Businesses around the world are bracing themselves for the fallout from tough U.S. sanctions against North Korea, as their impact moves through global supply chains.
Those effects were still being processed as the reclusive nation fired a ballistic missile over Japan early on Tuesday in what is seen as one of its most provocative actions ever.
President Donald Trump and Japan Prime Minister Shinzo Abe spoke after the launch when they agreed to increase pressure on the isolated regime, according to reports.
On Wednesday, the United Nations Security Council condemned North Korea’s firing as an “outrageous” act and called on all states to implement UN sanctions on Pyongyang.
Already, Trump’s administration had taken out new so-called “secondary sanctions” against third-country entities deemed to be aiding Pyongyang, prompting some protests.
Beyond its North Korea concerns, the White House has also recently rolled out sanctions against various countries including Russia and Venezuela.
And while Kim Jong Un’s regime may not be showing signs of slowing down, recently announced U.S. penalties are already eliciting strong reactions from other countries.
Why US sanctions matter
As the world’s largest economy, the U.S. has significant clout in the global supply chain that will hit many companies’ logistics, said Alex Capri, a visiting senior fellow at the National University of Singapore’s business school.
That’s likely to create a domino effect down the supply chain in terms of tracing the movement of goods, which will be hard and costly to enforce, with consequences to business operations. The U.S. sanctions are causing “great distress,” according to the international trade scholar.
Capri has over two decades of experience in various trade roles including leading the Asia trade and customs practice at accounting giant KPMG.
Now, those who come into contact with “strategic goods,” as defined by U.S. authorities, will need special licenses.
While such goods are generally understood to be weapons, nuclear and biological materials, that designation can affect a much wider range of products, which is what makes sanctions “so painful,” said Capri.
Broadly, sanctions also cover the trade of “dual use” goods, which refer to products and technologies that can be used by both civilians and the military. They include over 1,000 classes of goods from brake pads to SIM cards, Capri said.
“Once sanctions are in place, dual use goods might require special export licenses or be banned entirely,” he added.
That will impact the entire supply chain from seller to end user.
For instance, Capri said, the latest round of U.S. sanctions against Russia may require five of the largest companies in Western Europe to halt their business activities on a gas pipeline. That project, connecting Russia to Europe, has seen the firms partner with Russian gas giant Gazprom, which will be hit by the U.S. sanctions.
Rainer Seele, CEO of OMV, a Vienna-based oil company that deals with Gazprom said greater clarity is needed from the U.S. There’s market uncertainty, he said, over the fallout of the new sanctions, which creates a supply-demand mismatch.
But analysts say these “secondary sanctions” have been imposed precisely because some United Nations members were not stringently enforcing overarching sanctions.
“We are often reliant on the governments in these countries to police their own sanctions enforcement because the UN doesn’t have police on its own that it can send around the world. A lot of it is in good faith, and as we often see in the case of mainland China as the conduit for North Korea’s trade for the rest of the world, a lot of the enforcement doesn’t happen unfortunately,” said Sean King, senior vice president at consultancy Park Strategies.
The approach of new U.S. sanctions in the case of North Korea is to strengthen the effectiveness of direct economic penalties that have already been put in place on the reclusive regime, said IHS Markit’s Asia Pacific Chief Economist Rajiv Biswas.
The new sanctions also take aim at firms that export North Korean workers overseas — a major source of foreign exchange earnings for the isolated regime, added Biswas.
Are unilateral sanctions even illegal?
Some countries have come out to say unilateral secondary sanctions from the U.S. are illegal, but that’s a matter of debate, experts said.
In July, France’s foreign ministry said new U.S. penalties against Iran, Russia appeared at odds with international law due to their extra-territorial reach, Reuters reported.
Those sanctions limited the type of business that energy companies can do with Russia and European companies fear they could lead to unintended consequences.
In fact, the French foreign ministry said that that its domestic and European laws would need to be adjusted due to the sanctions. Germany also signaled the U.S. sanctions against Russia were “a violation of international law.”
The issue is a contentious one, NUS’ Capri told CNBC.
“Any country, technically, can impose sanctions against another state as a form of ‘coercive diplomacy,’ however, there is a considerable body of scholarly work that argues convincingly that this is a violation of international law,” he said.
“Only the U.S. and a handful of other states can effectively resort to this sort of realpolitik without real consequences,” Capri added.
Asia’s second-largest economy, Japan, also recently imposed secondary sanctions on North Korea. Chief Cabinet Secretary Yoshihide Suga told reporters that Japan would freeze the assets of entities and individuals linked to North Korea, including four Chinese entities, one Chinese individual and two Namibian entities.
As it did with the new sanctions from the U.S., Beijing reacted negatively to Japan’s announcement.
“The Japanese side, in disregard of China’s stern stance, goes so far as to follow some countries to impose unilateral sanctions on the Chinese enterprises and individuals. We are strongly dissatisfied with and firmly opposed to this,” Chinese Foreign Ministry spokeswoman Hua Chunying said at a Friday news conference.
She added on Tuesday after North Korea’s latest missile test that “the past has proven that pressure and sanction only will not fundamentally settle the issue.”
“We believe that only by addressing the legitimate security concerns of all parties in a balanced way can the intricate and complicated Peninsula issue be peacefully resolved and the vicious cycle of more sanctions followed by more missile tests be fundamentally cut off,” she said.