[OUTLOOK]North causes its own trade ills

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[OUTLOOK]North causes its own trade ills

North Korean propaganda incessantly proclaims that the United States is “stifling” North Korea’s development. Trade relations between the two countries have, indeed, always been highly politicized. Following the outbreak of the Korean War in 1950, Washington imposed comprehensive sanctions under the World War I-era “Trading With the Enemy” Act. These sanctions were partially eased in 1995 as part of the Agreed Framework, and a bilateral agreement on long-range missile testing resulted in the removal of all but a few of the remaining trade restrictions in June 2000.
In this connection, restrictions on the sale of potential military-use items under the multilateral Wassenaar Arrangement (to which both the United States and South Korea are signatories) were retained. U.S. importers of DPRK products are required to obtain prior approval from the U.S. Treasury’s Office of Foreign Assets, certifying that the products were not produced by North Korean entities designated as having engaged in missile proliferation. Subject to this condition, approval is routine.
However, U.S. government officials report that they receive only a handful of such requests each year. Their impression is that business conditions in the DPRK pose a greater impediment to bilateral trade than the regulatory regime.
The relaxation of sanctions tied to a specific political agreement is intentionally reversible: The trade restrictions remain off as long as North Korea maintains the missile moratorium; if missile testing is resumed, sanctions could be re-imposed. So at present, with the exception of military-related products, there are few specific legal restrictions on the ability of Americans to export to or invest in the DPRK. Imports are subject to a prior approval process, but this is based on a transparent and narrowly delineated certification requirement.
Yet there is little trade between the United States and the DPRK. North Korea is among the few countries to which the U.S. does not grant normal trade relations (NTR) status, and North Korean exports are subject to the so-called column 2 tariff rates established by the infamous Smoot-Hawley Tariff Act of 1930. These tariffs tend to be highest on labor-intensive products such as garments, in which North Korea is conceivably competitive. Though their incidence is an accident of history, not an intentional slap, the column 2 tariffs represent a serious potential impediment to trade. Some countries, notably China, have successfully exported to the United States despite being subject to higher column 2 tariffs ―though even China eventually gained NTR status on a year-to-year basis. Most countries that have recently obtained permanent NTR, such as China, have done so through the World Trade Organization (WTO) accession process. The DPRK has shown no interest in joining the WTO.
This disinterest is unfortunate. The United States does not grant the DPRK quotas under the Multi-Fibre Arrangement (MFA), a worldwide network of bilateral trade quotas on textiles and apparel (due to expire in 2005), and WTO accession could aid the DPRK in this regard. In the case of the similarly diplomatically problematic Burmese government, the U.S. government found it politically easier to accept an increase in Burmese exports to the United States than to negotiate publicly a textile agreement under WTO auspices with the repressive regime. WTO membership has its privileges. But the DPRK is one of the rare countries that chronically do not fill their MFA quotas in Europe, where there are no sanctions, suggesting that the problem lies in the DPRK’s inability to compete, not in trade barriers.
However, should the DPRK obtain NTR status, the United States would likely classify it as a non-market economy (NME) and subject it to onerous anti-dumping rules on the Chinese template. The point is that improved diplomatic relations are no panacea ― the United States can be protectionist on purely economic grounds, regardless of politics.
Conversely, the United States trades with some low-income countries preferentially, unilaterally granting them limited tariff-free access through the Generalized System of Preferences (GSP), subject to standards concerning workers’ rights, intellectual property protection and drug trafficking. Given North Korea’s disregard for internationally accepted labor standards, it is inconceivable that Washington would grant North Korea GSP privileges under current practices, even if diplomatic relations were normalized. Yet China, which has never received GSP privileges, vividly demonstrates that it is quite possible to prosper without such advantages.
Today, internal conditions and practices in North Korea, not legal restrictions, impede bilateral trade. However, with sufficient reform and improvements in competitiveness, a broad range of policy issues would become increasingly relevant. In this regard, DPRK accession to the WTO would be advantageous. In the meantime, rather than complaining about U.S. policy, North Korean officials would be better served by redoubling their reform efforts.

* The writer is a senior fellow at the Institute for International Economics in Washington D.C.


by Marcus Noland
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