Secondary Sanctions on North Korea: Keep your supply chain safe
- What are Secondary Sanctions?
- Trade Relations between China and North Korea
- Trade Relations between China and the USA
- Secondary Sanctions Effects on US Distributors
On September 21, 2017, US President Donald Trump signed an executive order placing secondary sanctions on North Korea. These new sanctions are the latest action taken against North Korea and the country’s dictator Kim Jong-un. But what are these sanctions? And how will they affect an international supply chain?
What are Secondary Sanctions?
Secondary sanctions are economic sanctions that have been implemented more and more frequently on a global scale in the past decade. These kinds of sanctions aim to negatively impact a certain country’s economy by putting laws and regulations into place with other country’s economies.
Thursday’s executive order outlines sanctions that penalize any company or person that does any sort of business with North Korea. This includes banks that trade with North Korea, any goods or services being imported to or exported from North Korea, or even cargo ships and planes that stop at a port in North Korea – among other things. The penalty for conducting any business with North Korea is being barred from conducting any business with the United States and her businesses.
These sanctions are the latest in a string of sanctions stemming from different global bodies (including the UN) placed against North Korea, and less than a week before Trump signed his executive order new sanctions were released by the UN. Bans on North Korean exports, limits on their imports, and contracts with overseas laborers among other regulations had already been put into place.
While these sanctions can be applied to a small number of countries, their biggest impact is meant for North Korea’s number one trade partner: China. China is also the top trade partner for the United States – and vice versa. So what is the impact that these sanctions will have?
Trade Relations between China and North Korea
China accounts for roughly 90% of North Korea’s foreign trade, and China also supplies North Korea with about 90% of their energy and food. China imports 85% of the $3.47bn imported goods to North Korea. North Korea also exports $2.83bn of goods per year, with 83% of that going to China. Overall, it’s an trade partnership worth a few billion dollars.
These new secondary sanctions are not the first to be placed on North Korea, so why is China still trading with the country? In fact, China had already begun limiting their trade with North Korea including a ban on imports of iron ore, iron, lead, coal, and seafood from North Korea. However Chinese banks are still holding accounts for North Korean citizens and trading with the North Korean government. The US has been taking action against such banks by cutting off business with US banks, culminating in actions against the Chinese Bank of Dandong this past summer.
China has been hesitant to completely sever ties with North Korea since the trade between the two countries is what sustains North Korea’s current regime. By removing that support, the North Korean regime would topple – leaving North Korea’s over 25 million citizens to fend for themselves in an uncertain future. Mass emigration to China is a certainty, which would put massive strains on China’s already over-taxed resources.
Trade Relations between China and the USA
Meanwhile, the trade industry between China and the US amounted to $578.6bn in 2016. With such a large trade partnership at stake, China needs to carefully navigate these new regulations. US distributors that source from China also need to be particularly wary. Manufactured goods account for 94% of Chinese goods exports to the US.
The good news is that China has already begun banning certain imports from North Korea – mainly raw materials that China uses for manufacturing. However, there is still a considerable risk that smaller Chinese manufacturers still source from North Korea. Likewise, any company that imports anything to North Korea is not allowed to do any business with the US.
Secondary Sanctions Effects on US Distributors
The new sanctions are more targeted to banks that still fund North Korean business and government since these resources are what’s keeping the North Korean regime in place. However, any tangible goods and even logistics are still at risk. Any Chinese company that a US company is doing business with cannot do any type of business with North Korea.
As a distributor sourcing from China, the best thing you can do is know your suppliers. Suppliers nearer to the North Korean/China border are more likely to source goods from North Korea or hire logistics companies that use ships and planes to transport cargo to North Korea. If they are using these companies, their goods can be banned from entering the US or even the cargo transport can be barred from the US for 180 days after stopping in North Korea.
Another way to safeguard your distribution business is by sourcing from multiple distributors (especially in multiple countries). Keep in mind that China is not the only country to trade with North Korea, though they are by far the largest. It is reassuring that China has already begun halting materials trading with North Korea, but don’t risk your business!