How North Korea defies sanctions

It remains impoverished and dependent on food aid, but Pyongyang’s economy appears to be growing, partly because of a limited embrace of market forces

  • Workers at an apparel factory in the Kaesong industrial park where 53,800 North Koreans work at 124 factories Image Credit: Park Jin-Hee/Pool via NYT
  • An employee at a restaurant in Dandong, China. The restaurant caters to North Korean visitors and displays theImage Credit: Howard W. French/NYT
  • Bridges over the Yalu River connecting the North Korean city of Sinuiju and the Chinese city of Dandong. DandoImage Credit:
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As the end of the fashion season approached, and the suits and dresses arrived in her company’s warehouses here in the Chinese border town of Dandong, the accountant crammed about $100,000 into a backpack, then boarded a rickety train with several co-workers. She asked to be identified only by her surname, Lang, given the sensitivity of their destination: North Korea.

After a six-hour journey, she recalled, they arrived at a factory where hundreds of women using high-end European machines sewed clothes with “Made in China” labels. Her boss handed the money to the North Korean manager, all of it in American bills as required.

Despite seven rounds of United Nations sanctions over the past 11 years, including a ban on “bulk cash” transfers, large avenues of trade remain open to North Korea, allowing it to earn foreign currency to sustain its economy and finance its programme to build a nuclear weapon that can strike the United States.

Fraudulent labelling helps support its garment industry, which generated more than $500 million for the isolated nation last year, according to Chinese trade data.

North Korea earned an additional $1.1 billion selling coal to China last year using a loophole in the ban on such exports, and researchers say tens of thousands of North Koreans who work overseas as labourers are forced to send back as much as $250 million annually. Diplomats estimate the country makes $70 million more selling rights to harvest seafood from its waters.

China accounts for more than 80 per cent of trade with North Korea, and the Trump administration is counting on Beijing to use that leverage to pressure it into giving up its nuclear arsenal. The Chinese government took a big step in February by announcing that it was suspending imports of coal from the country through the end of the year.

But China has a long record of shielding North Korea from more painful sanctions, because it is afraid of a regime collapse that could send refugees streaming across the border and leave it with a more hostile neighbour.

In addition, Beijing now has a sympathetic ear in South Korea, whose newly-elected president, Moon Jae-in, echoes its view that sanctions alone will not be enough to persuade Pyongyang to abandon its nuclear programme.

While North Korea remains impoverished and dependent on food aid, its economy appears to be growing, partly because of a limited embrace of market forces since its leader, Kim Jong Un, took power more than five years ago.

Foreign trade, primarily with China, has surged, too, more than doubling since 2000, though it has slipped in the past three years.

In theory, North Korea’s greater openness to trade makes it more vulnerable to sanctions, with new potential targets and pressure points. But it also highlights the limits of an approach to sanctions — defined largely by China at the United Nations — that aims to punish North Korea’s military and ruling elite while sparing its people. As trade expands, the lines have blurred.

North Korean labour

Positioned near the mouth of the Yalu River, Dandong is China’s largest border town, and much of North Korea’s trade with the world flows across its old bridges or through its deepwater port.

Lang, 33, moved here more than a decade ago to study environmental protection. But she ended up like many with ambition in this city of more than 3 million: doing business with North Korea.

She wears exquisite makeup and carries a Louis Vuitton handbag, and she said her role in the garment trade was straightforward: Orders come in from Japan, Europe and other parts of China, and she gets the clothes made.

For those with quick deadlines or detailed specifications, she turns to Chinese factories in Dandong, where quality control is better. Yet even these factories employ North Korean labourers, she said.

For decades, North Korea has been accused of sending workers abroad and confiscating most of their wages, an arrangement that activists liken to slave labour. Researchers say the practice has expanded since Kim Jong Un took power, with more than 50,000 workers now toiling in up to 40 countries.

In Dandong, the local government boasts that 10,000 North Koreans are employed in its apparel factories, working 12- to 14-hour shifts, with just two to four days off each month and a monthly wage of no more than $260.

“They are well disciplined and easy to manage,” says the website of the Dandong commerce bureau, noting that the workers have been vetted before arrival. “There is no such thing as absenteeism or interfering with management, no using illness to shun work or procrastination and losing work time.”

Lang sends more flexible orders to North Korea, where costs are lower but it is impossible to guarantee delivery dates because of power failures and a shortage of trucks.

Her company ships fabric, buttons and zippers to factories there, she said, because the North lacks the materials, and they put “Made in China” labels in garments to make them easier to sell overseas.

That would most likely be considered fraud and a violation of place-of-origin rules in countries that import the clothes, experts said.

Paul Tjia, managing director of GPI Consultancy, a Dutch company that offers advice on doing business in North Korea, said that some of his European clients had ordered hundreds of thousands of garments and that “Made in China” labels could be justified by additional work put into the clothes inside China.

But he added: “I’m not a garment manufacturer. I just make the introductions.”

Loopholes abound

China has kept North Korea’s garment sector off the list of industries targeted by UN sanctions, arguing that punishing it would hurt ordinary people and not military programmes. It has protected North Korea’s seafood industry using the same argument.

But it is difficult to say who benefits from this trade, in part because even private enterprise in North Korea is overseen by state officials who extract taxes and bribes.

“Whether the proceeds from the textile industry support the nuclear programme is an open question,” said Joseph M. DeThomas, a professor at Pennsylvania State University and a former US ambassador involved in sanctions policy. “Money is fungible.”

