North Korea-China Trade Ties: North Korea’s Life Jacket is Becoming China’s Straight Jacket

Autarky Doesn’t Work

Behind its rhetoric, the North Korean regime understands that its goal of economic self-sufficiency is not feasible and has produced poor outcomes. North Korea’s relatively closed economy ensures the majority of North Koreans remain food insecure, poor, and cut off from the rest of the world.

North Korea’s leaders have made allowances for limited market-based activity in light industry and agriculture, stimulated by economic relations with China and investments by Chinese firms. But North Korean dictators want China’s investment, equipment, and technology without introducing individual economic freedom. In 2009, fearing too much individual wealth was being created, the Kim regime confiscated household income by reissuing its currency at a fraction of its previous worth. While impoverishing its population, the regime simultaneously covets imported luxury goods to keep itself happy and a small number of elites loyal.

More significant than these personal indulgences, the regime continues to amass missile and nuclear technologies, through a combination of global licit and illicit transactions. North Korea trades for currency, for fuel, and for military materiel to preserve its power.

North Korea Depends on China for Trade and Investment – What Does China Gain?

North Korea is a political pariah, but only in recent years did more countries clamp down on trade with the rogue state. As North Korea’s trade with these secondary partners steeply declined, China significantly expanded infrastructure to facilitate trade with North Korea, building bridges, a new port, and duty-free zones to cover about half of its 850-mile shared border with North Korea. In 2015, China opened a high-speed rail route between Dandong and Shenyang, which moves North Korean coal to China’s northeastern Liaoning province. While the numbers are specifically unreliable, the general trade trend is clear. In 2009, China accounted for roughly half of North Korea’s imports and took one quarter of its exports. In 2015, China absorbed 83 percent of North Korea’s exports and accounted for 85 percent of North Korea’s imports.

During this time, South Korea and North Korea engaged in shared production inside the Kaesong Industrial Complex along the border where more than 120 South Korean firms employed over 50,000 North Korean workers to make socks, wristwatches, school uniforms, and other goods. By early 2016, North Korea’s unabated rocket testing prompted South Korea to shut down the complex and cease economic activity. Eliminating the nearly $2 billion in trade from the Kaesong Complex, China now accounts for around 93 percent of North Korea’s total trade volume. According to data from the Korea Trade-Investment Promotion Agency, North Korea’s trade with China may have peaked in 2014, yet it still grew about 6 percent in 2016.

Chinese investors also provide almost all of the foreign direct investment in North Korea, mostly targeted to the development of mineral resources that help fuel the Chinese economy. For example, in Musan, North Korea, Chinese investment drove development of the largest open-cut iron mine in Asia. North Korean coal, iron ore, and minerals help China meet demand for energy and raw materials.

More generally, China’s trade relations with North Korea, combined with outright economic assistance, serve its objective of preserving stability in North Korea, avoiding the kind of collapse that could produce mass migration of North Koreans into China. As a Congressional Research Service report puts it, “China’s food and energy assistance can be seen as an insurance premium that Beijing remits regularly to avoid paying the higher economic, political, and national security costs of a North Korean collapse, a war on the peninsula, or the subsuming of the North into the South.”

What Does North Korea Export and Import – and How?

North Korea has been under some form of United Nations (UN) sanctions since 2006. The sanctions are intended to embargo arms sales and related financial transactions with North Korea and prohibit trade in items related to nuclear, ballistic missiles, and other weapons of mass destruction. Sanctions also restrict the export of luxury goods to North Korea and encourage governments to freeze the assets of designated persons and entities engaged in such transactions. But China did not concur with all of the UN sanctions, nor has it fully implemented those it did approve.

In the realm of licit trade, North Korea’s importation of agricultural and aquaculture technologies has helped it increase output of cultivated fish, grains, and livestock such that it now exports fish, seafood, and agro-forest products. Textiles comprise a larger component of North Korea’s exports with garments sewn in North Korea but finished in China or elsewhere in order to carry a label from that country. North Korea has also leveraged its natural resource assets by acquiring the equipment necessary to improve output of mining and coal production, which is more lucrative for earning the cash it needs to support its military ambitions.

Not reflected in official statistics is hundreds of millions in illicit trade North Korea engages in, selling small arms, light weapons ammunition, and minerals and metals prohibited under UN sanctions. North Korea can use air and land routes over China to engage in illicit trade with third countries when China fails to monitor or looks the other way. High profile interdictions of North Korean ships (often using flags of convenience) reveal secret cargo containing rocket-propelled grenades, anti-aircraft missile systems, and other materials sought after in war-torn countries like Syria and the Democratic Republic of Congo, Sudan, and Eritrea, according to UN reports. Organizations monitoring the flow of goods into North Korea cite evidence of Chinese companies serving as the front for North Korea’s purchase of goods prohibited under sanctions.

China Dependency — Closing the Spigot through Sanctions

Notably, both China and Russia joined a stronger UN resolution passed in August that prohibits the purchase of North Korean exports of coal, iron, iron ore, lead ore, and seafood, which together earned North Korea some $1.5 billion in revenue from exports to China in 2016.

Under a related Executive Order, President Trump gave the U.S. Treasury Department authority to target anyone engaged in “at least one significant importation from or exportation to North Korea of any goods, services, or technology… or anyone who materially assists such economic exchanges.” Treasury Secretary Mnuchin put it this way, “Foreign financial institutions are now on notice…they can choose to do business with the United States or North Korea, but not both.”

As commercial transactions with North Korea’s secondary trade partners have significantly declined, the determining factor in how effective the new sanctions are is North Korean economic relations with China.

For many years, Beijing’s coal purchases helped to pay for the North’s nuclear weapons program. China imported $1.2 billion in coal and mineral fuel from North Korea in 2016, but announced in February 2017 it would temporarily suspend coal imports from North Korea, citing concerns that North Korea would fail to make payments. Monitoring of shipments into China show that the suspension is being enforced, but North Korea persists in finding ways to reroute its coal exports through other countries in the region such as Malaysia and Vietnam, according to UN reports.

The Ultimate Question: Will Sanctions Prevent North Korea from Becoming a Nuclear Power?

Critics of the new tougher sanctions also say they don’t go far enough. North Korea sends its people to work in shipyards, in construction, on farms, and in clothing factories in Russia and other countries throughout the Middle East and Africa as “guest workers.” They are mandated by the Kim regime to send back most of the money they earn in the form of remittances. The UN estimates that 60 to 80 thousand workers could bring in as much as $500 million a year. The new sanctions encourage countries to stop taking new workers but they do not prevent remittances.

Critics argue that two other even more significant avenues need to be shut down to make sanctions effective. China could deal a serious blow to North Korea’s weapons programs by withholding shipments of oil and other petroleum products since North Korea is almost entirely dependent on China for crude oil. The United States is also considering implementing “secondary sanctions” that would penalize Chinese and other banks that help finance the companies that front for North Korean purchases.

Whether these approaches are implemented or not, the Kim regime may not feel the impact of new sanctions in the near term. Many observers believe North Korea has stockpiled resources and earnings accrued from previous sales of newly prohibited goods. They worry that evasion remains viable for North Korea despite the expanding scope of sanctions, and that little will deter Kim Jong-un, the current leader of North Korea’s regime, from pursuing the nuclear capabilities that he believes are key to preserving power.