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North Korea’s International Economic Ties
in the 21st Century and Prospects
for Their Development under Kim Jong Un
Ludmila ZAKHAROVA
abstract. The author offers an overview of whatever statistics is available about North Korea’s economic ties with the rest of the world in the
2000s when its foreign trade expanded significantly. She examines the principal trends in commercial relations, cooperation in business investment, and
projects North Korea is carrying out with its principal partners, China and
the Republic of Korea, in the first place, and with Russia, too. In conclusion,
the author provides an outlook for North Korea’s economic cooperation with
other countries under the new leader.
keywords: Democratic People’s Republic of Korea (DPRK), international economic ties, trade, China, the Republic of Korea, Russia, cooperation.
With the 21st century well underway, the Democratic People’s Republic of
Korea (DPRK, or North Korea) is still a country in nearly complete isolation
from the world economy. The official juche ideology in economics is actually its
desire to be self-sufficient (doing all by drawing on internal resources). North
Korean scientists who happen to speak at international conferences insist that
their country’s economy is “independent and modern” and that to be fully independent, North Korea “relies fully on its internal resources, such as natural materials and fuels, and uses the latest technologies” (information technologies, in the
first place). Nuclear weapon tests and satellite launches are cited as proof of
independence and advance of North Korea’s economic system.1
Whatever the official tenor, North Korea’s economy cannot develop in complete isolation from the outside world. In the second half of the 20th century,
North Korea’s economic system was largely built up with foreign technological
Ludmila Zakharova, Ph.D. (Econ.), Senior Research Associate, Center for Korean Studies, the
RAS IFES. Tel.: 8(499)129-04-10, 8(916)345-01-33.
North Korea’s International Economic Ties in the 21st Century
129
assistance using imported equipment and technologies.2 As the country’s economic ties with the outside world loosened in the 1990s, its GDP contracted significantly, and only started to recover slowly in the 2000s, not least because of
its expanding foreign trade. North Korea today is a secretive country short on
internal resources and long on military projects, its infrastructure and manufacturing plant in civilian industries severely in need of modernization. Energy and
food shortages are major challenges confronting North Korea in its development
prospects and forcing it to import fuel products and crude fuels, foodstuffs, and
fertilizers. Militarization taken to its extreme deprives its civilian industries of
materials to be processed into consumer goods. Economic cooperation with other
countries is a way for North Korea to obtain raw materials, industrial and consumer goods, foreign exchange, investments, and the latest technologies. North
Korea’s economic ties with the outside world are restricted considerably, though,
because of international sanctions imposed on it and the lack of free foreign
exchange Pyongyang could spare.
North Korea can only be attractive to the outside world as a source of rare
minerals and natural materials, and cheap labor for Northeast Asian countries.
According to various estimates, North Korean natural resources (including rich
coal fields, and large deposits of iron ore, copper ore, gold, zinc, nickel, and rareearth metals) are valued at between $2 trillion3 and $6 trillion.4 North Korea also
claims that its labor is competitive on the world market.5 Relatively low-paid,
skilled North Korean labor can be used in other countries (in China and Russia
as the biggest host countries) and at enterprises established in North Korea to
process customer materials (provided by the ROK and China) into industrial
products or consumer manufactures. Geographical position is yet another of
North Korea’s competitive advantages. As freight traffic intensifies in the region
and between Asia and Europe, North Korea turns increasingly into a convenient
transit route.
For all their public pretensions to independence and self-sufficiency of their
country’s economy, the North Korean leaders acknowledge the need for economic cooperation with other countries in their official statements and practical
efforts to improve the investment climate in the country.
Back in the 1990s, North Korea stepped up its efforts to attract foreign capital by setting up foreign-owned businesses and special economic zones (SEZ).
In addition to the 1984 Joint Ventures Law, the North Korea legislature passed,
in 1992, a Foreign Investments Law that expanded the bounds of foreign capital
involvement in the country’s economy. In 1991, North Korea established a special commercial and economic zone at Rajin-Sonbong, followed, in 1997, with
tax-exempt commercial zones to process customer materials at Wonsan and
Nampo, and a special mining zone at Tanchon. In 2002, Sinuiju Special Administrative Region, Kaesong Special Industrial Area, and Kumgangsan Tourist
Region were established in North Korea. In 2011, legislators in North Korea
passed a law to establish the Hwanggumpyong and Wihwa Islands Economic
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FAR EASTERN AFFAIRS
Zone. Also in the 2000s, the North Korean leaders worked, and are still working,
hard to improve laws and regulations and business climate for foreign investors
in the country.
After a new leader came to power in North Korea, the country’s international economic strategy continues to be geared to expanding external economic ties. Efforts are focused on reorganizing relevant government agencies and
creating a beneficial investment climate. In particular, the Taepung Investment
Group under military control was replaced in its capacity of the principal
agency to encourage foreign investment with a Committee on Joint Venture and
Investment under the Cabinet of Ministers that opened an office in Beijing in
late 2011. It was resolved at the Fifth Session of the 12th Supreme People’s
Assembly that more attention be given in North Korea to developing special
economic zones to promote economic and technological cooperation with foreign countries. In late 2011, in an attempt to make the investment climate more
attractive in the country, the DPRK government reviewed several laws, including the Foreign Investments Law, Joint Ventures Law, the Foreigner Income
Taxation Law, and Foreign Invested Bank Law. The law on the Rason Economic and Trade Zone (TEZ) was revised as well. The rights of foreign investors
(above all, land lease and labor hire) and tax privileges within the zone were
expanded significantly. In mid-March 2012, an investment insurance company
was established in North Korea to reduce risks for foreign investors. It is hard
to guess how real guarantees are for investors in North Korea, and yet growing
foreign investments are evidence of a positive impact of the efforts the country’s
leadership is making.