At least one North Korean enterprise controlled by the atomic energy bureau, the Korea Kumsan Trading Corp, ran a garment factory that added embroidery and beading to clothing, according to a North Korean government trade website.

And South Korean officials say that the millions paid by Chinese companies to fish in North Korean waters go primarily to firms controlled by the North’s military.

Sanctions also do not cover the organised export of labour. The United States has urged countries to eject North Korean workers, saying their remittances benefit the military, not their families. But China, Russia and other nations continue to hire them.

US sanctions against North Korea began with a near-total economic embargo adopted in 1950, at the start of the Korean War. Over the years, some sanctions were eased and others added, including after the cyberattack on Sony Pictures in 2014 that Washington attributed to the North.

The UN Security Council did not impose sanctions until July 2006, when, after a series of missile tests, it banned countries from selling material for missiles or weapons of mass destruction to North Korea.

The North detonated its first nuclear device months later, followed by additional tests in 2009 and 2013, and two in 2016. The Security Council tightened sanctions after each test, as well as after a satellite launch in 2013. It targeted military supplies and luxury goods, shut Pyongyang out of the international financial system and, most recently, banned a range of mineral exports.

But loopholes abound. Resolutions called for searches of vessels carrying cargo to North Korea but have failed to stop its use of ships sailing under foreign flags. And when the Security Council banned its top export, coal, China insisted on an exception for transactions judged to be for “livelihood purposes.”

New measures seek to limit North Korea’s ability to make money through its embassies. In Berlin, for example, authorities are closing a hostel run out of former diplomatic quarters. But the North has responded to such crackdowns by shifting business to countries with weaker enforcement.

“How much cooperation will the international community get from Cuba, Russia, Iran or even Pakistan, Bangladesh or Laos?” asked Stephan Haggard, an expert on the North Korean economy at the University of California, San Diego.

The United States has also urged a boycott of Air Koryo, the North Korean airline, but it still flies to China and Russia. Chinese tourism to North Korea is booming, said Cha Yong Hyok, whose company, Indprk, takes groups by train to Pyongyang and will soon use new flights from Dandong.

The North often circumvents banking sanctions using front companies and agents overseas, and North Koreans routinely send and receive payments using Chinese intermediaries who take a commission, despite the ban on “bulk cash” transfers.

“We can and should go after these targets, but turning this into a game of financial cat-and-mouse will never achieve the level of pressure needed,” said Daniel L. Glaser, a former Treasury Department official involved in sanctions enforcement.

Ultimately, he argued, that pressure will come only if China makes a strategic decision to truly squeeze the North.

“Though China has taken helpful steps at times,” he said, “it has never been willing to go all in.”

Business with the North

Many of China’s best-known companies have done business with North Korea even as they have sought customers and investors in the United States or relied on US-made parts and materials.

ZTE, the mobile phone and electronics manufacturer, for example, shipped about $15 million of goods to the North in 2015, according to Chinese customs records viewed via the global trade database company Panjiva.

The company agreed to pay $1.19 billion in March for violating US sanctions against Iran and North Korea, in part by sending 283 shipments of electronics with US-made components to the North. ZTE has pledged to improve oversight.

But many Chinese companies sell their products to North Korea without running into such issues.

The electric car and battery maker BYD, in which Warren Buffett’s Berkshire Hathaway owns a 10 per cent stake, has shipped about $14 million in goods to North Korea since 2012, including rubber products in January and vehicles in December, customs records show. BYD and Berkshire Hathaway did not immediately respond to a request for comment.

Just about every big Chinese appliance maker does business with North Korea, too, shipping refrigerators, air-conditioners, televisions and other electronics. The major Chinese automakers sell vehicles to the North as well.

Even Tsingtao Brewery shows up in the customs records, with a delivery of about $20,000 worth of beer in the summer of 2014.

UN sanctions prohibit the sale of luxury goods to North Korea, but countries are generally left to define what that means. The resolutions list jewellery, luxury automobiles, sports equipment and snowmobiles but make no mention of televisions, consumer electronics or home appliances.

In some cases, Chinese companies with access to advanced technology are doing business with North Korea. Subsidiaries of the defence manufacturer Norinco made seven shipments, mostly of electronic and optical goods, worth a total of $1.5 million, in the second half of last year, according to the records. Norinco did not respond to a request for comment.

Matthew Brazil, a security consultant and former diplomat for the United States who investigated Chinese trade controls in the 1990s, said it was often impossible to get China to follow up on leads suggesting Chinese firms were violating restrictions.

“Three months later, if you’re lucky, the visit is scheduled, and many times, visits weren’t scheduled at all,” he said.

Brazil said the problem had persisted, and as a result, “any level of control of American electronics has completely collapsed because this technology can be so easily shipped from China to North Korea.”

On AliExpress, an e-commerce platform operated by the Chinese internet giant Alibaba, six of the nine shipping services list North Korea as a potential destination. Alibaba declined to comment.

The manager of a shipping firm in Dandong who asked to be identified only by her surname, Li, because of the nature of her work said shipping a package of electronics to North Korea was straightforward “as long as it doesn’t have obvious labels” and meets weight requirements.

In fact, a delivery is more likely to run into problems on the North Korean side of the border than with customs inspectors in China. “The key,” she said, “is to make sure everything is fine with the people on the other side.”

–New York Times News Service

Jane Perlez and Yufan Huang reported from Dandong, China, and Paul Mozur from Hong Kong. Ryan McMorrow contributed research from Beijing, and Caroline Zhang from Shanghai.

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