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North Korea: Witness to Transformation

Gravity, North Korea, and the Gains from Trade

by | May 19th, 2014 | 10:00 am
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The potential benefits of enhanced Northeast Asian economic integration is a hardy perennial, often invoked as a byproduct of reform and opening in North Korea.  In a recent paper for the Asan Institute, Kim Chong Woo takes a look at a narrow slice of this story, one consistent with South Korean President Park’s vision of Eurasia, and one that ought to be relatively easy for the North Korean regime to swallow: the gains from opening up transportation routes across North Korea.

Kim uses a standard gravity model framework to examine the possible impact of opening up transportation corridors across North Korea on China’s trade with South Korea, Japan, and the United States (and indeed northeastern China’s trade with southeastern China). The workhorse gravity model relates the decline in the volume of trade to distance (hence the “gravity” moniker). It is a robust empirical regularities in economics to which theorists have devoted time to trying to justify in formal models; it formed the basis, for example, of an earlier post on what North Korea’s trade pattern might look like if it were a “normal” country. It’s not clear to what extent this empirical regularity is due to transport costs per se, and how much of the decline of trade volume with distance is due to other transactional costs such as cultural or linguistic dissimilarity.

In this application, Kim simply picks some parameters from the literature, and then calculates the reductions in transportation distance if North Korea was opened with roads, rail, and ports, freeing Chinese traders of the need to ship via Dalian or other existing routes. Some of the implied increases in trade volume associated with the reductions in transportation distance are quite significant: Liaoning to Seoul trade would increase 16-24 percent; Jilin to Tokyo trade would increase 10-16 percent, to cite two examples.

He then goes on to estimate the total trade expansion associated with the reduction in transportation distance and concludes it would cumulatively increase Chinese trade by more than a half trillion dollars over 16 years.  I’m not completely sold on that calculation: he extrapolates from historical trend growth rates and for all sorts of reasons those growth rates are decelerating. And for some routes, Liaoning to Tokyo, for example, the existing trade route dominates traversing North Korea, and it is not clear if the calculation incorporates a trade-reducing switch. And many of the routes that Kim examines include intermodal changes and he does not take into account the fixed costs associated with switching from road to ship, for example. So don’t get carried away with the half trillion figure. Nevertheless, the basic point still stands: China would gain significantly from an ability to transship across North Korea.

So what’s in it for the North Koreans? Currently the country is extremely dependent on China for trade. Ironically opening to transshipment would actually reduce the country’s dependence on China as a source of final demand, since the trade would be associated with final demand originating in South Korea, Japan, and the United States. Indeed, even within China, opening to transshipment would reduce North Korea’s implicit dependence on China’s three northeastern provinces, and shift economic integration with China towards southeastern China. In short, North Korea would benefit from a diversification of risk.

P.S. At this point I was planning to insert a YouTube video of someone doing “A Slow Boat to China” (I had used Dee Dee Bridgewater’s version in an earlier post) but I cannot because I am in China and YouTube is blocked. As are many other sites. (Want to read the Guardian’s take on the Michael Kirby reddit session? Can’t do it if you are in China.) So the next time you are talking to Chinese colleagues and they seem ill-informed, be patient, their government severely circumscribes their access to news and information.)

In the meantime, I figured out how to use my cell phone as a work around, so here is the Fishin’ Musician himself, Mr. Jimmy Buffett doing “A Slow Boat to China.” Take that internet censors.