Research into North Korea’s external economic ties is difficult because of
the shortage of full and authentic data. North Korea’s official economic statistics
are beyond researchers’ reach and have not been published for quite a long time.
Government agencies in the Republic of Korea (such as KOTRA, the Ministry
of Unification, and the Bank of Korea) and international organizations (including UNCTAD and the IMF) that collect data and work out the results using their
own techniques, frequently as estimates, are the principal sources of statistics on
North Korea’s economy. Information about North Korea’s economic relations
with other countries can also be requested from its trading partners as customs
statistics. Whatever indirect approach is used, any survey of North Korea’s economic relations with the outside world rests on data that cannot be always crosschecked, and figures obtained from different sources are often significantly at
odds with each other.
According to the Korea Trade-Investment Promotion Agency (KOTRA),
North Korea maintains commercial relations with 70 countries, including South
Korea. It has trade missions in 38 countries.6 Between 2000 and 2009, North
Korea’s foreign trade (including trade between the two Koreas, which both
regard as exchange within one country) rose from $2.395 billion to $5.089 billion, or slightly over double (at an average annual growth rate of 8.6%).7 In 2010
North Korea’s International Economic Ties in the 21st Century
131
and 2011, North Korea’s foreign trade picked up in growth rates (to an average
25% a year), particularly its exports (registering an over 80% growth in 2011),
to a total of $8.03 billion in 2011.8
North Korea’s foreign trade has always been in chronic deficit that reached
an all-time high of $1.5 billion in 2008. In the years since, the deficit has been
showing a downward trend with an increase in exports, and reaching approximately $630 million in 2011.9
Structurally, North Korea’s principal exports in 2011 were anthracite (which
brought in $1.7 billion in revenue) and other minerals (iron ore, for the most
part), and textiles (produced through processing trade); and its imports were predominantly oil and other fuels ($810 million), industrial machinery, and electronics.10 In geographical terms, the DPRK conducted over 90% of its trade in
2011 with China and South Korea, North Korea’s two principal partners.
Labor is yet another North Korean export. By South Korean estimates, nearly 70,000 North Koreans were employed in other countries’ construction,
forestry, textile industry, and medicine in 2011, mostly in Russia, China, and the
Middle East. South Korean experts put North Korea’s revenues from this type of
economic cooperation approximately at $1.2 billion.11 In recent years, there has
been an increase in the number of North Koreans working abroad (particularly in
China since 2012) to meet the country’s growing needs for foreign exchange.
Statistics on foreign investments in North Korea are even more scanty than
they are on trade. According to UNCTAD estimates, North Korea received
$38 million in foreign direct investments in 2010 that added up to $1.475 billion
cumulatively (up from $1.044 billion in 2000),12 a sign that there had been an
upward trend in the influx of foreign direct investments over the preceding
decade. The greater part of foreign investments flowing to North Korea from
China, Chinese statistics might differ from UN estimates.
Overall, North Korea has been showing a desire to expand its economic ties
with the outside world. Apart from the chronic deficit, its foreign trade has been
little diversified geographically and structurally. North Korean exports have been
growing in recent years because more mining industry output has been sent out,
and the country’s imports have been rising as more manufacturing industry products have been brought in. The exports to imports ratio is evidence that North
Korea’s manufacturing industry is not yet ready to produce revenue-earning
exports, nor is the country’s foreign trade in general, its economy depending to a
great extent on cooperation with other countries. It is hard to estimate North
Korea’s foreign trade quota in the absence of reliable statistics on its GDP. For a
more revealing insight into the ongoing trends, it is appropriate to take a look at
North Korea’s economic ties with its principal partners in recent years and where
they are now.
By the end of the first decade of the 21st century, China had become North
Korea’s principal trading partner and investor, and North Korea’s economic ties
with China have become a lifebelt keeping the North Korean economy afloat.
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Between 2001 and 2011, China’s share of North Korea’s foreign trade (including
trade between the two Koreas) increased from 28% to 70%.13 In value terms, the
bilateral trade that started out at $488 million in 2000 reached $5.63 billion in
2011.14 According to Diagram 1, the most significant growth was posted beginning in 2008 when economic ties between the two Koreas were plunged into crisis and North Korea was forced to make up for the suspension of considerable
aid deliveries from the South by expanding its trade with China. The 4% decline
in trade between North Korea and China in 2009 was caused by the world financial crisis15 and was made good by trade between them doubling in 2010 and
2011. In 2012, trade growth rates leveled off, and trade between North Korea and
China only rose by 5% to $5.93 billion.16
Diagram 1
North korea’s trade with china in 2000 to 2011
millions of u.S. dollars
6,000
5,000
4,000
3,000
2,000
1,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exports from North korea to china
Imports from china to North korea
total bilateral trade
S o u r c e: KOTRA and KITA (Korean International Trade Association) (based on data available
from China’s Customs Service).
North Korea runs a chronic deficit in its trade with China. Until 2005, the
deficit had ranged from $200 million to $400 million a year. In 2008, it rose to
over $1 billion. In 2009, though, after North Korea’s exports to China had grown
appreciably, its deficit in their bilateral trade started shrinking to just above
$700 million in 2011. Some analysts believe that China is subsidizing secretly its
trade with North Korea by setting special “friendly” prices for Pyongyang to
cover its deficit.17
North Korea’s International Economic Ties in the 21st Century
133
After the Republic of Korea placed an embargo on trade with North Korea
on May 24, 2010, North Korea’s exports to China went up significantly, primarily because of larger shipments of anthracite and mineral ores. According to
KOTRA, coal and iron ore claimed 63% of North Korean exports to China in
2010.18 The upward trend held in 2011 as well, North Korean exports to China
more than doubling, mostly because of expanding shipments of these two commodity groups. The other way around, crude oil, diesel fuel, nitrogen fertilizers,
and synthetic fabrics came first in North Korea’s imports from China in 2011.19
Generally, unlike its exports, North Korea’s imports from China are relatively
diversified well beyond two or three groups of commodities.20
In the past few years, China has been investing heavily in North Korea. In
UNCTAD estimates, $44 million of foreign direct investments (less investments
from the Republic of Korea) flowed into North Korea in 2008, $41.2 million,
according to official Chinese statistics, coming from China. In 2009, North
Korea had slightly over $250 million in cumulative direct investments from
China.21 By South Korean estimates, though, cumulative Chinese investments in
North Korea topped $500 million in late 2010.22 In the view of South Korean
experts, so huge a difference is due to China’s deliberate downscaling of statistics related to its economic cooperation with North Korea.
