The Maximum Financial-Pressure Strategy for North Korea

The Maximum Financial-Pressure Strategy for North Korea

The Trump administration has said that the maximum-pressure approach to address North Korea’s destabilizing nuclear and missile activities includes sanctions. That’s just the starting point to sever Pyongyang’s external financial ties and build leverage to reduce the risk of conflict on the Korean peninsula. The success of such an effort rests on a calculated strategy for sanctions implementation, aggressive diplomatic engagement around the measures, and a program for minimizing blowback from North Korea’s main financial enabler, China.

Here’s how to do it.

First, Washington needs the right financial tools to pressure North Korea. Contrary to what some believe, there is plenty of scope to increase the pressure. The most powerful way to do this is with secondary sanctions, measures that force foreign firms to choose between dealing with the United States or North Korea. Medium to large global firms will always choose the United States. They can’t do without access to the U.S. market or the dollar.

The administration should layer on secondary sanctions targeting firms or people facilitating North Korea’s nuclear and ballistic missile programs. They should also aim at economic sectors generating benefits for the regime, including North Korea’s minerals, mining, and energy trade, and payments for this trade. In addition, secondary sanctions should target anyone abroad involved in shipping, financing, or insurance tied to trade with North Korea. Finally, the measures should also be applied to foreign banks servicing North Korean front companies and foreign firms employing North Korea’s contract laborers.

The second feature of a successful U.S. financial-pressure strategy on North Korea is a calculated implementation strategy. Choosing the right targets and incrementally building pressure will cultivate leverage for the United States. Many of the targets will be Chinese, as China is North Korea’s most significant trading partner and banker. The United States should aim first at medium-sized Chinese banks and firms facilitating North Korean commerce before moving on to bigger ones, if necessary.

The administration should also use waivers to allow foreign firms time to significantly reduce business with North Korea, and keep North Korean money from permitted trade in bank accounts abroad. These practical steps will make the sanctions implementable and allow the possibility for recalibrating and tightening, if necessary.

A third step in the financial pressure effort toward North Korea should be rigorous diplomatic outreach. The administration must engage China to explain a sanctions pressure strategy, the consequences of secondary sanctions, and the path for Beijing to direct a severing of financial ties with North Korea. This will reduce the risk of miscalculation and appropriately signal a U.S. willingness to escalate. U.S. leaders should also urge allies to independently underscore for China the urgency of cutting off revenue to North Korea. Of course, the U.S. administration should also prepare a sanction off-ramp for Pyongyang if it bends under pressure and commits to meaningful concessions on denuclearization.

The fourth component of the financial pressure strategy for North Korea is self-defense. Prior U.S. secondary sanctions on a Chinese target, Bank of Kunlun in 2012, did not provoke blow back. This time may be different. Beijing oversees a more powerful economy, has more leverage with trading partners given its greater global economic integration, and has a cooler relationship with Washington. Beijing has also increasingly used trade, and other, restrictions to respond to political disagreements with Taiwan, South Korea, Japan, Mongolia, the Philippines, Norway, and others.

Beijing may be most likely to retaliate against U.S. secondary sanctions by cutting trade with U.S. allies in Northeast Asia, with which it has significant economic leverage. U.S. leaders should work closely with these allies to consider alternative suppliers or markets. China could also threaten select U.S. firms, necessitating the scouting out of alternative suppliers and consumers. In addition, U.S. leaders should support U.S. and foreign firms in ally countries in adding new safeguards into trade contracts with Chinese firms, and new insurance products, to limit potential economic harm.

Ultimately, the United States may only have one more big chance to use secondary sanctions to pressure North Korea and show the world how powerful this tool can be to address a grave national-security challenges. If this effort is bungled, and lacking sufficient diplomatic engagement or appropriate sequencing and calibration, the United States will look unfocused, weak, and suffer a setback in the North Korea crisis. It could invite economic harm on the United States and allies, with no public policy benefit, and make sanctions less credible to address future security challenges.

Notwithstanding the risks associated with secondary sanctions on North Korea, they are a leading strategy to change Pyongyang’s calculus in a shrinking window of opportunity. The U.S. Congress understands this and is moving a bill to toughen sanctions on North Korea. The administration must follow suit and immediately implement secondary sanctions, integrating them into the maximum pressure plan.

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