Despite Beijing’s displeasure, the latest round of US sanctions on foreign banks associated with North Korea is preferable to military options that could trigger a full-scale war, says Matthew Cottee.

Donald Trump at UN General Assembly

By Matthew Cottee, Research Associate, Non-proliferation and Nuclear Policy

Shortly after North Korea’s sixth and largest nuclear test on 3 September, United States Treasury Secretary Steven Mnuchin warned that if the international community’s response was unsatisfactory, the US would compel key states to make a decision: stop facilitating trade with North Korea or lose access to the US and international dollar system. Mnuchin threatened an executive order that was prepared and ready for the president’s signature; this has now been brought into force. The new measures impose ‘a range of sanctions, such as suspending U.S. correspondent account access to any foreign bank that knowingly conducts or facilitates significant transactions tied to trade with North Korea or certain designated persons’.

Such economic threats may appear inconsequential when compared with President Trump’s bellicose address at the United Nations General Assembly this week, in which he threatened to ‘totally destroy North Korea’. In Beijing, however, this latest development will be viewed as highly controversial and will likely further escalate tensions between key stakeholders.

Heightening the pressure on Pyongyang

The swift passage of UN Security Council Resolution 2375 earlier in September – unanimous support for which was not guaranteed – earned the US administration some elusive praise and brought some immediate action. On 11 September, China’s central bank reportedly told banks to strictly implement UN sanctions against North Korea. Trump welcomed this move, although it was obviously not deemed to be tough enough. The Trump administration, presumably unhappy with the progress it has seen, is prepared to exert the power of the US financial system to force Beijing, in particular, to do more.

Aside from Mnuchin’s explicit warnings, the US Treasury had already telegraphed its likely direction of travel. In June it labelled the Chinese Bank of Dandong ‘a foreign bank of primary money laundering concern’. Although small in the grand scheme of things, this was a symbolically significant move. Beijing has frequently conveyed its displeasure at ‘long-arm jurisdiction’ and warned the US that further secondary sanctions would be an escalatory move amid deteriorating bilateral relations. With this new executive order, the US administration has decidedly upped the ante.

Economics aside, latest move highly provocative

From an economic point of view, there is no real decision to be made. Trade between China and North Korea was estimated to be worth US$2.6 billion in the first half of 2017, compared with the hundreds of billions that China earns via international dollar markets. Politically, however, this move will be incendiary and will further exacerbate tensions in the region. Forcing China to choose between trade with North Korea and the US is provocative, particularly during final preparations for China’s Communist Party Congress, when President Xi Jinping is seeking a period of calm and predictability.

There have been signs that China might be beginning to rethink its relationship with its supposed ally. Recent public murmurings from Chinese scholars have proposed a shift in how Beijing should approach Pyongyang. Writing in Foreign Affairs, Zhu Feng argued that ‘Beijing must face the reality that the Kim family’s nuclear and missile programs are opposed to Chinese interests and a threat to regional stability.’ Similarly, Jia Qingguo concluded: ‘North Korea has largely ignored China’s efforts … When war becomes a real possibility, China must be prepared. And, with this in mind, China must be more willing to consider talks with concerned countries on contingency plans.’ In the wake of the new executive order, such dialogue may now be harder to initiate.

This new economic move represents part of a broader US strategy of heightened pressure. While Trump has been blustering in public, behind the scenes US diplomats have been successfully lobbying for states around the world to cut trade and diplomatic ties with Pyongyang; this month four countries expelled North Korean ambassadors.

By further isolating North Korea diplomatically and restricting its ability to trade, it is hoped that North Korea will have no option but to enter into talks over its missile and nuclear programmes. Whether a government that allowed up to two million of its people to starve in the 1990s will succumb to pressure remains questionable. Controversial and potentially futile though it may be, however, threatening access to the US financial system is preferable to military options that could trigger a full-scale war.

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