North-South Relations: China Anxiety

Stephan Haggard (PIIE) and Kent Boydston (PIIE)
November 20, 2015 7:00 AM

Every now and then, strategic arguments emerge in South Korea to the effect that North Korea is getting so integrated with China that prying it loose might prove an impossible task. In a report (in Korean) released last week, former Ministry of Unification (MoU) minister Lee Jong-suk argued that Sino-DPRK economic relations have moved to a new stage of investment-driven integration. As a result, Seoul should change its strategy with Pyongyang to prevent Beijing from driving a wedge between the North and South. Lee particularly notes North Korea’s recent expansion of Special Economic Zones (SEZ) on the North Korea-China border, the Chinese Helong SEZ focused on North Korean iron-ore exports, and Chinese investment in the new Yalu bridge. Lee challenges President Park on the effectiveness of maintaining the May 24 measures that ban almost all North-South trade and economic cooperation; I have opined similarly.

China’s history of infrastructure and private investment in North Korea in fact has a somewhat more mixed record. On the new Yalu bridge, China has invested $350 million in its construction only to have the North Koreans fail to hold up their side of the deal to build the roads necessary to connect the bridge to the rest of the country. Chinese investment is almost certainly driving exports in raw materials, where Chinese firms have access to collateral and get paid through countertrade. But in the short-run at least, these exports are declining, a victim of China’s slowing economy and falling global prices, and investment is surely slowing as well.

Pyongyang has been touting its new SEZ strategy for several years now, and so far they appear to have borne little fruit. It is claimed that the North Koreans are dragging their feet on the Hwanggumpyeong and Wihwa Islands Economic Zone. In a new push for economic development in the Rason SEZ—the most promising location to date outside of Kaesong—the North recently announced plans to pursue new joint development projects with foreign firms by offering low taxes and profits that could be repatriated “without restriction.” We’ll believe it when we see real takers.

President Park has also recently showed a willingness to expand inter-Korean economic cooperation. The ROK-DPRK-Russia Rajin-Khasan coal shipment project is currently in its third trial run and there are reports that the ROK government will provide loans to South Korean firms to invest in the project. Given the risk, ROK government investment guarantees for South Korean firms are also likely to be involved. The funding will probably come out of the MoU’s Inter-Korean Cooperation Fund (IKCF). We have previously noted that the IKCF has continued to grow in size while funds distributed from it have decreased. This project could help reverse that trend.

Park has also allowed a greater number of South Korean citizens to visit North Korea for exchanges and provision of humanitarian assistance: 880 people in October compared to an average of forty-six per month from January to September. As this goes to press, the Korea NGO Council for Cooperation with North Korea, a group of fifty-nine private humanitarian assistance providers, is in Pyongyang for discussions with North Korean officials. This is the largest delegation ever to travel to Pyongyang since it was founded in 1999. Yonhap also notes a marked increase in private humanitarian aid to North Korea since the August North-South agreement.

Our take is that recent developments reflect the semi-thaw after the August agreement, contingent on no fourth nuclear test, rather than fears of growing Sino-DPRK economic dependency. But Minister Lee is articulating an anxiety we have heard before. Is expanded Sino-DPRK economic cooperation really a bad thing for Seoul? Park’s Trustpolitik calls for a North Korea integrated with the rest of Asia, which will not happen without China. China is increasingly operating in North Korea on a market-oriented basis; integrating the two economies will only accelerate the marketization currently underway. Is a North Korea that looks a little more like China really a bad thing for South Korea?

Comments

Su Lim

I think ROK, US and PRC agreed upon engaging North Korea within the parameter of UNSC resolutions through three bilateral summits among presidents of three countries in the past two months. Chinese expansion of economic cooperation with DPRK seems following the agreements. ROK, US and PRC have common grounds on the issue of North Korean opening and marketization. We could do more than a zero-sum game with China on this issue.

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Stephan Haggard Senior Research Staff
Kent Boydston Former Research Staff

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