Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with William Brown – Adjunct Professor at Georgetown University School of Foreign Service and nonresident fellow for the Korea Economic Institute of America – is the 136th in “The Trans-Pacific View Insight Series.”
Is sanctions relief a primary motive behind Kim Jong-un’s move to meet with U.S. President Donald Trump? Explain.
Yes, there is little doubt in my mind that Kim is being hurt badly by the current UNSC [United Nations Security Council] sanctions and needs to obtain relief. China and others have probably told him that to get such relief he must talk to the denuclearization issue with the U.S. It’s interesting since the specific U.S. sanctions probably don’t exert much pressure — we don’t trade with them anyway due to structural problems we have with North Korea’s non-market economy — and the real bite is coming from China, this in only the past six months. But Kim probably knows he must at least give the appearance of reaching out to the U.S. to get the others to bend.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Of course, Kim may not have expected Trump to agree to a summit, so this likely is causing lots of deliberation in Pyongyang. If the real targets for getting sanctions relief are China and South Korea, he may not want to suggest to President Trump that he is in real difficulty, and thus may not even bring up sanctions. I wouldn’t be surprised if he aims higher with Trump, focusing on the security issues that have the others upset.
Kim, no doubt, has military and security concerns as well as economic, but it is less clear how he can deal with those without concrete steps taken to back off his nuclear program. Any renewed North Korea threats, or nuclear or ICBM [intercontinental-range ballistic missile] tests, will likely be answered by a more threatening U.S. military posture and Kim will not want to have to expend resources to counter those.
Kim’s main hope may be to drive a wedge between the U.S. and other Security Council members, and with South Korea, to get some relief. But to do that, he will have to make himself out to be the victim, not the instigator of all the hostility.
Explain North Korea’s currency crisis in drawing on national reserves to fund the deficit with China.
We don’t know North Korea is drawing on official foreign exchange reserves, because they don’t publish any real data and most of what we know comes from its trade and finance partners, by far the most important of which is China. It’s clear that North Korea has never run a global goods trade surplus, and it gets next to nothing in foreign investment or credits, so it is reasonable to question how they could have built up any foreign exchange reserves. The short answer to that is a great deal of foreign aid over the years — from the former Soviet Union, China, East and West Europe, Japan, South Korea, and even the United States — and a fair amount of remittances returned to North Korea from workers abroad and the large expatriate populations in Japan, China, Russia, and South Korea. Since the government expropriates most foreign currency, or at least it used to, this may have created several billion dollars of reserves which the central bank can now draw upon. And then there are likely several billion dollars in illicit, unrecorded exports over the years.
The problem today though is two-fold. The sanctions, especially by China, have in the past few months increased the goods trade deficit by an additional $100 million or so each month; that is in addition to a normal deficit of the same size. It seems very unlikely aid or remittances could have increased to offset that outflow; in fact, it is very likely that aid and transfers also have plummeted. So, it is very hard to see how the government is not drawing down reserves at a prodigious rate. The drop in imports in February suggests to me they are running short.
The other side to the problem is that increasing amounts of foreign exchange seem to be circulating in North Korea, private money that either comes from the government’s reserves, or which has been earned privately from abroad. These dollars compete with the state’s money and can threaten the stability of the North Korean won.
How might a potential currency crisis unravel North Korea’s state economy and black market?
Kim has done an excellent job in recent years getting hold of inflation and stopping the deterioration of the won, which was rampant under his father’s regime. A more solid money in turn has helped the private market economy expand, enabling people to save and invest more than they ever could under the strict command economy system. Most importantly, private activities make much more productive use of the country’s ample labor, capital, and natural resources than does the old system which is extravagantly wasteful — people everywhere tend to make bad use of public money, good use of their own money.
But Kim’s success has come by allowing foreign money to circulate as never before and by not attacking the increase in market activity which competes with, and tends to corrupt, the state system. Now most Koreans seem to have at least two currencies in their wallets — North Korean won and U.S. dollars, or Chinese yuan, in what is called a partially dollarized economy. If Pyongyang isn’t careful with its issuance of won-denominated credit, or won cash, the people will decide dollars are safer and may suddenly shift their wallet allocations by selling the won and buying dollars. This can happen quickly, even overnight in a financial panic atmosphere, if something sparks the run, whether it be a small change indicating slippage is beginning, or an event, such as a nuclear test or a widely observed U.S. action. In fact, something similar happened in late 2008-2009 in a crisis that forced the government to apologize for stealing money from the people, even though at that time money was not near as important as it is now.
Kim likely knows he must at all costs prevent this from happening and, as a result, is keeping close tabs on the won, not extending as much won credit as the economy needs to invest and grow, and perhaps expended his reserves. But dollars are likely leaving the country anyway, due to the likely current account imbalance, thus putting pressure on the exchange rate.
A break in the exchange rate could result in some combination of hyperinflation or depression, either of which could put people in the streets. It stands to reason that Kim must feel very vulnerable to U.S. actions that could destabilize the won and is now summiting to prevent that from happening.
How is Beijing using North Korea’s dependence on China as leverage in the upcoming U.S.-North Korea summit?
It’s hard to know but we can be sure President Xi advised Kim to deal with the U.S. but not too closely. China has its own objectives, certainly to try to keep North Korea stable but also to keep it from becoming a U.S. target. It’s amazing how tough Beijing has gotten on Pyongyang, just since the Xi-Trump Florida summit last year. And Beijing has one more big lever — it supplies, for free, all the crude oil that the country uses. I’m sure somewhere the Chinese are giving hints that any more bad actions — meaning nuclear tests — will shut off that flow and shut down the economy. With Pyongyang now begging for help, Xi has quite a lot of leverage. Trump would do well to cooperate with Xi to use it well.
Explain how the U.S. administration could use sanctions relief as a negotiating tool in the Trump-Kim talks.
Sanctions, in my view, are not the real issue between Kim and Trump. We have never traded or invested in North Korea because of its “command” or socialist economic system, not because of UN or even our own sanctions. So, if sanctions were taken off, we would still have “hostile” economic relations and like in the past, disappointments would cloud any further progress. The two systems simply can’t trade with each other on normal terms.
Kim, however, has allowed a substantial shift away from the socialist economy and may be willing to consider a breakthrough, much like Deng in China a generation ago, that would bring the economy out of its misery, and its people as well. So, Trump should take advantage, in my view, by offering to guide North Korea down a reform path, one that will end the hostility that Kim claims makes his nuclear weapons necessary.
That sounds like a tall order and I’m afraid Trump will try to do too much in the proposed summit, goaded on by the hysterical political situation in Washington that seems to want him to fail. So, I would recommend a short meeting in which Kim and Trump set up several joint U.S.-North Korean task forces aimed at exploring where we can make progress: a task force on nuclear-security-normalization issues; a task force on economic, reform, sanctions, and financial stabilization issues; and a task force on people-to-people issues, including the penal system, tourism, economic assistance, and the potential for an official tourism office in Pyongyang. The two leaders can order their staffs to come up with three such proposals and the two would meet again in three months, maybe in a better location, and hammer out what they can agree upon.