Table 1
chinese Investments
in North korea in 2001 to 2010
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Trade, $ million
2.6
1.5
3.5
14.1
6.5
11.1
18.4
41.2
5.86
29
S o u r c e: China’s Ministry of Commerce; Statistical Bulletin of China’s Outward Foreign
Direct Investment; and UNCTAD.
Beginning in 2003, Chinese investments in North Korea have been spreading from the services and commerce into production and manufacturing, and further on into mining and infrastructure. Uncommonly, China’s government is
encouraging its national companies in every way possible to cooperate with
North Korea. In 2005, North Korea and China entered into an agreement to promote and protect investments; at the time, China’s State Council urged the country’s Northeastern provinces to boost their cross-border investments, particularly in transportation and joint mining of minerals. Government officials also
spoke about the need to invest in road and seaport building to connect China and
North Korea.23 Of the 138 joint ventures set up by Chinese businesses legally in
North Korea between 1997 and 2010, 41% were registered in the mining industry, 38% in the leather and textile industries, 8% in the heavy industry, and 13%
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FAR EASTERN AFFAIRS
in the services industry.24 Moreover, 70% of the $29 million China invested in
North Korea in 2010 went into mining.25
Several of many economic factors that stimulated the growth of Chinese
investments in North Korea in the 2000s have had the greatest impact:
n
n
First, China is interested in obtaining mineral resources from North Korea.
In the late 1990s, China’s Northeastern provinces (Heilongjiang,
Jilin, and Liaoning) that depend heavily on mineral resources to sustain
their economies were experiencing problems because of depletion of their
own mines. With rich mines next door, their regional governments and
companies saw a good chance in having a part in mineral mining projects
in North Korea and transporting ores to China at low cost. In turn, North
Korea was starving for investments in its mining industries to step up its
exports of natural resources and earn revenues in foreign exchange. This
convergence of the two countries’ interests in mineral mining led to a specific system of mutually beneficial cooperation between China and North
Korea taking shape in the mid-2000s – in a kind of give-and-take, Chinese companies invest their equipment, electric power, and technologies
in exchange for a share of minerals mined.
Examples of Chinese companies investing in mineral mines in North
Korea include China Minmetals Corporation (with investments put into a
coal mining joint venture), Tonghua Iron and Steel Group (development
of iron ore at Musan), Wanxiang Resources Limited Company (copper
ore mining at Hyesan in North Korea’s Ryanggang Province), and
Zhaoyuan Shandong Guoda Gold Stockholding Company (a gold mining
joint venture in Southern Hamgyong Province).
Second, construction of transportation infrastructure to fill China’s needs.
Two of China’s three northeastern provinces have no access to the sea,
and the promise of using North Korea’s seaports on the coast of the Sea of
Japan stirs up local Chinese companies’ interest toward North Korea. In
particular, port Rajin in the Rason trade and economic zone offers an
opportunity for exporting Chinese goods cheaply to Japan and Southeast
Asian countries, and to China’s domestic market in the South. Shipments
of goods normally follow from Hunchun, Jilin Province, through the seaport of Dandong or Dalian, from where they are exported to Japan, taking
three to four days. In the estimates of local Chinese managers, shipments
from Rajin cut the time in transit to the Japanese port of Niigata to ten
hours,26 while, in the estimates of experts at the ROK Industrial Bank,
there will be a saving of around $10 to be gained on each ton of freight.27
For over two decades, beginning in the early 1990s, China has signed
a succession of agreements with North Korea authorizing it to use the seaport at Rajin. According to reports published in early 2012, China had
obtained a long-term 50-year lease of three of the six terminals (numbered
North Korea’s International Economic Ties in the 21st Century
135
4, 5, and 6) of North Korean seaport Rajin.28 In September 2012, the road
between Rajin and Wonjong (a town across the China border) 53 kilometers long was paved with asphalt and open to traffic on October 26, 2012.
The two-lane highway will speed up significantly the delivery of freight
from Jilin Province to Rajin that the Chinese are using to capacity to ship
coal and farming produce from the Northeastern provinces to China’s
coastal southeastern cities. As reported by the Korean Central News
Agency, North Korea and China are planning to build a speedway
between Hunchun and Rajin and a new bridge across the Tumen jiang
river (Tumen River).
The Chinese media reported in September 2012 that on September 1,
2012 Yanbian Huaihua Group, a private Chinese company in Jilin
Province, entered into a contract with North Korea to develop the
Chongjin port by joint efforts. Under the contract terms, the joint venture,
Chongjin Harbor Joint Venture Company (in which the Chinese company
owns 60% of the authorized capital, and North Korea the remaining 40%)
will develop, manage, and use the third and fourth port wharfs for another 30 years. Also in September 2012, the official sources in Beijing confirmed that, in addition to the projects already under development in Rajin
and Chongjin, North Korea and China were going to develop jointly several other ports on North Korea’s eastern coast and that the two countries’
companies were negotiating the precise terms of their joint projects.29
A trend has surfaced in the past two to three years toward China’s
greater involvement in efforts to modernize transportation facilities in
North Korea, including seaports on its eastern coast, in the first place, that
the Chinese need most, the roads converging on them, and routes both
countries use in their bilateral trade. In a most probable scenario, continued cooperation between China and North Korea will help Pyongyang to
restore and modernize sections of its outdated transportation infrastructure as a tradeoff for its long-term use by Chinese companies.
n
Third, expansion of the market for Chinese goods.
