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North Korea's Paradoxical Upswing in Trade

Wednesday, June 4, 2014

Never before has the North Korean economy been so totally dependent on the largesse of a single trade patron as it appears to be today.

Exceedingly few hard facts are available in the outside world on the performance of the economy of the Democratic People’s Republic of Korea (aka North Korea). Consequently, analyses of the North Korean economy often take place in a sort of data-free vacuum.

There is, however, one relatively reliable independent source for an aspect of North Korean economic performance, and its data suggest that the DPRK is more totally dependent upon politically supported trade today than it has been for decades.

The reliable source is so-called “mirror statistics” on trade, derived from DPRK trading partners’ reports of what they sell to and buy from Pyongyang. (Of course, such statistics exclude the whole range of illicit commerce in which the DPRK famously traffics — what they offer is an aperture on the country’s legitimate merchandise commerce.)

By drawing together reports on inter-Korean trade from the South Korean Ministry of Unification (MOU), annual assessments of North Korea’s extra-peninsular imports and exports from Seoul’s Korea Trade-Investment Promotion Agency (KOTRA), and various data from the UN’s COMTRADE Database, we can assemble a picture of North Korea’s overall global merchandise trade trends. (Idiosyncratically, South Korean sources exclude North-South trade from their tallies of DPRK international trade performance, under the assertion that inter-Korean trade is actually domestic trade, and not foreign commerce.)

Since “mirror statistics” report what foreign partners pay, and are paid, for North Korean goods — rather than what the North Korean side earns or pays for the traded merchandise — we have to make what are known as “FOB–CIF” adjustments. A country that exports to North Korea reports its sales on a “freight on board (FOB)” basis — but North Korea actually pays more than this to import such merchandise, as it must cover the “cost, insurance, and freight (CIF)” charges of moving the merchandise to the DPRK. The reverse is true for trade partners’ reports on purchases of North Korean merchandise: these are tallied as imports including CIF, but North Korea only earns the FOB prices here. A standard rule of thumb — conventionally accepted if not always totally accurate — for converting CIF to FOB is to divide the former by 1.1 to obtain the latter, or to multiply the latter by 1.1 to obtain the former.

The following figures show the results of such conversions for the period since 2002 — the year when the latest round of the North Korean nuclear drama commenced.

It is striking — some would say surprising — to note that North Korea’s legal merchandise trade with the outside world has surged since the Bush administration caught Pyongyang cheating on its then-extant international non-proliferation assurances.

Measured in current U.S. dollars, estimated North Korean exports more than tripled between 2002 and 2013 (from about $1 billion to about $3.5 billion):

DPRK 1

By the same token, estimated North Korean imports more than doubled (from about $2.4 billion to more than $5 billion):

 DPRK 2

But this does not mean that the DPRK has at long last overcome its allergy to ordinary commerce in the international marketplace. Rather, North Korea appears to have relied increasingly on two channels of trade that were politically supported, and subsidized, by foreign governments. These are its commerce with China and South Korea, respectively. With the waning of the “Sunshine Policy” in Seoul, inter-Korean trade turnover, not surprisingly, has been on the downswing since the mid-2000s. But China’s commercial patronage of North Korea has not only continued, but apparently increased.

We can break down the DPRK’s estimated exports and imports to show just how critical politically supported trade has become to North Korea in recent years.

If we factor out China, then North Korea’s estimated exports, in current dollars, are basically flat between 2002 and 2013. If we factor out both China and South Korea, North Korea’s exports to the rest of the world are actually down sharply ($422 million in 2002 vs. $282 million in 2013, a drop of roughly one-third). Today, North Korea’s exports to markets whose governments do not expressly subsidize trade with the DPRK are miniscule — they amounted to less than $15 per capita in 2013. (See Figure 3.)

DPRK 3

The situation is even more acute for North Korean imports. If we take China out of the picture, DPRK’s estimated imports tumbled, plunging from $1.9 billion in 2002 to barely $800 million by 2013. Remove both China and South Korea, and North Korea’s estimated imports from the rest of the world nosedived from $1.2 billion in 2002 to barely over $200 million in 2013:

DPRK 4

Even in the depths of the famine in the 1990s, North Korea managed to sell (and buy) more merchandise in non-subsidized markets than it is doing today.

Given its severely dysfunctional and distorted economy, North Korea relies upon an incessant flow of net resource transfers from abroad to continue its operations. One approximation of this transfer is found in the estimated merchandise balance of trade deficit.

From 2002 through 2013, North Korea’s estimated merchandise balance of trade has hovered around $1.5 billion a year — rising to $2 billion in 2008 and falling to $1.2 billion in 2011, but apparently staying regularly within this range:  

DPRK 5

But the composition of this trade deficit (think of it as a net inflow of resources) shifted dramatically over the period in question. In 2002, China accounted for only about a fifth of the total deficit; South Korea and China together made up less than half of it. By 2008 — i.e., with a new, non-“Sunshine” government in Seoul — net merchandise trade transfers from South Korea essentially ceased. By that year, North Korea’s trade with China was the source of fully three-fourths of the overall estimated net merchandise transfer to the DPRK. Since 2010, it looks as if China is responsible for basically all net merchandise transfers the DPRK receives from the outside world (at least in the licit areas of commerce):

Eberstadt Figure 6

There are many implications to be drawn from these trade trends. For now, it may suffice to observe that North Korea today is less willing, or perhaps less capable, of undertaking trade outside of politically supported markets than it was at the height of the Cold War. And the North Korean economy has never before been so totally dependent on the largesse of a single trade patron as it appears to be today.

Nicholas Eberstadt holds the Henry Wendt chair in Political Economy at the American Enterprise Institute.

 
FURTHER READING: Nicholas Eberstadt also writes "Seven Billion Reasons to Celebrate," "The Great Society at 50: The Triumph and the Tragedy," and "A State Insult with Chinese Characteristics." Vaclav Smil adds "Hoping for China's Success."

Image by Dianna Ingram / Bergman Group 

 

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