Economics

Why Sanctions Against North Korea Are Causing Pain in China

  • China sees job losses as shops close along North Korea border
  • Trump has threatened a trade war if China fails to rein in Kim

How North Korea Sanctions Are Impacting China's Rust Belt

Along China’s border with North Korea, residents are more worried about feeding their families than the possibility of nuclear war.

In Hunchun, a city of about 230,000 people near China’s shared frontier with North Korea and Russia, protests briefly broke out last month after the United Nations Security Council approved sanctions banning exports of seafood and other goods from Kim Jong Un’s regime. Dozens of wholesale stores were shuttered, dealing a blow to the packagers, distributors, drivers and restaurateurs who depend on the trade.

“Many people are unemployed now,” said Liu Guanghua, 41, who owns one of the few businesses still open on what’s known as Seafood Street. “Sanctions should be against the North Korean government, but this impacts regular people in China and North Korea.”

Seafood Street, where protests broke out last month.

Source: via Bloomberg Businessweek

Towns on the southeast fringe of China’s rust belt were already struggling with the decline of heavy industries such as steelmaking and coal mining before becoming collateral damage in the U.S.-led push to isolate North Korea. The risk of social unrest due to job losses is a sensitive issue for Chinese President Xi Jinping, particularly as the Communist Party prepares for a twice-a-decade reshuffle of top leaders next month.

The ability to deliver robust economic growth helps underpin the Communists’ legitimacy in the country’s one-party system. So while U.S. President Donald Trump has threatened a trade war if Xi doesn’t use his economic leverage to curb North Korea’s nuclear ambitions, authorities in Beijing need to also weigh the domestic cost of implementing sanctions. 

The provinces of Jilin (home to Hunchun) and Liaoning haven’t had much success finding new drivers of growth after Beijing began scaling back its support for state-owned enterprises in the 1990s, paving the way for entry into the World Trade Organization in 2001. The central government has showered the region with subsidies and investments for the past decade, but few factories have opened to take the place of the shipyards and petrochemical plants that once powered growth.

Liaoning, where officials recently admitted they falsified economic statistics for years, saw output shrink 2.5 percent last year -- the only one of the 31 provinces administered by Beijing to register a contraction. That served as a drag on China’s national growth rate of 6.7 percent, the slowest pace in about a quarter century.

Empty Factories

Reporters visiting an industrial park in the provincial capital of Shenyang this month saw scores of shuttered factories, while men squatting on the streets held red-lettered signs asking for work.

“A loss in border trade could potentially destabilize China’s strategic plan to revive the industrial economy in the northeast, a plan the central government won’t allow to be disturbed by international affairs,” said Lyu Chao, who studies border issues at the Liaoning Academy of Social Sciences in Shenyang. “Maintaining stability in northeast China is very important to the government.”

While Beijing has joined the international community in condemning North Korea’s missile launches and nuclear tests, it doesn’t want a war on the Korean peninsula or Kim’s regime to collapse. Either event may trigger a rush of refugees and the potential for U.S. troops on its border, risking social unrest and a heightened security presence that could further hinder trade.

According to data compiled by the Observatory of Economic Complexity, an MIT project, China supplied 85 percent of North Korea’s $3.47 billion in imports in 2015 and absorbed a similar share of its $2.83 billion in exports. Foreign Ministry spokeswoman Hua Chunying said at a briefing this month that China has made “enormous sacrifices and paid a heavy price” to comply with UN sanctions.

Seafood wholesalers wait for customers.

Source: via Bloomberg Businessweek

A trader in Dandong, a city of 2.4 million on the Yalu River that lies between China and North Korea, said he traded everything from textiles to tires across the border in the 1990s, after he was laid off from his job as a procurement officer at the “Number 2 Construction Factory,” an enterprise owned by the city government.

“Now I’m sitting idle,” Wang, who asked to be identified only by his family name, said while eating North Korean clams at a local restaurant. “Traders like me have lost money after sanctions hit.”

Evidence shows that authorities in border areas previously maintained a balance between complying with Beijing’s requests and protecting the local economy, according to Zhao Tong, a fellow at the Carnegie-Tsinghua Center for Global Policy in Beijing. But that’s changing: “Now that the central government has a stronger stance and is resolved to take the sacrifice of the local economy, local governments will have to go along with it.”

Closed seafood wholesale shops, with signage in Chinese, Korean and Russian.

Source: via Bloomberg Businessweek

Residents along the border don’t seem very concerned by Trump’s repeated threats to use military force against North Korea -- most recently before a gathering of world leaders at the UN General Assembly in New York. After Trump threatened to “totally destroy” North Korea if attacked, its foreign minister called the warning “the sound of a dog barking.”

U.S. President Donald Trump addresses the UN General Assembly in New York.

(Source: Bloomberg)

“This is a peaceful area,” said Fang Hexiang, 37, who sells locally brewed liquor called baijiu in Dandong. “They’ve been there since we were kids and there has been no war.”

Piao Zhongzhe, who owns a Korean restaurant in Hunchun, is confident that Kim won’t point his missiles at China.

“They’re doing that to the U.S., not to China,” the 59-year-old said of the frequent missile tests. “They wouldn’t dare to do anything to China because China would destroy them in a few minutes.”

While smallish local protests are common in China, one in Hunchun after sanctions came into effect in August was notable for directly criticizing the country’s foreign policy. Photos of the event that circulated on social media showed traders holding banners calling for cargo to pass across the border and accusing the government of hurting Chinese citizens.

By this month, stoicism was setting in. Liu, the store owner in Hunchun, said that while dozens of shops around him have closed, he’s shifting to importing seafood from Russia.

“There’s nothing the local government can do,” Liu said. “I was angry when I first found out, but being angry is pointless.”

Watch Next: Kim Jong Un: Nuke-Wielding Madman or Astute Dictator?

— With assistance by Peter Martin, Sarah Chen, and Hannah Dormido

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