Minerals are North Korea’s key exports. The international community assumes that a significant portion of North Korea’s mineral exports is devoted to the development of weapons of mass destruction (WMD), such as nuclear weapons and missiles, and therefore has been implementing strong export sanctions since 2016. As a result, North Korean exports of more than 10 kinds of minerals, including anthracite and iron ore, have been banned for trade by the international community. The purpose of this study is to investigate the effect of sanctions placed on anthracite and iron ore exports on the North Korean economy in depth, which account for the largest share of North Korea’s exports. More specifically, we examine the production and export of anthracite and iron ores, the process of acquiring foreign currency as a result of the trade and its distribution mechanism. To ensure this end, we conducted in-depth interviews with North Korean defectors who have worked in the business of acquiring foreign exchange as a result of trade in anthracite and iron ores in North Korea, and Korean and Chinese business operators who had engaged in mineral trades with North Korea.
In Chapter 2, after briefly examining North Korea’s foreign trade management system before and after Kim Jong-un came into power, we analyze the characteristics of North Korea’s foreign trade system, with an emphasis on its linkage with marketization. The “National Unique Trade System” that North Korea had maintained for a long time stepped over the doorstep of decentralization that followed the collapse of the socialist bloc and was replaced by a new trade system. This decentralization of trade was extended with the declaration of the demarche of July 1 in 2002 and gained further momentum thanks to economic reforms carried out by the Kim Jong-un regime. North Korea’s foreign trade is primarily operated by a licensing system, with certain areas managed by market mechanisms which are gradually expanding throughout numerous processes of decentralization. In particular, the strong infusion of private equity and substantial amount of economic activities in the private sector trade strengthened the relationship between trade and the marketization. As a consequence, the North Korean trade system composes systemic operations between the trade and the marketization where there is a mutual benefit of promoting each other.
In Chapter 3 we use official data to examine the production and export policies of anthracite and iron ores in North Korea and analyze the current state of production and exports. The central topic of this chapter is the tension between domestic and foreign demands in mineral resources. Originally, North Korea’s anthracite and iron ores were key items supporting the nation’s economic development platform of self-sufficiency, and production aimed to satisfy domestic demand rather than foreign ones. However, in the 2000s, export promotion policies were introduced to secure the facilities and funds needed for economic reconstruction, and domestic demand was constrained due to a surge in exports caused by the increased demand for minerals in China. Although the North Korean authorities have introduced policies to restrict exports of minerals accordingly, they seem to have failed due to contradictions with other economic policies, the logic of mineral production itself, and internal policy conflicts. Meanwhile, North Korea’s biggest mystery regarding the production and export of anthracite, iron ores is that production has increased at a very slow pace since the late 2000s, while exports have precipitously increased. In this regard, this study examines the possibility of increased consumption efficiency, underestimation of the production, and overestimation of exports in North Korea.
In Chapter 4, we analyze the major processes of securing and operating anthracite and iron ore production bases, securing and transporting export goods, and collecting and processing export proceeds in detail from a perspective of trading company. Based upon the initial analysis, we estimated costs and benefits of exports in each process. We verified a number of facts along the way. First, in case of anthracite coal, domestic and export coal mines are operated separately. Domestic goods are produced and sold at prices set by the government, while exports are produced and traded in accordance with market mechanisms. Iron ore, on the other hand, is exported almost exclusively to purchase the coke used for steel production, not to gain foreign currency itself. Therefore, while powerful organizations such as the party and the military exert a great influence on the export of anthracite coal, iron ore exports are overseen almost exclusively by the cabinet.
Second, there is a complex dual-payment structure in North Korea’s mineral trade with China. To begin with, 70% of the payment for mineral exports is made immediately after the Chinese receives the minerals within the DPRK, and the remaining 30% is paid differentially after quality inspections in China. This is called the pre- and post-payment structure. In addition, a separate system of advance and post-delivery payment is in operation as well. In case of anthracite coal 30-50% of the export payment is paid in advance before production, and the remainder is paid according to the pre- and post-payment settlement method described above. Finally, payments can be made either in cash or in products. In particular, a significantly high proportion of iron ore exports are bartered in exchange for steelmaking coke.
Third, the reason the advance payment method came to an use was due to the increase in demand for North Korean minerals by China but also due to the excessive demand for payment by North Korean authorities. The North Korean authorities demand an upfront payment of 30% of the sales amount, i.e. the export price, not the sales profit. Therefore, trading companies that lack production and operation funds have no choice but to ask their Chinese counterpart for the payment in advance. This is also the fundamental cause of disputes on outstandings between North Korean and Chinese trading companies.
Fourth, political expenses and bureaucratic expenses account for a large portion of the sales cost. Suppose the official export amount is 100, then the various economic costs such as production cost, transport cost and operating cost are 25, 15 and 7.5, respectively, while bureaucratic costs amount to 35. If we add the payment to the authorities which is 30, North Korean trading companies suffer from a constant deficit structure. As a consequence, North Korean and Chinese trading companies started a new practice to make up for these deficits, which are “kickback” and various rebates. In other words, kickbacks and rebates in North Korean trade are not merely bribes but an inherent factor to sustain the trade.
Fifth, approximately 50% of the foreign currencies earned from mineral exports are assumed to be flown to the authorities in the form of procedural costs (assuming that about half of the procedural costs are absorbed by the authorities), and the remaining 50% flows into the market in the form of production (purchase), transportation, and procedural costs. Therefore, sanctions on mineral exports will seriously damage not only the North Korean authorities but the market as well.
In Chapter 5 we analyze and predict the effects of sanctions (mineral sanctions) that will have on the North Korean economy, anticipate how North Korea will respond to UNSC sanctions and draw implications of policies on North Korea. First and foremost, North Korean authorities seem to have secured a certain level of foreign currency to persevere against the sanctions for the time being. However, the extent to which the North Korean authorities can endure will depend on the amount of foreign currency they are holding. On the other hand, the market is expected to respond more quickly to sanctions. As time goes by, the shortage of foreign currency is likely to push North Korean authorities to try to absorb foreign currency circulating in the market or owned by individuals. In this case, depending on how they collect foreign currencies, it is likely that a change in North Korean regime or socio-economic disruption will occur.
In the meantime, if the money flowing from the Chinese side is cut off due to the mineral sanctions, it will be impossible for North Korea to produce anthracite itself for export, and most of the tunnels developed for these exports since the 2000s are likely to be abandoned. This runs counter to the claims that export anthracite can be used for domestic demand to offset the impact of sanctions. The situation is even worse for iron ore. Most of the iron ore exports are used to cover the cost of importing coke for domestic steel production. If exports are discontinued, North Korean authorities will have to inject foreign currency reserves. In the worst case, the steel industry itself, which is the major industry of the North Korean economy, may face massive shutdowns. Moreover, North Korea has been supplying miners’ food through minerals exports, so if food supplies become restrained due to a fall in minerals export, the productivity of domestic mining will fall and there will be overall food crisis in the mining sector.
The conclusion of this study is that current sanctions are already strong enough. Therefore, the government should focus on the current sanctions and should be careful about introducing additional sanctions. It is necessary to provide clear compensation for the commitment of North Korea while maintaining the consistency of the sanctions. At the same time, continuous efforts should be made to extend humanitarian assistance and attempt non-economic cooperation.