From 2002 to 2011 China has maintained an average annual growth of over 9%, and North Korea as a result enjoyed economic stability benefiting from China’s growth. In the 2000s North Korea goes beyond overcoming economic difficulties in the 1990s through anthracite and iron ore export, and begins to utilize its economic cooperation with China as a tool for its economic growth.
Its dependency on Chinese economy quickly intensified due to the internal motivation for North Korea’s aspiration of economic growth through expansion of resource exports to China as well as external motivational factor of intranational economic sanctions. However, beginning from 2010, North Korea and China’s economic cooperation faced a turning―point. China’s economic slowdown induced a structural change in North Korea―China trade since 2012 and led to a new pattern of North Korea―China relations.
This research aims to analyze the effect that recently facilitated North Korea and China’s economic relations have on North Korean economy and find the implications this has on inter―Korean economic integration and the development of Northeast Asian economic community. For thorough analysis of the economic cooperation between North Korea and China, we defined what exactly international economic cooperation stands for, theorized various factors that create and facilitate this cooperation, and analyzed how changes in trade environment and China’s economic policy towards North Korea due to China’s economic slowdown impacts these various factors in terms of North Korea China trade and economic cooperation projects.
The originality of this research is in the data and methodology it adapts. The Chinese customs data from 2010 to 2014, consisted of 8 digit HS code product level list by year, country, import and export, custom districts, as well as customs regime categories enabled us to analyze the qualitative change in North Korea―China trade from simple trade to higher shares of process trade and intermediate goods trade. As for the methodology, we have provided a theoretical framework analyzing the division of labor between countries and fieldwork results. Our theoretical framework delineates the sectors and incentives where international economic cooperation occurs which is used in our analysis of the North Korea―China economic cooperation. As for the fieldwork, we tried to enhance the quality of the research by interviewing people who are indirectly and directly involved in trade and business with North Korea in the Chinese border region. In chapter 2, we analyzed the intensification and the developing process of economic cooperation between North Korea and China. The background of North Korea’s resource extraction export structure has a lot to do with China’s high level economic growth of over 9% from 2002 to 2011, serving as the world’s manufacturing base, vacuuming raw materials to feed its demand. This in turn fueled North Korea’s raw material export to China. This led to a steep increase of North Korea’s trade with China, and bilateral sanctions initiated by Japan in 2006 and by South Korea in 2010 also played a role in this increase. China’s share in North Korea’s total trade exceeded 50% in 2005 and reached 90.1% in 2014, and its share of North Korea’s total incoming net FDI exceeded 90% after 2008. Such statistics is an indication of the consolidation of economic cooperation between the two countries.
We assume that economic cooperation between countries is created when the cost of production or consumption domestically is more expensive than the cost of production or consumption out―sourced, using another country’s resources, coupled with gradual reduction of border regulations that prohibit cross―border movement of various resources such as labor, capital, merchandise, and technology through international conventions. In this research, we concluded that North Korea and China’s economic cooperation through trade is in its mature stage, and direct economic cooperation through business interactions is in the creation stage in the four stages of economic cooperation―formative stage, creation stage, mature stage, and declining stage.
In chapter 3, we explored determining factors that would facilitate North Korea and China’s trade in the future. First of all, recently North Korea’s exports of anthracite and iron ore to China which were the major export items has shown either stagnant or decreasing trends. Such changes in the previously major items of exports to China is predicted to bring about fundamental changes in North Korea and China’s economic cooperation.
Along with this trend, China’s shift of its economic development methods to domestic―centered policies, businesses’ costs are increasing due to increasing wages and social security costs. Specifically, the outflow of young labor in the Northeast China bordering North Korea is occurring in critical levels. In such situation the number of North Korean laborers that are dispatched to the Chinese border and engage in productive activities is predicted to increase.
Moreover, China’s Northeast region’s small and medium cities are actively engaging in economic cooperative projects with North Korea involving opening up of North Korea’s economy as a part of its own economic development policies. Especially, newly implemented projects such as the construction of the new Yalu river bridge, establishment of China―North Korea civilian border mutual trade market, implementation of outbound trade are leading the China―North Korea division of labor.
In the case of North Korea, despite its policy to enhance the livelihood of the people in order to maintain legitimacy, the difficulty of the so―called “self―reliant” economy led individual economic actors to rely more on trade with China. Also, North Korea is also putting effort into attracting foreign investment through development and usage rights of its natural resources in order to establish production infrastructure as well as expanding trade with China through its rich natural resources. However, underdeveloped investment infrastructure as well as political risks has been obstacles to foreign investment in production infrastructures that need big―scale investment. Therefore we predict that China’s investment will be focused in out―sourced processing trade which does not require a large scale investment.
