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North Korea: Witness to Transformation

Is China Ripping Off North Korea? (Part II)

by | January 23rd, 2014 | 10:00 am
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On Tuesday we examined whether China could be exploiting North Korea’s isolation to set favorably low prices on the rapidly growing amount of natural resource commodities it imports. Regarding anthracite, we saw that North Korea is probably not getting a bad deal, but it also does not appear to be benefiting to the degree of larger, more globally integrated exporters.

Today we look at other natural resource commodities where there is more compelling evidence to suspect underpricing. The table below shows prices (per metric ton) China pays North Korea for anthracite and three other metals, which together made up 61% of the DPRK’s exports to China in 2012. This price is then ranked (highest to lowest) along the spectrum of prices China pays all of its other import partners for that commodity.

ripping of nk part2

As we have already shown, North Korea ranks fairly well for anthracite (though it gets considerably less than Russia or Australia). However, out of the 53 iron ore exporters to China, North Korea ranks 34th in terms of value per metric ton, comparable to the prices that Iran, the Philippines, and Mongolia receive for their iron exports. For lead ore and unwrought zinc, North Korea rounds out the bottom of the list, ranking in the 15th and 8th percentiles, respectively, and falling more than one standard deviation below the mean lead price. In both cases, even countries such as Kazakhstan and Myanmar receive significantly more for their exports.

As stated in the first post, comparing the price of commodity groups is nowhere near perfect: we could merely be seeing price differentials based on quality, purity, and transport costs. However, it’s fairly plain that North Korea does not enjoy comparatively high prices for any of its traded goods, and in many cases it occupies the bottom of the list of pricing power, even if one allows considerable room for quality differentials.

If anything, we have provided subtlety to what is ultimately a very import argument for the future of North Korea’s trade. It has been long known that North Korea’s mineral extraction industry has a great deal of potential, and there may be much more under the ground than we had previously thought; any future scenario of trade and investment liberalization would undoubtedly feature the mining industry heavily. To realize these gains, North Korea has to make drastic improvements to mining infrastructure, productivity, and the foreign investment environment. However, equally as vital is the development of trade infrastructure and the improvement of relations with other economies, ultimately accessing a pricing system based on internationally competitive supply and demand and decreasing its reliance on the whims of China.