The Chinese economy’s manufacturing capacities have been outstripping domestic demand since the late 1990s. Investments in joint ventures
in North Korea were a way for Chinese companies to get entrenched on
the local market. As North Koreans’ purchasing power started rising after
2002 and the country’s economy was unable to meet growing demand,
Chinese companies’ attention centered on North Korea’s consumer market and they set to opening new marketplaces and stores. In 2004, for
example, the Shenyang Municipal Commerce Promotion Association
opened a Dandong market in Pyongyang, and China’s Zhongxu Group
entered into a contract with North Korea’s government to manage Department Store 1 in Pyongyang for ten years.30
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FAR EASTERN AFFAIRS
Dandong in Liaoning Province has become more than a major transshipment point in trade between China and North Korea (it handles over
70% of the bilateral trade); it is also a beachhead from where investments
flow into North Korea. Many state-owned North Korean companies have
opened their offices in Dandong. Companies in China’s coastal areas took
to opening their offices in the city as well, regarding Dandong as a window of opportunity to conduct business with North Korea.31
From the start, a great majority of Chinese investors in North Korea were
medium and small enterprises led by merchants of Korean stock living in Liaoning Province and the Yangbian Korean Autonomous Prefecture in Jilin Province.
Lately, though, the share of ethnic Koreans among Chinese investors went down
as more ethnic Chinese businessmen with connection to local Chinese governments took over. In addition to investors from Jilin and Liaoning provinces (who
make up over 60% of the total), entrepreneurs from Beijing, Shanghai, and Tianjin, and the provinces of Shandong, Jiangsu, and Zhejiang established joint ventures in North Korea as well.32
In recent years, joint operation of economic zones in North Korea’s border
areas has become a major area of trade and economic cooperation between the
two countries. The first session of the joint governing board for joint development
and management of the Rason Trade and Economic Zone and the Hwanggumpyong and Wihwa Islands Economic Zone33 was convened in November 2010, with
Chen Deming as its chairman on the Chinese side and Jang Song Thaek, Vice
Chairman of North Korea’s National Defense Commission, as his counterpart on
the North Korean side. The joint economic zone development project received
much media attention because it was supported by China’s central government.
Previously, it had kept away from joint projects with North Korea, leaving them
to local governments and private companies to be involved in.34
Official ceremonies starting off the two economic zones by China and North
Korea were held on June 8 and 9, 2011, when the Joint Governing Board convened for its second session. Under North Korea’s amended Rason TEZ Law of
December 3, 2011, it will be “a zone of international transit, transportation, investments, finances, tourism, and services,” with top priority to be given to development of “high technologies, international logistics, equipment manufacture, manufacturing industry, light industry, the services, and modern agriculture.” According to the Hwanggumpyong and Wihwa Islands Economic Zone Law passed on
the same day, the zone to be established will take on the development of “information technologies, tourism, agriculture, and the light industry.”
In August 2012, Jang Song Thaek, Vice Chairman of North Korea’s National Defense Commission, came to Beijing for the third session of the Joint Governing Board for the joint development and management of the Rason TEZ and
the economic zone on Hwanggumpyong and Wihwa islands. The session ended
in specific agreements on deliveries of electric power from China to the Rason
North Korea’s International Economic Ties in the 21st Century
137
TEZ, development of communications networks, and facilitation of customs procedures. In addition to the Joint Governing Board in charge of strategic aspects
of SEZ development, management boards were formed for the Rason TEZ and
Hwanggumpyong Economic Zone to be concerned with operation and development of the joint zones on the ground. At the end of Jang Song Thaek’s visit to
China, several major Chinese corporations announced plans to invest in Rason,
in particular, in construction of facilities to produce building materials and infrastructure elements, including an electric power grid.
A matter of guesswork, experts suggest that Jang Song Thaek’s talks with the
Chinese leaders in August 2012 centered on measures to speed up establishment
of joint economic zones in North Korea and, above all, develop modern infrastructure in the zones. North Korean leaders were probably trying to get China’s
government involved more closely in joint projects to offset the trickle of private
investments. The Chinese negotiators, though, insisted in the documents passed
at the end of the talks on the old principles of bilateral economic cooperation –
“government initiatives, business involvement, market principles of operation,
and mutual benefit.”
In mid-2012, the Rason TEZ joint development project was moving ahead
fast enough (as port and road infrastructure the Chinese wanted most was going
up rapidly, and so were manufacturing and commercial facilities, and properties),
in contrast to the Hwanggumpyong Economic Zone where work had not yet
begun at the time. Still, the agreements reached during Jang Song Thaek’s visit
disproved rumors going around that China was withdrawing from the project to
develop the Hwanggumpyong Economic Zone because of business showing no
interest in it. In mid-September 2012, it was announced officially at the groundbreaking ceremony for the building of the Management Board of the joint
Hwanggumpyong Economic Zone that work had started to build highways in
preparation for the launch of the principal stage of zone development. A new
bridge across the Yalu River from Dandong to Sinuiju is now under construction
(its completion is scheduled for 2014). After this bridge and the bridges to the
Hwanggumpyong and Wihwa islands are brought into service, bilateral cooperation in this border area is expected to put on more momentum.
