North Korea in 2007

If 2006 was a year of confrontation, culminating in North Korea’s missile and nuclear tests and the tightening of both multilateral and bilateral sanctions, 2007 was characterized by a gradual rapprochement. The key markers in this process were the resumption of the Six-Party Talks and the second North-South summit. This thaw appears to be a product of changes both in North Korea’s external environment and in the country’s domestic political economy. Whether these developments will prove enduring depends both on the intentions of the North Korean leadership—always difficult to read—and on longer-range political and economic dynamics inside and outside the country.

The Nuclear Issue and the Six-Party Talks

The unraveling of the 1994 Agreed Framework that froze North Korea’s nuclear program can be dated to October 2002, when the United States accused North Korea of seeking to enrich uranium. The North Koreans responded by unsealing the Yongbyon reactor, expelling International Atomic Energy Agency (IAEA) monitors, and reprocessing the spent reactor fuel to extract weapons grade fissile material.

During the second George W. Bush administration, American strategy toward North Korea shifted, and the United States increased diplomatic efforts to put the genie back in the bottle. The Six-Party process (comprising North Korea, South Korea, the United States, China, Japan, and Russia) yielded a Statement of Principles in September 2005 under which North Korea agreed to “abandoning all nuclear weapons and existing nuclear programs and returning, at an early date, to the Treaty on the Non-Proliferation of Nuclear Weapons and to IAEA safeguards."

Further progress was almost immediately derailed as the implications became clear of the US Treasury’s designation of a small Macao bank, Banco Delta Asia (BDA), as a primary money-laundering concern. The bank held North Korean accounts valued at roughly $24 million, which were effectively frozen after the bank collapsed and went into receivership. But the more important consequence was the message the US Treasury action sent to other financial institutions: Do business with North Korea at your own risk. North Korea’s fragile links to the international financial system were dealt a blow and it demanded not only the return of the frozen funds but also the reestablishment of bank accounts as a precondition for implementation of its side of the bargain.

With diplomatic progress stalled, the North Koreans raised the ante, testing missiles in July 2006 and a nuclear device that October. Even China displayed its displeasure by signing on to UN Security Council sanctions, and Japan drifted toward an almost complete embargo.