How North Korea Managed to Defy Years of Sanctions

May 14, 2017

By JANE PERLEZ, YUFAN HUANG and PAUL MOZUR New York Times

https://www.nytimes.com/2017/05/12/world/asia/north-korea-sanctions-loopholes-china-united-states-garment-industry.html?smprod=nytcore-iphone&smid=nytcore-iphone-share

DANDONG, China — As the end of the fashion season approached, and the suits and dresses arrived in her company’s warehouses here in the Chinese border town of Dandong, the accountant crammed about $100,000 into a backpack, then boarded a rickety train with several co-workers.

Bridges over the Yalu River connecting the North Korean city of Sinuiju and the Chinese city of Dandong. Dandong is China’s largest border town, and much of the North’s trade with the world flows across its bridges or through its port. Credit Damir Sagolj/Reuters

Bridges over the Yalu River connecting the North Korean city of Sinuiju and the Chinese city of Dandong. Dandong is China’s largest border town, and much of the North’s trade with the world flows across its bridges or through its port. Credit Damir Sagolj/Reuters

She asked to be identified only by her surname, Lang, given the sensitivity of their destination: North Korea.

After a six-hour journey, she recalled, they arrived at a factory where hundreds of women using high-end European machines sewed clothes with “Made in China” labels. Her boss handed the money to the North Korean manager, all of it in American bills as required.

Despite seven rounds of United Nations sanctions over the past 11 years, including a ban on “bulk cash” transfers, large avenues of trade remain open to North Korea, allowing it to earn foreign currency to sustain its economy and finance its program to build a nuclear weapon that can strike the United States.

Fraudulent labeling helps support its garment industry, which generated more than $500 million for the isolated nation last year, according to Chinese trade data.

North Korea earned an additional $1.1 billion selling coal to China last year using a loophole in the ban on such exports, and researchers say tens of thousands of North Koreans who work overseas as laborers are forced to send back as much as $250 million annually. Diplomats estimate the country makes $70 million more selling rights to harvest seafood from its waters.

China accounts for more than 80 percent of trade with North Korea, and the Trump administration is counting on Beijing to use that leverage to pressure it into giving up its nuclear arsenal. The Chinese government took a big step in February by announcing that it was suspending imports of coal from the country through the end of the year.

But China has a long record of shielding North Korea from more painful sanctions, because it is afraid of a regime collapse that could send refugees streaming across the border and leave it with a more hostile neighbor.

In addition, Beijing now has a sympathetic ear in South Korea, whose newly elected president, Moon Jae-in, echoes its view that sanctions alone will not be enough to persuade Pyongyang to abandon its nuclear program.

While North Korea remains impoverished and dependent on food aid, its economy appears to be growing, partly because of a limited embrace of market forces since its leader, Kim Jong-un, took power more than five years ago.

Foreign trade, primarily with China, has surged, too, more than doubling since 2000, though it has slipped in the past three years.

In theory, North Korea’s greater openness to trade makes it more vulnerable to sanctions, with new potential targets and pressure points. But it also highlights the limits of an approach to sanctions — defined largely by China at the United Nations — that aims to punish North Korea’s military and ruling elite while sparing its people. As trade expands, the lines have blurred.

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North Koreans performing at a restaurant in Beijing last year. For decades, the North has been accused of sending workers abroad and confiscating most of their wages. CreditNg Han Guan/Associated Press

North Korean Labor

Positioned near the mouth of the Yalu River, Dandong is China’s largest border town, and much of North Korea’s trade with the world flows across its old bridges or through its deepwater port.

Ms. Lang, 33, moved here more than a decade ago to study environmental protection. She ended up like many with ambition in this city of more than three million: doing business with North Korea.

She wears exquisite makeup and carries a Louis Vuitton handbag, and she said her role in the garment trade was straightforward: Orders come in from Japan, Europe and other parts of China, and she gets the clothes made.

For those with quick deadlines or detailed specifications, she turns to Chinese factories in Dandong, where quality control is better. Yet even these factories employ North Korean laborers, she said.

For decades, North Korea has been accused of sending workers abroad and confiscating most of their wages, an arrangement that activists liken to slave labor. Researchers say the practice has expanded since Mr. Kim took power, with more than 50,000 workers now toiling in up to 40 countries.

In Dandong, the local government boasts that 10,000 North Koreans are employed in its apparel factories, working 12- to 14-hour shifts, with just two to four days off each month and a monthly wage of no more than $260.

“They are well disciplined and easy to manage,” says the website of the Dandong commerce bureau, noting that the workers have been vetted before arrival. “There is no such thing as absenteeism or interfering with management, no using illness to shun work or procrastination and losing work time.”

Ms. Lang sends more-flexible orders to North Korea, where costs are lower but it is impossible to guarantee delivery dates because of power failures and a shortage of trucks.

Her company ships fabric, buttons and zippers to factories there, she said, because the North lacks the materials, and they put “Made in China” labels in garments to make them easier to sell overseas. That would most likely be considered fraud and a violation of place-of-origin rules in countries that import the clothes, experts said.

Paul Tjia, managing director of GPI Consultancy, a Dutch company that offers advice on doing business in North Korea, said that some European clients had ordered hundreds of thousands of garments and that “Made in China” labels could be justified by additional work put into the clothes inside China.

But he added: “I’m not a garment manufacturer. I just make the introductions.”

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A silk mill in Pyongyang, the North Korean capital, in February. Fraudulent labeling helps support the garment industry, which generated more than $500 million for the country last year, according to trade data.CreditEd Jones/Agence France-Presse — Getty Images

Loopholes Abound

China has kept North Korea’s garment sector off the list of industries targeted by United Nations sanctions, arguing that punishing it would hurt ordinary people and not military programs. It has protected North Korea’s seafood industry using the same argument.

But it is difficult to say who benefits from this trade, in part because even private enterprise in North Korea is overseen by state officials who extract taxes and bribes.

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“Whether the proceeds from the textile industry support the nuclear program is an open question,” said Joseph M. DeThomas, a professor at Pennsylvania State University and a former American ambassador involved in sanctions policy. “Money is fungible.”

At least one North Korean enterprise controlled by the atomic energy bureau, the Korea Kumsan Trading Corporation, ran a garment factory that added embroidery and beading to clothing, according to a North Korean government trade website.

And South Korean officials say the millions paid by Chinese companies to fish in North Korean waters go primarily to firms controlled by the North’s military.

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