Also, North Korea is showing active policy underpinnings to expand border area tourism as well as dispatch of its labor in China in order to earn foreign currency. Border area tourism is not a zero sum game and therefore is expected to increase and intensify economic cooperation between the two countries. However, labor dispatch can be a threat to the labor market stability of the two countries as well as to the maintenance of the North Korean regime which makes it difficult to forecast its future trend.
In chapter 4, we investigated economic cooperation in production, economic cooperation in consumption, economic cooperation in terms of provinces and comparative advantage items in North Korea China trade based on China customs data. We found that indeed there was a structural economic cooperation in production and consumption between the two countries. First of all, in terms of customs regimes, during the last 5 years ordinary trade and border trade in both exports and imports continuously increased and decreased a little in 2014. Processing trade continuously increased. In terms of North Korea’s import from China, trade for consumption, which are ordinary trade and border trade had the biggest shares and in shares of bonded trade and processing trade, which are consisted of transit trades and raw material trade for processing were bigger in terms of North Korea’s exports than imports. This indicates that the purposes of North Korea’s imports from and exports to China are different.
In terms of the economic cooperation in consumption, the main items of both countries were being traded, showing a stable trend. In North Korea’s import from China, industrial raw materials, construction materials, food products in ordinary trade, grains and household necessities under the category of border trade were mainly traded. Economic cooperation in the production side through processing and assembling trade was also conducted at a regular basis. main products that were imported from China by North Korea under the processing trade category included materials and energy sources required in production such as patroleum oil, rubber, plastic, special fabric, and main products that were exported to China from North Korea included nut products, fish, and clothing. Clothes were not traded as a major product for trade for consumption, but it was one of the main traded item for trade for production categories.
By customs districts, more than 70% North Korea’s imports from China goes through Dalian customs district (which includes Dandong). North Korea’s exports to China show less concentration in a single channel of entry. This shows that North Korea’s imports are mostly executed by land in small amounts while exports mostly by sea in bigger amounts. By analyzing revealed comparative advantage(RCA) between North Korea and the two Northeast Chinese Provinces we were able to find a clear patter of economic cooperation. Dalian’s RCA vis―a―vis North Korea was high in raw materials for clothing manufacturing or other fabric materials, as well as nonmetal materials, industrial raw materials and capital goods. North Korea’s RCA vis―a―vis Dalian was high in finished clothing, which indicated a production sharing network in clothing manufacturing in which Dalian supplies North Korea with raw materials and North Korea supplies Dalian with completed clothing products. North Korea’s RCA vis―a―vis Changchun was high in raw materials that are used in manufacturing apparel and other daily necessities, daily necessities, food products whereas Changchun’s RCA vis―a―vis North Korea was high in local specialties such as Ginseng, vegetables and fruits, and other food products as well as clothing. This indicates a similar production sharing network as in the Dalian case.
In chapter 5, we provide analysis based on in―depth interviews with people who engage in businesses related to economic cooperation with North Korea at the North Korea―China border. First, most interviewees agreed that there exists an economic cooperation relationship between the two countries. Specifically, interviewees that were more deeply involved in this cooperation had an easier time understanding and assenting to the concept of international economic cooperation. Meanwhile, there were some differences in perspectives among interviewees regarding the China factor as a determinant of the economic cooperation which we discussed in chapter 3. This was due to regional disparities, as well as different businesses the interviewees were engaged in. However, most of them agreed that the economic cooperation will expand due to North Korea’s cheap and reliable supply of labor to China.
In chapter 6, we analyzed the effect the intensification of North Korea and China’s economic cooperation has on North Korea’s economy. Positive effects included facilitation of North Korea’s marketization, reform and opening up, resolving North Korea’s economic difficulty, and economic development. Negative effects were China’s preemptive monopolization of North Korea’s economic resources, and setbacks to inter―Korean economic cooperation. To maximize the positive effects and minimize the negative effects of North Korea and China economic cooperation, we suggested policy recommendations for tripartite cooperative projects among South and North Korea and China, such as IT industrial cooperation, participation in China’s Rajin port development plan, entering the North Korea―China civilian border mutual trade market, inducing North Korea’s rejoining of GTI. For inter―Korean economic cooperation, we suggested that there needs to be more research on exchange rates between South and North Korea currencies as well as on plans for gradual removal of the 5.24 measures.