It was announced in October 2012 that the plan of the State Grid Corporation of China (SGCC) to supply power to Rason had been approved in advance
by a commission of experts of the Beijing Institute for Economic Studies. The
plan provides for a 66 kV power transmission line 97.8 kilometers long to be run
from Hunchun to Rason and a transformer substation built in Rason. The planned
project had been worked on for nearly three years, and when its feasibility study
is completed it will move on to practical implementation. The principal purpose
of power supply from China to the Rason TEZ is to facilitate construction of
zone infrastructure and meet the power needs of local enterprises.35
The Chinese media reported in January 2013 that a Chinese bank opened an
office in Rason for transactions to be conducted in yuan in the TEZ.36 Given the
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FAR EASTERN AFFAIRS
weakness of North Korea’s official currency and the precedent of the yuan being
used in the country, opening a Chinese bank there for settlements to be effected
in the joint special economic zones in the Chinese currency is an unavoidable
requirement for future economic cooperation and influx of Chinese investments.
Indeed, trade between the two countries and the influx of Chinese investments into North Korea have grown significantly over the past few years and
Pyongyang’s dependence on its western neighbor has increased. The choice of
North Korea’s potential trade and investment partners being limited and China
having a vested interest in North Korea’s political regime staying on in power,
expansion of trade and economic cooperation between the two countries by
establishing joint economic zones in North Korea’s border areas providing a
business environment completely different from what it is elsewhere in the country is the most probable scenario for the future.
South Korea has been North Korea’s second biggest trading partner since
2002. The first North and South summit in 2000 raised economic relations
between the two countries to government level and gave a boost to major investment projects, such as linking of their railroads and highways, the Kumgangsan
sightseeing project (initiated in 1998), and the Kaesong Industrial Park.37 The
South Korean liberal presidents’ “sunshine policy” toward North Korea between
2001 and 2007 was instrumental in expanding trade between the two Koreas
more than fourfold, from $403 million to $1.79 billion and raising South Korea’s
share in North Korea’s foreign trade from 15% to 38%.
Diagram 2
trade between North and South koreas in 2000 to 2011
millions of u.S. dollars
2,500
2,000
1,500
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exports from North korea to South korea
Imports from South korea to North korea
total bilateral trade
S o u r c e: Ministry of Unification, Republic of Korea.
North Korea’s International Economic Ties in the 21st Century
139
All available statistics on trade between the two Koreas have been provided
by the South Korean Ministry of Unification and bear an imprint of the South
Korean approach to economic ties with North Korea. The South Koreans divide
all bilateral trade into commercial and noncommercial trade. Commercial trade
figures relate to ordinary and processing38 trade, the Kaesong Industrial Park,
and other joint economic projects. Noncommercial trade includes government
and nongovernmental aid to North Korea, costs of sociocultural cooperation projects, and the Korean Energy Development Organization (KEDO) project.39
In 2000 to 2003, the share of commercial trade did not exceed 61% of total
trade, largely because of significant humanitarian aid and deliveries under the
KEDO project from South to North. Beginning in 2005, the share of commercial
exchanges started to grow rapidly, primarily in response to growth in real trade
and investments into joint projects. In 2007, commercial exchanges amounted to
80% of total trade between the two countries.40 This trend was evidence of the
growing share of commercial long-term cooperation projects in bilateral trade.
In 2007, North Korea’s exports to South Korea were valued at $765 million.
Too insignificant for South Korea’s foreign trade, though, this figure made the
Republic of Korea the biggest export market for North Korea.41 This rapid
growth of exports from North to South was registered because of expanding
trade in minerals and goods, textile garments, in the first place, produced as part
of processing trade. Imports from South to North were picking up rapidly as
well. In 2005 to 2007, the increase was largely related to the rise of the Kaesong
Industrial Park and movement of raw stock, semimanufactures, and machinery
from the Republic of Korea to South Korean enterprises in Kaesong.
The second Korean summit in 2007 and the economic agreements it produced might have contributed to broader cooperation between the two countries
by establishment of more joint economic zones and restoration of infrastructure
and manufacturing plants in North Korea. This hypothetical development was
interrupted, however, by a change of government in South Korea in 2008 and a
freeze of relations between the two countries that followed soon. The administration of the country’s new president, Lee Myung-bak, linked continued economic cooperation to progress in North Korea’s denuclearization and suspended
significant humanitarian aid to North and went back on the agreements reached
at the second Korean summit. Within a few months of 2008, it folded down joint
projects such as South Koreans’ travel to Kumgangsan and Kaesong operations,
and work was frozen on transportation projects in North Korea.
Trade between the two Koreas reached $1.82 billion in 2008, a 1.2% growth on
2007. The 7.8% decline in bilateral trade in 2009 under the impact of the world
financial crisis was offset by a 13.8% rebound to $1.91 billion in 2010. Humanitarian aid to North Korea suspended by the ROK government, bilateral economic ties
went over to a more pragmatic format of commercial exchanges. In 2009, 58.3% of
the bilateral trade went to the Kaesong Industrial Park, 24.3% was processing trade,
and 15.2% was regular trade, the share of noncommercial trade between the two
countries having fallen from 19.5% to 2.2% between 2007 and 2009.
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In 2008 and 2009, textiles, farming produce, seafood, minerals, steel and
metalware, and electrical and electronic products were the principal exports from
North to South. North Korea’s imports from the Republic of Korea included
mainly textiles, electrical and electronic products, chemical industry and
mechanical engineering products, farming produce, and seafood.42
Toward the end of the first decade of this century, the model of economic
cooperation between North and South Koreas was more beneficial for North
Korea’s economic growth than trade with China, its principal partner. North
Korean exports to the Republic of Korea were two-thirds finished products (textiles and electrical components) manufactured through processing trade and at
South Korean enterprises in the Kaesong Industrial Park. The major part of North
Korea’s exports to China, though, were minerals and low added value products.
