial Intelligence Adam Szubin underscored that North Korea relies on an estimated $5 billion a year in imports, as well as Kim Jong Un’s dependence on access to cash to continually pay off his inner circle. Cutting off such access will create pressure on the regime, though it does have a history of printing fake currency and other sanctions-avoidance schemes.

In addition to pressuring banks, the E.O. comes on the heels of new congressional sanctions and expands upon existing provisions. It tightens the shipping and air provisions of the Countering America’s Adversaries through Sanctions Act of August 2017 by banning, for 180 days, vessels and aircraft that have stopped in North Korea from entering the United States. Additionally, unlike the previous authorities to sanction luxury goods, arms and nuclear weapons technology trade, this E.O. gives the Secretary of the Treasury the authority to impose sanctions on any entity that deals in “significant importation from or exportation to North Korea of any goods, services, or technology.”

In addition to having a capacious mandate, the Secretary will also see parallel movements to constrain North Korea from outside the U.S, including important signals from China. The international community has demonstrated a newfound willingness to inflict pain on North Korea, and China is moving to fall in line. The latest United Nations Security Council sanctions sales to North Korea of natural gas, petroleum, crude oil, and textiles. This followed from the August 2017 UNSC bans on coal, iron, lead, seafood and the hiring of North Korean laborers. The Council included a ban on providing new loans to North Korean customers and an order to wind down existing loans. On September 18^th, China’s central bank reportedly ordered Chinese banks to implement fully the UNSC sanctions. Although there has been no signal regarding a fundamental change in Chinese priorities for the Korean peninsula to remain stable and to prevent a massive influx of refugees, the central bank may be a demonstration of a growing willingness to pressure North Korea.

Finally, while the E.O. “directly targets” North Korean shipping and trade networks, it “provides the authority” for the Secretary of the Treasury to impose sanctions on foreign financial institutions. Given that China has actually increased trade with North Korea in 2017, with a surge in trade in the first quarter at 37.4% higher than the same quarter in 2016, Kim Jong Un should expect significant economic paralysis if China feels sufficiently threated to cut off its financial ties to the Hermit Kingdom. For now, Secretary Mnuchin should maintain pressure on China and sanction financial institutions as needed, but make it clear that sanctions can be avoided if China finally applies significant pressure to North Korea.