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The Alleviation of US Economic Sanctions Against North Korea and Its Implication for Inter-Korean Economic Cooperation

The Alleviation of US Economic Sanctions Against North Korea and Its Implication for Inter-Korean Economic Cooperation

LIM Soo-Ho

Sept. 19, 2008

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Originally released on June 26, 2008

ABSTRACT

This study aims to take a full glimpse of the effects of ending the application of the Trading With the Enemy Act of 1917 (TWEA) to North Korea (NK) and delisting it from the US list of state sponsors of terrorism through an in-depth analysis of fourteen US laws and related regulations associated with economic sanctions placed on North Korea.

Discontinuing the application of the TWEA on NK appears to be a symbolic gesture. The TWEA imposes only a limited range of sanctions, i.e., the requirement of approving imports on a case-by-case basis, a freezing of select assets and the prohibition of direct financial transactions with the US. Despite being excluded from the application of the TWEA, goods produced in North Korea may remain uncompetitive in the US market given that a maximum level of tariffs will be set upon them according to the US Trade Act of 1974. This sanction was imposed because NK's non-market economy status. It is completely unrelated to the TWEA or the US list of state sponsors of terrorism. Moreover, the amount of North Korean assets frozen in the US under the TWEA was estimated at a mere $9 million as of 1994. Therefore, even if the practice of freezing assets were lifted it may prove to be marginally beneficial. Furthermore, when US President George W.Bush announced the ending of the application of TWEA on NK on June 27, 2008 , he also signed a presidential decree to maintain a freeze on North Korean assets while sustaining remittances to North Korea as illegal.

The delisting from the US list of state sponsors of terrorism, however, brings forth more promising benefits. It may alleviate US restrictions put on exports to the country, thereby opening way for strategic materials from the US to flow within its borders. However, given that North Korea is perceived as a security threat and a proliferator of weapons of mass destruction, the US is unlikely to drastically alleviate export restrictions without NK's abandonment of nuclear ambitions and the normalization of relations between NK and the US/South Korea.

Delisting from the US list of state sponsors of terrorism is a necessary condition but not a sufficient condition for NK to join international financial institutions. There are two international financial institutions in which underdeveloped countries like North Korea can be a member of: the International Development Association (IDA) and the Asia Development Bank (ADB).

A country which wants to join the IDA or ADB should first become a member of the International Monetary Fund (IMF) as stipulated according to IDA entry requirements and the national policies of the US and Japan (the largest stakeholders of ADB), respectively.

North Korea has two hurdles to surmount to become a member of the IMF. First, the Bretton Woods Agreements Act of 1944 prohibits not only state sponsors of terrorism but also communist countries from participating in the IMF. Therefore, without following the footsteps of countries such as China and Vietnam, which pursued top-to-bottom reforms and opening-up policies, it may be difficult for North Korea to get the green light from the US, a major IMF stakeholder. Second, applicant countries must establish transparency through the reform of domestic systems, as well as paying 25% of allotted funds in advance. At the current stage, North Korea's ability to fulfill such conditions is considered quite low.

The easing of US economic sanctions would create a more favorable atmosphere for the development of inter-Korean economic cooperation, although it may take time for the effects to materlialize depending on the progress of denuclearization, reforms and an opening-up. First, the easing of regulations on the shipments of strategic materials to North Korea may make the second phase of the Gaeseong Industrial Complex, a collaborative economic venture between the two Koreas , a reality. Shipments of technologically-sensitive items, however, will only be possible after North Korea abandons weapons of mass destruction, including nuclear weapons and long-range missiles.

Second, once the Korea-US FTA (KORUS FTA) is ratified and NK's denuclearization progresses, the goods produced in NK's Outer Processing Zones, including the Gaeseong Industrial Complex, could have price competitiveness in the US. For all North Korean products or products made jointly with South Korea, however, to have price competitiveness in the US, the country should be first eliminated from Trade Act-imposed sanctions by implementing reforms and opening-up. Third, full-scale investment to improve and re-establish the industrial infrastructure of NK should be taken only after NK joins the international financial institutions.

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