Inside China’s North Korean coal ban

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From Stephen Haggard at the Pieterson Institute for International Economics.

Beijing announced the following:

“In order to implement the NSC Resolution No. 2321, according to the Foreign Trade Law of the PRC, MOFCOM Announcement No. 81 of 2016, China suspends coal imports from North Korea for the rest of the year (including shipments that have been reported to customs yet granted permission for release). This announcement shall be implemented from Fed 19, 2017 to December 31, 2017.”

If this is for real, then we are about to see a real test of a proposition I have been offering for some time: that the North Korean economy is more vulnerable to Chinese pressure than is thought. North Korea is not immune from the laws of economics, and could easily experience a full-blown balance-of-payments-cum-currency crisis, with the black market value of the won plummeting rapidly and domestic prices spiraling in tandem.

But before we get too excited, the outcome of this episode will depend not only on whether China follows through, but on the politics of the move. If China is squeezing North Korea, it is for one purpose and one purpose only: to offer a cooperative gesture to the incoming Trump administration in return for an initiative on negotiations. The key question is whether the US can pick up on the offer given the transition and the answer could well be “no.”

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First, a couple of quibbles about the coverage and the likely veracity of the Chinese announcement. Contrary to CNN(link is external) and other outlets this measure would not “comply with a UN Security Council resolution that China helped draft and pass last November.” That is misdirection coming from the Ministry of Commerce. As I explained in earlier analysis of 2321, the resolution did not in fact impose a coal ban. Rather, it put a complex cap in place. That cap would ultimately impose about a $500 million hit to roughly $900 million of coal exports over the full year. But 2321 would have allowed China to continue to conduct coal trade with the country, probably importing trend amounts through April or May.

And on whether China is serious, we also need to be cautious. Recall that 2270 did purportedly impose a ban (see our analysis here). But the resolution was riven with a livelihood exemption that allowed North Korean exports to China over the year to trend up. And only two weeks ago, Kent Boydston and I showed that following the announcement of a coal ban for the remainder of the year on December 10(link is external), China actually ended up importing more coal in December than it had in any other month of the year (analysis here, with both coal and overall trade for the year; Simon Denyer’s quality coverage at the WaPo here(link is external)). David von Hippel and Peter Hayes have a very strong analysis(link is external) of how China could go wobbly if it chose to, and that is quite apart from possible smuggling and diversification of export markets.

Trying to figure out why the Chinese moved is a fool’s errand. Some in the invisible college have noted that the announcement appeared more closely timed to the assassination of Kim Jong Nam than to the first missile test of the Trump era. But it could well be cumulative causation: mounting frustration. My favored explanation is that the decision has more to do with US-China relations than with North Korea.

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It is no mystery that China was frustrated with the Obama administration’s “strategic patience” approach, which put the onus for progress on a North Korean move back to the negotiating table. To understand the meaning of this gesture, it is important to understand China’s overall posture, which is easily summarized in four bullets:

  • Strong and principled declaratory opposition to North Koreas nuclear program;
  • Willingness to support sanctions that are narrowly targeted at the WMD program, while effectively propping the country up through ongoing commercial trade and investment;
  • Opposition to any actions that would create “instability” on the peninsula, meaning not only military conflict but instability of the regime itself;
  • Insistence that concessions from the US—including a willingness to negotiate—are the key to resolving the puzzle, rather than Beijing’s own enabling behavior.

It is this last bullet that now will pose challenges to the Trump administration. The objective of the coal ban is clearly not to bring down the North Korean regime. As with both 2270 and 2321, the Chinese objective in supporting sanctions was to return to some kind of talks: two-party, Six Party, or any other configuration that would move a wider settlement forward. In his conversation with Foreign Minister Wang Yi last week, Secretary of State Tillerson reportedly urged China to use all available tools to moderate North Korea’s behavior, presumably including diplomatic action and sanctions. But Wang Yi similarly pressed Washington to figure out how to get to talks.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.