Comment on “United Nations Sanctions on North Korea's Luxury Goods Imports: Impact and Implications”

Abstract

Jeong (2019) investigates the effectiveness of the United Nations Security Council's (UNSC) economic sanctions against North Korea, focusing on the embargo of luxury goods exports into North Korea from 2006 onward. Jeong's interest is especially on the effects of Resolution 1718 adopted by the UNSC on October 14, 2006. Resolution 1718 requires all UN member states to prevent the supply of luxury goods to North Korea; however, it provided no detailed definition of what constituted “luxury goods” and left the decision on whether and how to actually implement the embargo on luxury goods to individual member states. Although such features of Resolution 1718 pose a challenge to Jeong in evaluating the impact of UN sanctions on North Korea's imports of luxury goods, Jeong augments the gravity model, which is the workhorse of empirical international trade, by adding a binary dummy variable that takes the value of one in 2006 and beyond and another binary dummy variable indicating the UN member states that submitted an embargo implementation plan to the UNSC. Jeong also includes an interaction term of these two dummies and effectively uses the difference-in-difference method. He concludes that the Resolution 1718’s embargo was ineffective in decreasing North Korea's luxury goods imports though the estimation results for the interaction term of interest indicate some weak evidence that the sanctions were effective for the imports originating from those countries that (seem to) actually implement the embargo. The contribution of Jeong (2019), which presents empirical facts as to whether UN sanctions are really reducing North Korea's luxury goods imports, is appreciated, but its analytical framework seems to have room for improvement and extension. First and foremost, we should be aware of the fact that the Resolution 1718 embargo substantially takes the form of a unilateral (or preferential) rather than a multilateral (or common) export prohibition. There were likely to be substitutes for the exports of certain luxury goods banned by unilateral export prohibitions. That is, trade diversion and termination effects would arise due to the unilateral export prohibitions. To capture the real (direct) impact of the Resolution 1718 embargo, Jeong could follow the ex-post empirical studies that differentiate the trade creation and diversion effects of regional trade agreements (RTA) (e.g. Magee, 2008). If Jeong could detect trade diversion effects more than offsetting the trade termination effects, then he would argue that international cooperation in achieving multilateral export prohibitions against a target country is necessary to bring about greater negative impacts on the target country's imports. By doing so, Jeong could also strengthen his argument that China recently replaced other major countries exporting luxury goods to North Korea. Second, to look into the trade termination and diversion effects of the Resolution 1718 embargo, Jeong could conduct product-level analysis instead of employing aggregate trade data at the country level, because there exists a list of finely disaggregated product codes for the luxury goods that were banned by the USA. Using product-level bilateral trade data would enable us to analyze with which particular trading partner and for which particular product code the termination of trade relationships actually occurs (as the counterpart in the empirical RTA literature, e.g. Urata & Okabe, 2014). Furthermore, Jeong could build on the empirical literature on the extensive and intensive margins of trade to examine whether and to what extent the trade termination is accompanied by the trade diversion (as the RTA counterpart, e.g. Debaere & Mostashari, 2010). Finally, from a broader perspective, Jeong could relate his findings in the case of Resolution 1718 embargo to the literature on the economic effects of unilateral and multilateral trade sanctions. As surveyed in Kaempfer and Lowenberg (2007), we can use offer curves to study the effects of trade sanctions on relative prices of exports and imports, that is, the terms of trade, and make inferences about the welfare effects of trade sanctions. The simple textbook analysis using offer curves shows that unilateral trade sanctions create a smaller deterioration in the target's terms of trade than do trade sanctions involving a larger number of participant countries (multilateral in an extreme case). It would be interesting if Jeong could elaborate on the offer curve analysis by incorporating features of the luxury goods exports into North Korea (e.g. trade elasticities) to derive a theoretical implication that could then be confirmed with data.