North Korea’s trade amount has been gradually increasing since the global financial crisis of 2008, and its economic conditions are also improving after Kim Jong Un’s rise to power. However, in order to prepare for unification, we first need to understand the underlying causes for change in North Korea’s economic conditions so that we can explore challenges that await us and find solutions to them.
This study aims to investigate the factors regarding the fluctuations in North Korea’s trade and the relationship between trade and economic development by using North Korean trade data. Using UNCTAD Comtrade’s data ranging from 1990 to 2013, we analyzed North Korean trade by year, by industry, by application, and by region, and analyzed change in North Korean trade by dividing it into factors that facilitate trade and those that obstruct trade; and based on this analysis, we also analyzed the correlation between trade and economic development by using the gravity model and production function.
First of all, regarding the current state of North Korean trade, its volume is showing an increasing trend, but is highly concentrated in primary industrial products such as iron ore or anthracite coal, and highly dependent on China as its major trade partner and therefore is vulnerable to changes in external trade environment.
Through the analysis of the factors of change in North Korea’s trade, this study found that trade fluctuation can be explained primarily by internal margins (effect of changes in price and quantity) than by the external margins (effect of introduction of new items and exit of old items), and by quantity more so than the price within the internal margins.
We also analyzed changes in North Korea’s economic policy and neighboring countries’ North Korean policies as factors contributing to North Korea’s trade facilitation. The approach to North Korea’s economic policy was made in three aspects ？ decentralization, foreign investment, and the establishment of trade infrastructure. Decentralization is implemented through gradual expansion of the number of trade entities and establishment of legal and institutional infrastructure related to trade. Foreign investment and establishment of trade infrastructure is being encouraged through concurrent designation of economic development zones and renovation of railroads. The year 2011 is noteworthy in that it indicates that after Kim Jong Un’s rise to power, North Korea is generating its own economic growth momentum through trade facilitation by internal efforts.
Regarding neighboring countries’ economic policies for North Korea, although China has been the primary motive force in eliciting and facilitating North Korean trade based on its ‘special’ historical relationship with North Korea, current circumstances now influence China-North Korea relations just as much as the hsitoric legacy, which leads to the conclusion that it may be unclear whether China’s North Korea policy may continue to facilitate North Korea’s trade.
In case of Russia, due to recent strengthening of ties between Russia and North Korea, it seems that Russia will implement economic cooperation centered around the Russian Far East and North Korea’s Northeastern area including the Rason special economic zone, facilitating North Korea’s trade in diverse ways. As for Japan, which is constantly imposing strict sanctions, North Korea will not likely engage in any trade relationship unless Japan lifts the sanctions. However, most outcomes of Japan’s sanctions are already substituted by North Korea’s trade with China, meaning there will not be any new negative effects.
According to the analysis of the effect of tariff barriers in the North Korea-China trade and the international society’s sanctions against North Korea on North Korean trade as obstacles to trade, our results show that it is difficult to regard tariff barriers between North Korea and China as well as international sanctions as obstacles to North Korean trade. In case of tariff barriers, while China’s total imports were negatively correlated with tariff rates, China’s imports from North Korea had a positive correlation with tariff rates. This is because China’s tariff policy did not act as a trade barrier impacting the China-North Korea trade, and because most of North Korea’s export to China consist of primary industry goods which usually have low tariff rates.
However, we found through field research that recently, due to the increase in the share of North Korea’s clothing exports to China, which has comparatively high tariff rates, more diverse forms of trade emerged, such as consignment processing trade and China-based processing by sending North Korean labor into China. Our quantitative analysis on the effects of international sanctions on North Korean trade show that sanctions had a negative effect on its intensive margins of trade, but due to North Korea’s response, which involved diversifying the range and types of items, the sanction's impact on the number of items was negligible.
Lastly, by using the gravity model to analyze the direct effects of economic development on trade, we found that economic sizes of North Korea’s trading partners had a statistically significant impact on its trade. When we used the result of the gravity model to predict the scale of North Korea-China trade, we found that if China’s economy grew by 7.2% in 2015, there would be a 10.4% increase in trade between North Korea and China. In terms of trade facilitation index, the trade facilitation index for China-North Korea in 2013 was expected to be 3 times the normal level, indicating the intensification of their already close relationship.
Meanwhile, when we analyzed the indirect effects of trade on North Korea’s economic development using the production function, the result was that the import of intermediate goods had a statistically significant, positive effect on North Korea’s GDP, which implies that North Korea’s economy is import-driven, in addition to the expansion of the production base through importation of capital goods, raw materials and transportation. Based on the production function, we also derived the total factor productivity of North Korea which revealed an improving trend for North Korea’s productivity after 2010.
From our findings, we derived the following implications for inter-Korean economic cooperation. Firstly, North Korea must develop labor-intensive secondary industry by taking advantage of its productive and cheap labor force in order to improve its trade situation which is vulnerable to changes in the external trade environment. South Korea should indirectly support North Korea through a multilateral framework such as those involving the two Koreas and China, two Koreas and Russia, and finally, the two Koreas and Russia/China, respectively. Also, with the establishment of the AIIB, joint efforts involving both Koreas, China and Russia have become more important for the development of infrastructure in Northeast Asia; not to mention the increased importance of improving investment efficiency through cooperation on development of trade infrastructure among neighboring countries, which would be difficult for one single country to undertake on its own. It is also important to share South Korea’s and China’s economic development experiences and development model with the gradually reforming North Korea, and expand opportunities for programs for the exchange of experts on international law and trade-related contracts, which would induce economic reform. Moreover, we also would like to suggest that North Korea itself needs to work on improving its infrastructure for trade facilitation.