Even though North Korea was making, beginning in the latter half of 2009,
attempts to reinvigorate economic cooperation between the two countries, the
ROK government opted for scaling down bilateral economic exchanges. On May
24, 2010, South Korea imposed an embargo on trade and economic relations with
North Korea in response to the sinking of the corvette Cheonan and accused
North Korea of the wrongdoing. The Kaesong Industrial Park and the World
Health Organization’s projects of aid to North Korean children and pregnant
women were the only exceptions. Still, new investments into Kaesong were also
banned.43 In consequence, regular and processing trade between North and
South, almost 40% of their bilateral trade in 2009, declined rapidly and collapsed
completely by 2012.
In 2011, bilateral trade fell below the 2007 volume, to $1.71 billion. As trade
between China and North Korea surged, the ROK’s share in North Korea’s foreign trade plunged to 21%. North Korea had been running a deficit in its trade
balance with South Korea until 2008, while after 2008 North exported more to
South than it imported at a surplus ($114 million in 2011).
Tense political relations regardless, trade between the two countries recovered
by 15% to a first-ever maximum of $1.97 billion in 2012 (and North Korea’s surplus went up to $174 million).44 Almost all bilateral trade (over 99%) originated in
the Kaesong Industrial Park and its growth was attributed to increased output45 that
was valued at $470 million in 2012, 17.5% more than it was the year before.46
By early 2013, the 123 South Korean enterprises operating at Kaesong
employed over 53,000 North Korean workers. By some estimates, North Korea
earns approximately $90 million a year in workers’ wages, land rent, taxes, and
other charges. The Kaesong project is, therefore, an important source of foreign
exchange, not the most important, though.
Kaesong’s success is indisputable evidence that the two countries’
economies have much to share with one another, that North Korea and the South
Korean business community are interested in cooperation, and that much of the
potential of their economic ties is still untapped. In early 2013, North Korea sent
signals to the other side of its readiness to develop economic relations with the
North Korea’s International Economic Ties in the 21st Century
141
ROK without preconditions. The issue having strong political undercurrents,
much will depend on the option the new ROK President, Park Geun-hye, will
take in the setting of the continuing nuclear crisis on the Korean Peninsula.
Toward the end of Lee Myung-bak’s presidency, many politicians and experts
were calling publicly for reversion to economic cooperation with North Korea,
and a majority of ordinary people supported the idea of resuming dialogue with
North Korea. A probable scenario for reinvigorating cooperation between the two
countries might be for South Korea lifting its embargo on trade with North
Korea, unfreezing immobilized projects (above all, allowing South Korean
tourists to travel to Kumgangsang), going over to the second phase of Kaesong
expansion, and resuming discussion of projects agreed upon in the Declaration
of October 4, 2007 issued at the end of the second North-South summit.
It is a tradition now to name Russia among North Korea’s principal trading
partners, even though its weight in North Korea’s trade has been slipping in recent
years. In the early 2000s, Russia’s trade with North Korea showed an upward
trend, increasing from $105 million in 2000 to $233 million in 2005. Having
reached the top, though, it started downhill in 2006, bottoming out at $49 million
in 2009. In 2010 and 2011, bilateral economic cooperation recovered some lost
ground, springing back to $113.7 million (less than 1.5% of North Korea’s total
foreign trade)47 in 2011, only to slide back again, to $81 million, in 2012.
Diagram 3
trade between North korea and russia in 2000 to 2011
millions of u.S. dollars
250
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exports from North korea to russia
Imports from russia to North korea
total bilateral trade
S o u r c e: Federal Customs Service of Russia.
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The diagram shows that bilateral trade is mostly imports from Russia, with
North Korea’s exports to Russia still insignificant. This imbalance causes North
Korea to run a chronic deficit in its economic relations with Russia. Between
2005 and 2011, though, the deficit narrowed from $219.5 million to $84.7 million, mostly because of decline in overall bilateral trade. According to the 2011
figures provided by the Russian Federal Customs Service, North Korea’s principal exports to Russia included machinery, equipment, and vehicles (31.8% of the
total), chemical industry products (21.2%), mineral fuel, oil, and petroleum products (20.9%), fabrics, garments, and footwear (15.2%). North Korea’s principal
imports from Russia in 2011 were mineral fuel, oil, and petroleum products
(35.4%), foodstuffs and farming produce (22.5%), metals and metalware
(10.4%), and machinery, equipment, and vehicles (9.6%).48
By another longstanding tradition, North Korea’s ties with Russia’s Far Eastern areas, particularly Amur Region and Primorye and Khabarovsk territories,
have held a prominent place in bilateral economic relations. Recruitment of
Korean labor for employment in these Russian regions is the most common area
of interregional cooperation. As federal and regional development programs
went ahead, they brought out a trend toward a significant increase in labor
recruitment from North Korea.49 In 2010, approximately 21,100 North Koreans
held jobs in construction, agriculture, forestry,50 health care, fisheries, and the
textile and leather industries. In 2013, Russia raised the quota of North Korean
labor to 35,000.
Investment-related cooperation between Russia and North Korea has until
recently been just taking off. According to data provided by the Russian Ministry
of Economic Development, Russia had $2.552 million in cumulative investments
in North Korea at yearend 2008 (almost all of them in manufacturing) and
$2.505 million in North Korean investments back home. Experts named economic stagnation and few export choices North Korea had on offer, high solvency risks that North Korean companies are suffering and the distrust in which they
are held by Russian companies, lack of modern infrastructure, and financial settlement problems precipitated by international sanctions against North Korea
among the causes of Russian business community’s sluggish performance in the
DPRK. North Korea’s debt to Russia, too, has long been a serious obstacle to
more extensive economic ties between the two countries.
Even though bilateral economic ties are still frail, North Koreans keep on
urging Russia at all meetings and talks toward expansion of their cooperation.
Deep concern for the completion of joint projects with Russia was shown by the
late North Korean leader, Kim Jong Il, at his last meeting with the Russian president in August 2011. North Korea’s current leaders take this stand as well.
