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North Korea: Witness to Transformation

North Korea’s Direction of Trade: Aidan Foster-Carter, Nick Eberstadt, and New Focus International

by | June 9th, 2014 | 07:52 am
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For some time, this blog has tracked the direction of North Korea’s trade: the share of total trade, exports and imports accounted for by different trading partners (see our East-West Center monograph on the issue). The direction of trade mirrors the ups-and-downs of the diplomatic process and the strategies of both North Korea and its partners. Recently, several colleagues have done interesting work talking about new developments and have presented the data in new ways.

First up, Aidan Foster-Carter has a piece at the WSJ’s Korea Real Time on how the otherwise-useful data on North Korean trade from the Korea Trade-Investment Promotion Agency (KOTRA) contains one crucial distortion: North-South trade is not considered “foreign” trade and is thus omitted. The potential for mischief are obvious. According to KOTRA’s most recent release, North Korea’s trade in 2013 was up nearly 8% over 2012 to $7.34 billion. However, if we factor in North-South trade, the picture looks quite different. 2012 trade was $8.8 billion, with nearly $2 billion of that North-South while 2013 trade fell 3.3% to $8.5 billion, of which $1.15 billion was with South Korea. The explanation for the dramatic fall in North-South trade: the five-month closure of the Kaesong Industrial Complex, the only trade allowed since the post-Cheonan sanctions were imposed in 2010.

Foster-Carter’s article also makes an interesting point on trade with Russia, a topic that we recently discussed in our review of the Russian pivot. My review of the data with Kevin Stahler suggests a much more modest tilt toward the region than Moscow suggests and virtually no chance that Russia and the DPRK would hit their $1 billion target (unless a pipeline is built and transit fees are paid or transshipment through Rason jumps dramatically from the new rail links and port rehabilitation). In a similar vein, Foster-Carter writes that “Russia is named as North Korea’s second-largest partner in 2013, with trade up 37.3% to $104 million. The truth is that even with Kaesong out of action for almost half the year, inter-Korean trade was still 11 times larger than that puny trickle with Moscow, a distant third.”

Nick Eberstadt has put together some very interesting figures on North Korean trade that adjust existing data (using the conventional 10% adjustment benchmark to convert freight-on-board [fob] into cost-insurance-freight [cif], and vice versa). The data is drawn from three different sources: China trade is from UN Comtrade; North-South trade from the South Koran Ministry of Unification; and the “rest of the world” trade from KOTRA. This data shows the central story: the extraordinary dependence of the country on China and South Korea and the lack of progress in diversifying trade with the rest of the world. With Eberstadt’s permission, we reproduce two of his figures here.

Eberstadt Decomposing NK Import

The first (above) is adjusted North Korean merchandise imports from the world, from the world minus China and from the world minus China and South Korea. The conclusion: if you take out imports from China or China and Korea, there is not much left and the trend in imports from the rest of the world shows a steady secular decline since about 2005.

Eberstadt Decomposing trade deficit

The even more stunning figure, however, is North Korea’s merchandise trade deficit with the world, with the world minus China and the world minus China and South Korea (above). By 2010, North Korea’s entire trade deficit was accounted for by the deficit it ran with China; the trade deficit with the rest of the world hit zero.

Why is this so stunning? The trade deficit is equal to capital inflows that the DPRK is receiving from the rest of the world. Except for China, those flows appear to be exactly zero. Although trade with each country may not be exactly balanced, the DPRK does not have the ability—or the credibility—to finance any trade deficit with the rest of the world outside of China. We suspect the financing of the substantial deficit the DPRK runs with China comes largely from foreign direct investment in large-scale resource extraction projects.

