Sanctions and Consequent Effects on North Korea's Trade

6 Pages Posted: 23 Jun 2017

See all articles by Jangho Choi

Jangho Choi

Korea Institute for International Economic Policy

So Jeong Im

Korea Institute for International Economic Policy

Date Written: June 17, 2017

Abstract

This paper aims to show how neighboring countries' bilateral sanctions have changed the trade patterns of the DPRK, and how extensive they are. We can see how much the DPRK has sacrificed its potential growth to pursue its nuclear program, and how it would recover if the DPRK freezes its nuclear program and sanctions by its neighbors are subsequently eased or lifted.

Sanctions against the DPRK caused changes in trade patterns, which is referred to as trade diversion. The sanctions sender cuts off economic relations including trade to achieve its goal, and the sanctions target country diversifies its trade routes to minimize the negative effects of sanctions. Trade diversion can be decomposed into four categories: trade suspension, trade substitution, detour (bypass) trade, and trade creation. The DPRK’s changes in trade are an exemplary case of trade diversion after bilateral sanctions were imposed by Japan (in 2006) and South Korea (2010).

The most drastic form of change in the DPRK's trade had been trade suspension after the sanctions have been imposed. Roughly, about $189 million's worth of trade was suspended between the DPRK and Japan after 2006, and about $298 million has been suspended in inter-Korean trade after 2010.

Trade substitution is the next significant change in the DPRK's trade, in which the target country increases trade with existing trade partners other than the sanctions sender countries. In the case of the DPRK, after Japan's bilateral sanctions, South Korea and China became target countries of its trade substitution. In 2006, inter-Korean trade soared by 113.1%, and trade between the DPRK and China increased by 95.2%, substituting its previous trade with Japan. In 2010, trade between the DPRK and China increased by 195.0% due to South Korea's sanctions.

Detour (bypass) trade is the unintended effect of sanction. Regardless of the sanctioned country's intentions, even after the sanctions the target country's trade with sanctions sender country is likely to be maintained due to preexisting economic relations via a third country, instead of direct trade between sanctions sender and target countries.

Changes to the sender countries' sanctions against the DPRK would take the form of either tightening or loosening of the sanctions. If the DPRK would continue to implement nuclear missile tests or develop other weapons of mass destruction (WMD), sanctions would not only continue, but also are likely to be strengthened, as can be seen in the recent UNSCR sanctions mandate adding 15 DPRK individuals and 4 entities in the sanctions blacklist in early June. However, in order for the sanctions to be effective, the cooperation of the DPRK's major trade partner and key patron, China, is imperative.

Conditions for loosening sanctions would require the DPRK's suspension of its development of WMDs, including its nuclear weapons program.

Despite the fact that causes for sanctions are multifaceted, the main impetus for any easing of existing sanctions would come from the DPRK's suspension of its WMD development, including its nuclear weapons program.

Keywords: Sanction, Trade of North Korea, North Korea Economy

Suggested Citation

Choi, Jangho and Im, So Jeong, Sanctions and Consequent Effects on North Korea's Trade (June 17, 2017). KIEP Research Paper. World Economy Brief 17-13. Available at SSRN: https://ssrn.com/abstract=2990865 or http://dx.doi.org/10.2139/ssrn.2990865

Jangho Choi (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

So Jeong Im

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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