Settlement of North Korea’s debt to Russia after several years of talks is the
most recent confirmation of Russia’s interest in developing economic ties with
North Korea. On September 17, 2012, Russia and North Korea signed an agreement on settlement of North Korea’s debt to Russia under loans it had contract-
North Korea’s International Economic Ties in the 21st Century
143
ed from the former U.S.S.R. The debt was estimated at $11 billion, including
accrued interest, with consideration for the exchange rate of the ruble at the time.
Russia agreed to write off 90% of North Korea’s debt, with the remaining 10%
(or over $1 billion) to be credited to the Russian Vnesheconombank’s account
opened with a North Korean bank. Under the terms of the agreement, this amount
can be used to fund joint Russian-North Korean humanitarian (in education and
health care) and energy projects. The debt problem put out of the way, a major
obstacle to bilateral cooperation (in investments, in the first place) has been
removed and Russia has shown its political will to meet North Korea halfway.
Multilateral projects involving both Koreas are central to Russia’s economic strategy toward North Korea. The biggest of them are linking the Trans-Siberian Railroad and the Trans-Korean Railroad into an overland transportation route
from Asia to Europe, building a gas pipeline across North and South Koreas, and
supplying Russian electric power to the Korean Peninsula. Even though their
economic rationale is evident to all parties, none of these projects has taken off
in the trilateral format to this day because of differences between the two Koreas and the situation on the peninsula that comes to a head now and then.
At this writing, work has only started on the railroad project that has
increased the influx of Russian investment – to between $140 million and
$250 million – into North Korea.51 In 2008, North Korea and the Russian Railways launched a bilateral pilot project to join the two countries’ railroads, which
includes rebuilding the 54-kilometer-long section from Khasan station, Russia,
to port Rajin, North Korea, and building a freight terminal in Rajin for freight
transshipments to the Russian Trans-Siberian Railroad. In 2006, Russia and
North and South Koreas named this project as the first stage in the restoration of
the full length of the Trans-Korean Railroad (its leg running along the eastern
coast of the peninsula). Relations between the two Koreas were, however,
plunged into a crisis in 2008, and the ROK stayed away from the project. Its
withdrawal regardless, Russia and North Korea completed whatever repairs were
needed on the railroad, and the combined track between Khasan and Rajin was
given a trial run on October 13, 2011. Work continues on the freight terminal at
port Rajin (completion is expected in late 2013). According to the first business
plan, a container terminal was to be built in Rajin, its infrastructure intended for
transferring containerized freight brought by ship from South Korea (and other
APR countries) to the Russian railroad network. South Korea having withdrawn
from the project and no containerized freight traffic expected with certainty, the
remaining project participants had no choice but to depart from the original container terminal construction plan and replace it, even if temporarily, with facilities to transship bulk freight, including coal52 (for a start, they will be used to
export Russian coal to China and Southeast Asian countries).
The current status of economic cooperation between North Korea and Russia is not in the best interests of either North Korea or Russia. No alternatives
existing to North Korea’s growing cooperation with China, it wants to undertake
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joint projects with Russia to balance off its dependence on China. Much depends
now on Russia and its political will to build economic ties with so intractable a
partner. According to A.A. Timonin, Russia’s current ambassador to North
Korea, the Russian embassy in North Korea cooperates closely with Russian and
North Korean economic agencies and commercial institutions in efforts to turn
around the awkward situation that has developed in trade and economic relations
between the two countries over the part 20 years.53 To this author’s mind, major
Russian companies could play a key role, with government support (of the kind
provided to the Russian Railways), in putting things right. In another scenario,
North Korea and Russia could engage in closer cooperation with one another in
anticipation of the trilateral projects resuming following the change of government in the Republic of Korea last February.
China and South Korea are, in fact, the only countries doing more than $1
billion in annual trade with North Korea. Trade with any other countries is not
that important to North Korea. By KOTRA statistics, China (the ROK is left out
of these statistics) was followed in 2011 by Russia, Germany, India, and
Bangladesh, all trailing far behind.54
According to the European Commission’s statistics, North Korea did
$217 million in trade with the European Union. Significant growth in its exports
of minerals to the EU and dwindling imports gave North Korea a respectable surplus of $108.5 million in its balance of trade with the EU.55
Japan was North Korea’s important trading partner – until 2002. In early
2000, North Korea’s trade with Japan ($463.65 million) was about as large as it
was with China ($488.03 million).56 After political relations between them went
sour and Japan imposed unilateral sanctions against North Korea, trade between
them plummeted rapidly to $2.72 million in 2009, and officially to zero in 2010.
North Korea’s trade with the U.S. in the 21st century is also insignificant,
primarily because of economic sanctions imposed by the U.S. against it. In 2010,
North Korea’s trade with the U.S. was a $1.93 million trickle, most of it imports.
Investors in Europe and other parts of the world have shown a growing interest toward North Korea. It is exemplified most impressively and notoriously by
investments made by Orascom, an Egyptian diversified Holding, in joint ventures in North Korea’s telecommunications and construction. In 2008, Orascom
Telecom and North Korean Post and Telecommunications Corp. (KPTC) company controlled by the North Korean Ministry of Posts and Telecommunications
set up a joint venture, Koryolink, to provide mobile 3G communication services
in North Korea from $400 million in agreed investments. The joint venture
proved to be a notable success, with the number of mobile telephone users having topped 1.7 million by 2013 and the company’s expected earnings estimated
by Orascom Telecom’s owner at 186 million euros.57 Orascom was also
involved, through its banking division (Orabank), in the construction of the Ryugyong Hotel in Pyongyang managed under an agreement reached by the German
Kempinski hotel chain.