On Wednesday, we will explore some of the problems in the data in more detail; in particular, we need to be cautious about the KOTRA “rest of the world” numbers as they have in the past adjusted North Korea’s trade with developing countries for reasons that are both good and bad. In some cases, they have located outright reporting errors in the Comtrade data, particularly South Korean trade being mistaken for North Korean trade. In other cases, however, they have omitted trade that looks suspicious but reflects the large, lumpy deals that North Korea sometimes concludes with its trading partners, such as a large purchase several years ago of aviation fuel from India. Nonetheless, we suspect that as a broad order of magnitude, Eberstadt’s conclusions are justified. The DPRK’s isolation from the rest of the world—and its dependence on China—is even more extreme than we thought.

Which brings us to the final item: a fascinating report from New Focus International.

According to New Focus, the Central Party Committee of the Korean Workers’ Party has issued an internal decree with the title “Abandon the Chinese dream!” The statement–with it’s double-entendre on Xi Jinping’s “Chinese dream” concept–was revealed to cadres over the rank of departmental director. It purportedly contains extensive criticisms of China, including of its domestic model and foreign policy toward the North. In addition unwanted pressure on the nuclear issue, the report notes North Korean dependence on China and was followed by a set of policy measures directing state-sanctioned trading companies to decrease trade with China and expand trade with Russia. According to New Focus, the new edict even imposes discriminatory import controls on China.

The problem with this strategy returns us to Eberstadt’s findings. One of three things will have to happen for this strategy to work. First, North Korea will have to find something to export to Russia and Europe that private companies in those countries are willing to pay for. Second, in the absence of such exports, private firms or financial institutions will have to finance the trade deficit with investment in North Korea. Or third, state entities—particularly in Russia—will have to subsidize the trade with credits or outright aid. Juche indeed.

Eberstadt’s data suggests that if there is any good news in the North Korean economy it is due almost entirely to China. This diversification effort will either fail, because the economy’s tremendous dependence on China is too deep to reverse, or if it “succeeds” the victory will be Pyrrhic, as it will likely signal a contraction of trade altogether. Is North Korea about to embark on another one of its costly policy experiments?

Comments (5)

Roland:

The above analysis does not contradict past research. What the above charts show is the balance of trade in observed (ie licit) goods. As you can see here (http://blogs.piie.com/nk/?p=9647), Marcus and Stephan argue that North Korea may have been running a current account surplus in 2011, not a trade surplus. Their 2007 paper on North Korea’s External Economic Relations (http://www.petersoninstitute.org/publications/wp/wp07-7.pdf) explains in detail how they set up the Balance of Payments that went into this analysis, but the current account includes trade in goods and services, investment income, and current transfers (which includes things like some forms of aid and worker remittances from abroad).

In fact, Marcus and Stephan’s BoP sheet also shows a licit merchandise trade deficit of similar magnitudes in these years and use essentially the same data. However, once adding additional current account components like illicit exports, trade in services, worker remittances, as well as aid and international cooperation project current transfers, the “best guess” current account figure actually becomes net positive (though with a large error band).

Kevin Stahler June 12, 2014 | 1:15 pm

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Interesting… The initial commentary on the Q1 drop in Sino-DPRK trade suggested that it happened only because of Chinese restrictions. Is there any evidence from trade data that import controls on the DPRK side (or export reductions, which one would expect if one takes the charges against Jang at face value) contributed to the Q1 drop?

Sheena June 12, 2014 | 11:12 am

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It wasn´t long ago, Marcus Noland stunned us with his analysis of Noth Korea switching to a foreign account surplus beginning with 2011.
Now we have to learn the contrary.
May you please arrange yourself, instead of distracting your audience ?

Roland June 10, 2014 | 2:20 am

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Economics is so much easier to understand with graphs. especially the trade deficit one. thank you for putting all this information together.

ZacharyT June 9, 2014 | 3:51 pm

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Many thanks for the shout-out, Steph. Just to add that most of my paragraph on Russia was in fact restored, at my request. I’m very grateful to my editors at WSJ/KRT for allowing this.

Aidan Foster-Carter June 9, 2014 | 12:03 pm

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