Tell us about this ongoing study that you're engaged with on sanctions and the coarse nature
of that order there and what that means.
Sure.
Financial sanctions right now is the primary policy tool that I think many countries and
international organizations are using to deal with North Korea.
If you think of it as a medicine, it is being over-prescribed right now.
My focus on this research topic was: what is the real impact of applying financial sanctions?
The policy definition of it is that it raises transaction costs and makes life very difficult
for North Korean state trading companies and North Korean individuals to do business, to
do their money generating activities in the past.
The hope is that in doing that, you change the environment for their decision making
and ultimately they'll see the path of a negotiated settlement as being much more viable than
continuing on the path of further nuclear proliferation and engaging in illicit activities.
It's not just nuclear negotiations centered.
There are other illicit activities where those specific sanction measures will only be lifted
if North Koreans cease engaging in those illicit activities.
The core question here is what are the unintended consequences?
Very objectively, what are the unintended consequences of financial sanctions?
My preliminary research looks at the growth of private Chinese companies acting as middle-men
for North Korean state trading companies that are in many cases the focus of these sanctions.
With that type of transaction, there are three key points.
One is that increasingly these transactions are happening inside of China and the Chinese
nationalist economy.
There are heightened levels of commission fees that private Chinese companies now demand
of North Korean state trading companies.
The prices of certain items are also very high.
That's not new.
In other cases where we've seen the application of sanctions, that's usually the impetus for
the growth of underground economies and so forth.
They create legacy issues, but that phenomena isn't new.
What's different in this case is that we have a globalized Chinese economy.
By that, I mean that foreign companies no longer just export to the Chinese market,
they're setting up production companies inside of China for the Chinese market.
With that, the North Korean state trading companies no longer really have to go to the
four corners of the world to procure or sell high-value items.
They merely have to contract with a private Chinese company.
The private Chinese company is a very important enabler in this.The bottom line in all of
this is that financial sanctions lead to private Chinese companies usually demanding higher
commission fees to do a transaction for a North Korean state trading company.
That in turn, attracts more sophisticated and well-connected private Chinese companies
to the point that in practice North Korean state trading companies now have the opportunity
to rent the capabilities of these middle men.
That is a function that didn't exist before.
This activity is increasing in an environment where you're seeing more financial sanctions
so there is an inverse relationship I think that merits much more research.
And so, if you are in North Korea and you're trying to purchase, for example, German agricultural
equipment from China, that may be built in China, that is a definite possibility regardless
of the German parent company might think of that, or the enforcement question.
That is a growing reality and so German companies, European companies, and especially those who
are involved in things like industrial equipment, manufacturing (equipment) and whatnot, North
Korean state trading companies, in many respects, just have to go across the border, engage
a private Chinese company in a contract.
They go so far and take out an insurance on the transport of whatever merchandise they
purchase.
It follows legitimate channels in a way, but the key point is that when the private Chinese
company goes to that European company to procure this industrial equipment, the European company
really thinks that it just sold something to a Chinese company.
This is a type of activity in this particular instance I think has implications in terms
of proliferation and in other areas in terms of the banned luxury goods.
As you have living standards and wealth increasing in China, they mirror the luxury taste of
the elites in North Korea.
Going across the border, procuring cognac and other items that are banned is relatively
straightforward.