[Seri column]North Korea’s trade dilemma

North Korea’s foreign trade is based on two principles. First, it is centrally controlled, with decisions on trade volume made every December. In this process, it decides to import goods that it is unable to produce or lacking in adequate capacity. Typical examples are oil, food and equipment parts. Exports are planned according to the amount of imports that are needed, suggesting the latter is the priority, not outbound shipments.

The second principle is barter trade. During the Soviet era, North Korea was able to import necessities from its Socialist brethren in return for corresponding goods. The decades-long structure implied that Pyongyang’s trade formula was based on need, rather than on value as it excluded any need to establish regular international trade policies or to develop exports that could generate foreign hard currency. Chaos naturally ensued when the structure collapsed. As the Soviet sphere moved toward formal disintegration in December 1991, North Korea’s foreign trade plunged from $4.1 billion in 1990 to $2.5 billion in 1991. The disorder was further magnified by trade partners immediately after the Soviet collapse. They demanded hard currency for goods shipped to North Korea.

The new economic order exerted pressure on North Korea to adopt market economy principles. However, China and Japan stepped into the vacuum created by the Soviet demise and became North Korea’s new barter trade partners. That alleviated the need for Pyongyang to urgently revamp its economic structure in the 1990s.

China provided at least the minimum of goods that the North needed at favorable terms. In addition, there was no difficulty for the North to secure necessary goods from Japan. Transactions with Japan actually involved Chongryon, a Korean community in Japan that has close ties with North Korea. Thus, the trade between Japan and the North was almost trade within a nation, rather than trade between nations.

North Korea did not totally reject enhanced trade connections with the global community. In the early 1990s after it introduced the Law of Equity Joint Venture, the regime established the Rajin-Sonbong Free Economic Trade Zone. That was an attempt to attract foreign capital. It also allowed most companies, not just trade specialists, to engage in trade. However, it was virtually impossible for the North to adapt without fundamental change in its trade policy.

In the 2000s, South Korea has replaced Japan in Pyongyang’s trade scheme. Particularly, as Japan tightened economic sanctions on North Korea in 2006, their bilateral trade nearly ceased. North-South trade has the characteristics of national exchanges; no tariff is imposed. However, if China is involved, some principles of trade are applied. For example, if goods that the North sends to the South go through China, they are calculated both in trade statistics of China and South Korea.

South Korean aid to the North accounts for nearly half of the exchanges between the two Koreas. The rest includes production from the jointly developed Kaesong Industrial Complex, consignment processing for textiles and import of North Korea’s agricultural products and minerals. While none of the transactions require funds from the North, Pyongyang can acquire foreign currencies from the South through the exchanges.

Meanwhile, in recent years the North has departed from its original model in opening up to foreign trade. In the 1990s, the North took the initiative in managing the Rajin-Sonbong Free Economic Trade Zone, but since 2000, outside developers have been allowed to manage other areas - Shinuiju, Kaesong and Mount Kumgang. This suggests that the North wants to avoid opening up completely while at the same time obtain as much foreign currency as possible. The North is expected to continue such import-oriented trade in the future.

North Korea’s constant trade deficit has been pointed out as something mysterious. As for imports, it should provide foreign currencies at a national level because the regime determines the amount of exports based on the amount of imports it needs. In contrast, since exports are connected to outside markets, it is difficult to meet targeted goals, thus aggravating the trade deficit. So how and where can the North raise foreign currencies for imports? It means that there must be another channel that is not reflected in official trade statistics, which are based on inverse calculation. In fact, the North’s biggest trade deficit is with China, its No. 1 trade partner.

Therefore, to say that China is increasing free aid to the North to guarantee the stability of the regime would be an exaggeration. After three decades of reform and market opening, China’s economic structure has transformed into one that cannot support itself without imports. China is continuing trade with the North because it does not incur a loss from the exchanges.

To help relieve its trade deficit, North Korea is earning hard currencies by dispatching workers to the Middle East, Latin America, the Littoral Province of Siberia and Kaesong Province. It also is generating revenue from leasing service for Kaesong and Mount Kumgang, third-party trade arrangements and exchange transactions made in Europe and Southeast Asia.

Since the North is not a member of international financial organizations, it has no obligation to release various statistics such as trade account balance and current account balance. Therefore, it is dangerous to evaluate demand and supply of North Korea’s foreign currencies only through inversely calculated trade statistics. Although foreign trade is helping prop up the North Korean economy, it has failed to serve a practical role because Pyongyang continues to cling to old approaches. To achieve its goal of becoming a powerful and prosperous nation, the North will need to resolve economic problems more aggressively through a dramatic shift of its trade policy.

The writer is a research fellow in the Global Studies Department at Samsung Economic Research Institute. For more SERI reports, please visit www.seriworld.org.

By Dong Yong-sueng