Asia Pacific

What China’s Coal Ban Is and What It Isn’t

By Isabella Uría, Tianyi Xin
Monday, March 13, 2017, 9:00 AM

On February 18, 2017, Beijing abruptly announced that it would suspend all coal imports from North Korea through the end of this year. China’s Ministry of Commerce explained the move as part of its effort to implement sanctions adopted November 30, 2016 under UN Security Council Resolution (UNSCR) 2321. The decision followed President Donald Trump’s February 9 phone call with Chinese President Xi Jinping, North Korea’s February 12 missile launch into the Sea of Japan, and the assassination of Kim Jong-un’s half brother Kim Jong-nam, who had seemingly enjoyed Chinese protection for years.

The unexpected coal ban has given rise to speculation about China’s underlying motivations. Some China watchers posit that the move demonstrates China’s determination to rein in an increasingly obstinate Pyongyang and to slow the growth of North Korea’s nuclear and ballistic-missile programs. Others suggest the move is aimed not at North Korea but at the United States, as a nod to U.S. concerns about North Korea’s missile and nuclear programs.

Coal exports to China constitute over 40 percent of North Korea’s total exports, so a suspension would indeed severely cut North Korean revenues. However, restricting coal imports is not exceptional or strictly unprecedented for China. Beijing has adopted similar temporary embargo policies to implement previous rounds of sanctions targeting North Korean coal, with varying results. And while restricting coal imports from North Korea satisfies some of China’s existing obligations to the U.N. Security Council (UNSC), the ban also serves domestic policy interests in limiting foreign coal imports and reducing domestic consumption of coal-fired energy. As such, the new policy is significant, but it isn’t extraordinary.

 

The Coal Ban Is Not New (And It May Not Change Much)

Restricting North Korea’s coal trade with China has the potential to severely undermine North Korea’s economic lifeline. Coal and anthracite exports represent 40 percent of North Korea’s exports to China, which itself is the destination of over 90 percent of the country’s total exports. The current ban is only the latest in a series of increasingly stringent restrictions on North Korean coal adopted by the UNSC. In implementing these resolutions, however, China has demonstrated a pattern of initial restriction of coal imports, followed by a relaxing of policy to serve domestic needs. For this reason, past Chinese coal embargos against North Korea have had limited success.

 Following North Korea’s fourth nuclear test in January 2016 and a subsequent ballistic missile test launch, the UNSC adopted Resolution 2270, which levied new sanctions on North Korean economic activities and instituted a global ban on coal imports from North Korea. The resolution was passed unanimously, with support from China as a permanent member of the UNSC. Article 8(a) of the resolution, a humanitarian exemption clause typical of stringent UNSC sanction regimes, allowed China and other Member States to continue to import coal from North Korea for “livelihood purposes;” that is to say, limited economic relations in support of humanitarian needs.

After UNSCR 2270, Chinese imports of coal from North Korea dropped by 21 percent year-over-year, but the decrease proved short lived. Beijing’s policies to limit domestic coal production were overly successful, resulting in underproduction of domestic coal with a “222 million tonne gap between production and consumption in the first three quarters of 2016.” At the same time, China experienced unusually high summer temperatures, leading to a spike in coal-produced electricity consumption. In August 2016, only five months after the U.N. ban, China imported more coal from North Korea than any other month on record. “Livelihood purposes” turned out to be a loophole you could drive a coal train through.

Later that year, in response to North Korea’s fifth nuclear test—the first time it had conducted two such tests over the course of a single year—the UNSC unanimously adopted the most severe sanctions regime ever levied against the DPRK on November 30, 2016. UNSCR 2321 placed a cap on North Korean coal imports, even for humanitarian purposes, at $400 million per year beginning in 2017, amounting to an approximate $700 million loss in revenue for North Korea compared with the previous year. The resolution additionally set a cap for the total value of North Korean coal imports for the month of December 2016 at just under $53.5 million. Nonetheless, a U.N. committee charged with overseeing sanctions against North Korea reported that China imported more than three-times the allowable amount for the month of December.

Furthermore, in the month of January 2017 alone, North Korea exported more than 19 percent of the total annual cap imposed by UNSCR 2321 for 2017. Assuming China’s imports continued the next month, future reports will reveal how much of remaining coal imports permitted by the cap China imported in February. This will reveal whether China’s new coal ban further reduces the amount of coal revenue the North Korean government can expect, or whether it is mostly a way to ensure that China doesn’t violate its commitments under the resolution.

 

The Ban Is About More Than North Korea

China’s decision to ban coal imports from North Korea must be understood in the context of shifting domestic priorities. Amidst a slowing Chinese economy and new efforts to shift away from energy-intensive industrial growth, lower energy demand has helped cause a significant decrease in Chinese coal imports from around the world. The year 2015 saw an astonishing 30 percent reduction in total coal imports to China, primarily affecting China’s largest sources of imports, Indonesia and Australia. That year, Beijing attempted to reduce domestic coal production in order to avoid overcapacity and a bottoming out of coal prices. Reports predict than in the long term, China’s demand for coal will stabilize at approximately 4 billion tonnes, and that China’s domestic capacity (reportedly 4.6 billion tonnes in 2015) will be capable of supporting this demand without substantial imports.

Decreasing demand for coal would also align more generally with China’s environmental and energy policies. China is currently the global leader in CO2 emissions, and in 2014 its National Development and Reform Commission issued a report outlining major new policies to reduce emissions, including prioritizing natural gas as a cleaner energy source over coal. Notably, in recent years, Chinese national oil companies—Sinopec and CNOOC in particular—have invested heavily in natural gas, reflecting a de-emphasis of coal-fired power production. These efforts are integral to Beijing’s goals of reducing carbon emissions and account for much of its decreasing reliance on coal imports.

In short, a number of factors may be at play in China’s decision to ban North Korean coal imports. The ban serves Chinese interests in complying with UNSCR 2321 and portraying a harder stance on North Korean actions, while also supporting China’s domestic policy of reducing coal imports and consumption.

 

What the Coal Ban Will Be

For China’s ban on North Korean coal to have the desired effects on the North Korean regime, Beijing will need to display steadfast commitment to its implementation and accompanying reductions in other aspects of China’s economic relationship with North Korea. We should pay close attention to other areas of trade between China and North Korea in the coming months. If trade between both countries decreases overall, this may show that the coal ban has been adopted primarily to punish North Korean behavior, rather than being motivated primarily by other interests.

North Korean textile exports will be one area worth watching: In 2014, textile exports to China yielded over $800 million in revenues for North Korea, compared to $1.39 billion in revenues from North Korea’s coal exports out of a total export value of $3.1 billion that year. Observers should also keep a close eye on exports from China to North Korea in 2017, as a sharp decrease in exports would indicate that the coal ban indeed signifies a more fundamental shift in the two nations’ special relationship. Finally, monitoring activity in the Guomenwan trade zone in the Chinese border city of Dandong may offer additional insights into how shifts in Chinese policy impact cross-border trade flows more generally. 

Whatever the underlying motivations, increased compliance by China with UNSCR 2321 provides an opportunity for U.S. policy to capitalize on North Korea’s significantly decreased ability to generate export revenues. Even if the coal ban turns out to be more rhetoric than substance, it may serve as a signal of China’s strengthened desire to coordinate responses to North Korean provocations with the United States. A sober view of China’s spotty track record in adhering to the spirit and letter of the UNSC resolutions should not prevent Washington from seizing this opportunity. After all, “机不可失,时不再来”—opportunity knocks at the door only once.