North Korea sanctions could trigger more missiles and test US-China ties

Key Points
  • Pyongyang could launch another missile test in retaliation against the U.N's latest sanctions
  • U.S.-China ties will be tested as Washington watches to see if Beijing will enforce the new punishments
  • North Korea's economic growth, foreign exchange reserves and trade deficit are seen hurting as a result

Further nuclear aggression from Pyongyang and heightened tensions between Beijing and Washington are widely expected following fresh economic sanctions on the rogue state.

Intercontinental ballistic missile (ICBM) Hwasong-14 is pictured during its second test-fire in this undated picture provided by KCNA in Pyongyang on July 29, 2017.
KCNA | Reuters

In the aftermath of July's two intercontinental ballistic missile tests, the United Nations on Saturday hit North Korea with "the most stringent set of sanctions placed on any country in a generation," according to U.S. Ambassador to the U.N. Nikki Haley.

Previous U.N. penalties have resulted in Pyongyang expressing its displeasure and demonstration of its iron-clad nuclear ambition through more missile tests, and analysts said there may be a repeat performance.

Beijing's participation in the latest punishment is significant given President Donald Trump's repeated criticism of Chinese President Xi Jinping for failing to contain North Korean belligerence. But it remains to be seen if the world's second-largest economy will properly enforce Saturday's measures — a potential catalyst for deteriorating U.S.-China relations.

Another test?

An unpredictable White House and the installation of advanced missile defense technology on South Korean shores have raised the stakes in the current North Korean crisis. Still, Kim isn't seen backing down.

"Given increased missile activity this year and past responses to U.N. sanctions, it seems very likely that North Korea will launch a sequence of short-range missiles in the coming days or weeks," Kyle Ferrier, director of academic affairs and research at the Washington-based Korea Economic Institute, told CNBC on Monday.

The pariah state has been under U.N. sanctions since 2006.

"There are concerns that North Korea could respond with more defiance: further tests of missile technology that would get the regime close to its goal of mounting a nuclear warhead on an intercontinental ballistic missile (ICBM) — or another nuclear test," echoed Jean H. Lee, global fellow at the Woodrow Wilson International Center for Scholars and former Pyongyang bureau chief at the Associated Press.

Sanctions on North Korea could take $1 billion out of its exports only if it fully enforced
Sanctions on North Korea could take $1 billion out of its exports only if it fully enforced

It's very unlikely that Kim will let Saturday's news go unanswered, added Scott Seaman, senior Asia analyst at consultancy Eurasia Group. "This regime has shown no desire to bend to the will of the international community — everything that's thrown its way is something Kim feels the need to respond to."

However, now that Kim has accomplished one of his goals — an ICBM capable of striking the U.S. — there could be a window of opportunity for negotiations, continued Lee, who said she'll be watching for statements from Kim's administration that could signal restraint.

"We can reasonably expect a military response from North Korea, such as another missile test, but whether or not it exceeds the level of seriousness compared with previous tests remains to be seen," said Anthony Rinna, analyst at research group SinoNK. North Korea, he added, "still has to be careful not to provoke the U.S. or its allies' further. "

Estimating the economic pain

Saturday's developments, anticipated to slash a third of North Korea's $3 billion export revenue, could "severely hit" foreign exchange inflows into the country, which would widen the trade deficit and erode limited foreign exchange reserves, Rajiv Biswas, Asia Pacific chief economist at IHS Markit, said in a note.

Following a surprising 3.9 percent rise in North Korea's 2016 economic growth, negative numbers are now expected this year, according to Biswas. "Around 34 percent of the total economy will be experiencing output declines, while the remaining manufacturing, services and construction sectors will also be weak," he added.

Depriving North Korea of its trade partners, which include various African and Southeast Asian economies, will amount to a revenue loss of "a low hundred million dollars," which will hurt the Kim regime, said Liang Tuang Nah, a research fellow at Singapore's Nanyang Technological University.

Geopolitical implications

Saturday's new punishments focused on two non-military financial pipelines crucial to Pyongyang's coffers: exports and income from overseas laborers. Sales of coal, minerals and seafood in addition to remittances not only prop up the fledgling economy, they are also suspected of supporting the nuclear program.

We're on the road to a major crisis: Johns Hopkins' Jae Ku
We're on the road to a major crisis: Johns Hopkins' Jae Ku

If enforced properly, the sanctions could bring severe economic pain to the isolated nation. But that depends on Asia's largest economy.

Considering how heavily Trump has been leaning on China as the key to solving the North Korea problem, Beijing will have to prove its commitment to those measures in order to maintain good relations with Trump, said Ferrier.

The mainland accounts for 90 percent of North Korea's official trade and although it endorsed earlier U.N. sanctions, Chinese imports from Pyongyang rose an annual 18.4 percent in yuan terms during the first three months of the year.

"U.S. officials are no doubt pleased that China backed the sanctions, but it's whether Beijing puts pressure on all entities to enforce them that matters," said Lee.

The latest developments also strain Beijing-Pyongyang relations, Lee continued: "Whether Pyongyang responds with restraint or pushes back against Beijing with more military provocations is what we'll be watching."