Roll out economic weaponry against North Korea
In dealing with North Korea, the Trump administration should look to Iran. Specifically, it should take a page out of the Obama administration's Iran sanctions playbook and apply against North Korea the tool used successfully to bring Iran to the nuclear negotiating table — "secondary sanctions" on those who do business with the regime.
North Korea is not, by any stretch, "sanctioned out." Despite a broad set of international and U.S. sanctions, North Korea has gotten off relatively easy, especially as compared with Iran. That is largely because the United States has historically been reluctant to impose secondary sanctions to isolate North Korea, particularly against China, the regime's principal legitimate trading partner. Certainly, the Trump administration should do its best to bring the Chinese government on board. But if China drags its feet, President Trump should proceed anyway.
Secondary sanctions are both simple and enormously powerful. They work by presenting a stark choice to a foreign bank: It can process transactions for a bank already facing sanctions (for example, one of the many North Korean banks that have been listed by the United States) or it can maintain its access to the U.S. financial system, but it cannot do both. That presents an easy choice, because access to the U.S. financial system, which also means access to the U.S. dollar, is a practical necessity for almost any bank anywhere in the world.
Adopting secondary sanctions against North Korea could cut the last tendrils of its access to the international financial system. As a recent assessment by a special U.N. committee reportedly concluded, North Korean banks and trading companies operate in China through China-based front companies. These front companies, in turn, have accounts at Chinese banks, from which they are able to do business globally, including in the United States.
If the United States were to adopt secondary sanctions against North Korea, that move would almost certainly force some Chinese banks to choose between facilitating the regime's international banking capacity and maintaining their own access. Some observers fear that this move would so irritate the Chinese government as to make secondary sanctions inadvisable.
History teaches that we should not worry too much about an adverse Chinese reaction.
When I was serving in the Treasury Department during the Obama administration, we employed secondary sanctions to significantly ramp up pressure on the Iranian government. Hundreds of foreign banks that had been transacting with sanctioned Iranian banks voluntarily severed those relationships, thereby isolating much of the Iranian banking system.
But two banks in particular continued to work with sanctioned Iranian banks. One was China-based Kunlun Bank, a midsize institution that, our financial intelligence told us, "provided hundreds of millions of dollars' worth of financial services" to a half-dozen sanctioned Iranian banks. Despite repeated warnings to the Chinese government, Kunlun refused to stop such activity. So in August 2012, Treasury used the secondary sanctions tool and cut off Kunlun from the U.S. financial system.
What happened next is instructive. The Chinese Foreign Ministry issued a relatively tepid and formulaic protest — and, behind the scenes, the Chinese government directed Kunlun to stop. Despite what some had feared, employing secondary sanctions against Kunlun neither led China to stop cooperating on Iran nor soured our relations with Beijing in any other respect.
China reacted this way for several reasons — all of which have parallels to the current situation with North Korea.
First, we had made clear to Chinese authorities our intention to close loopholes in the sanctions against Iran. Likewise, for several years, the U.S. government has complained to Chinese authorities that North Korean front companies' access to Chinese banks weakens financial sanctions against North Korea. So there would be no surprise if we took action to close that loophole.
Second, the Chinese understood that our financial pressure campaign against Iran was designed to spur negotiations over its nuclear program. By the same token, the Trump administration's "maximum pressure" policy toward North Korea also appears designed to produce a negotiation over the regime's ballistic missile and nuclear program. And, as with Iran, the Chinese have been pressing the United States to seek a negotiated resolution of concerns with North Korea's nuclear threat.
Finally, as with Iran, China is worried about the alternative — military action to destroy North Korea's nuclear and missile programs. Whatever sanctions pain China was willing to endure to avert a military strike by the United States (or Israel) against Iran, its deep-seated fear of a military confrontation on the Korean Peninsula means its pain tolerance for secondary sanctions against North Korea would be even higher.
The Trump administration should start by applying secondary sanctions against midsize Chinese banks that aid North Korean front companies, leaving the larger ones for later, if necessary. Imposing secondary sanctions would send a strong message to North Korean leader Kim Jong Un that the financial noose is tightening in a way that could drive a wedge between Kim and the Pyongyang elite critical to his continued hold on power. And it would demonstrate, to North Korea and China alike, that the United States is serious about generating the leverage necessary for a successful negotiation.