North Korea’s International Economic Ties in the 21st Century
145
European companies are widely known to be making investments in copper
ore and gold mining and cement production (by Lafarge of France), garments
making (Noko Jeans Swedish-North Korean joint venture), manufacture of drugs
(Pyongsu Swiss-North Korean joint venture) and other goods, DHL express delivery, and even games developed by North Korean programmers for mobile telephones in Western companies’ outsourcing projects (Nosotek joint venture).58
Google CEO’s visit to North Korea in early 2013 again turned world media
attention to potential business opportunities in North Korea where some industries could turn into money spinners for foreign investors.
***
Turning now to prospects for North Korea’s foreign trade and economic ties
with other countries, official declarations of self-sufficiency notwithstanding, the
external factor continues to have a major role in North Korea’s economic development in the 21st century. The country still fulfills its part in the international
division of labor, mostly as an exporter of raw materials and low added value
goods, and labor as well. Import that can be paid for by building up export still
meets many of the national industries’ needs and daily requirements of the country’s population. The extent of economy militarization leaves no hope for major
changes in the economic setup in the medium term.
The new leader will follow the course set by his predecessor to cultivate economic ties with other countries, primarily by expanding foreign trade and luring
foreign investments into special economic zones and joint ventures set up in
industries requiring foreign capital and technologies.
As long as international sanctions are in effect, China will most probably
remain North Korea’s principal economic partner, and cooperation with it will
take the form of bilateral trade, employment of North Korean labor, and joint
development of border areas. In the long run, though, bilateral trade is not the
best option for North Korea because it perpetuates its role as exporter of mining
industry products and does little to develop the country’s productive forces. The
Chinese will use North Korea’s resources and seaports, and build the kind of
infrastructure they need.
It would be far better for North Korea to develop economic ties with South
Korea that had by 2012 narrowed down to the Kaesong Industrial Park that is
expanding output under all sanctions. Now that South Korea has a new president
since early 2013, the two Koreas have a real chance to resume dialogue and reinvigorate bilateral cooperation to set up new joint special economic zones and
rebuild infrastructure and manufacturing plant in North Korea.
Russia is still among North Korea’s trading partners of little consequence,
but cooperation with it might rise in importance for North Korea if and when the
tripartite projects discussed above are launched.
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As foreign business communities show growing interest in North Korea’s
potentialities, an influx of new foreign direct investments into the country’s old
and new industries may be expected. With international sanctions still on and
high country risks, any investments will, in all likelihood, come in small takes
from North Korea’s old partners in the short term.
NOTES:
1. Excerpted from reports of North Korean economists at the International Scientific Forum in
Pyongyang in October 2011.
2. G.D. Toloraya, Narodnokhozyaystvenniy kompleks KNDR [The Economic System of the
DPRK], Moscow, 1984, p. 116.
3. URL: http://www.washingtonpost.com/wp-dyn/content/article/2009/06/11/AR20090611023
23.html.
4. URL: http://www.eastasiaforum.org/2011/02/18/north-korea-s-minerals-sector-chinas-gainsouth-koreas-loss/
5. Employees in the Rason TEZ draw minimum wages of around $80 a month, and some $68 in
the Kaesong Industrial Park. According to South Korean figures, North Korean workers in China
are paid between $150 and $250 a month, a third to a half of Chinese workers’ average pay.
6. URL: http://www.rfa.org/korean/in_focus/trade-01082013155843.html.
7. Calculated from data released by the Bank of Korea (ROK).
8. The Bank of Korea, News Release, July 9, 2012.
9. Calculated from data released by the Bank of Korea (ROK). Totals for North Korea’s foreign trade include trade between the two Koreas.
10. Hangere Sinmun, June 1, 2012, KOTRA data.
11. Data of the South Korean Group for Improvement of North Koreans’ Rights, Yonhap News
Agency, Vantage Point, Developments in North Korea, July 2011, Vol. 34, # 7, p. 24.
12. UNCTAD, World Investment Report, 2011.
13. Calculated from data released by the Bank of Korea (ROK).
14. Data of the Korea International Trade Association (ROK), North Korea Newsletter, # 195
(February 2, 2012).
15. According to the Korean Development Institute, North Korea’s total foreign trade fell off
by at least 5% in the same period. (Source: KBS World, March 10, 2010).
16. URL: http://www.reuters.com/article/2013/03/07/us-korea-north-trade-idUSBRE92605
A20130307.
17. Kwon Yong Geun, “Current Economic Relations between China and the DPRK and
Prospects for Bilateral Economic Relations under Kim Jong Un,” Reports at the 13th World
Korean Forum in Manila, 2012, p. 87 (in Korean).
18. Yonhap News Agency, May 7, 2011.
19. KOTRA data. North Korea Newsletter, # 191 (January 5, 2012).
20. Ye Sok, Yi Jie Ho, “Inter-Korean Trade and Changes in North Korea-China Trade after the
May 24 Measures,” KDI North Korea Economic Review, May 2012, p. 16 (in Korean).
21. 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment (in Chinese). URL:
http://chinainvests.files.wordpress.com/2010/12/2009-mofcom-investment-report1.pdf.
22. Kwon Yong Geun, “Current Economic Relations between China and the DPRK and
Prospects for Bilateral Economic Relations under Kim Jong Un,” Reports at the 13th World
Korean Forum in Manila, 2012, p. 90 (in Korean).
North Korea’s International Economic Ties in the 21st Century
147
23. Jae Cheol Kim, “The Political Economy of Chinese Investment in North Korea,” Asian Survey, Vol. 46, # 6, November/December 2006, p. 902.
24. Drew Thompson, “Silent Partners: Chinese Joint Ventures in North Korea,” the U.S.-Korea
Institute at SAIS Report, February 2011, p. 4.
25. URL: http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20120422000011&cid=
1202.
26. Global Times, “China Gains Sea of Japan Trade Access,” March 10, 2010. URL: http://china.
globaltimes.cn/diplomacy/2010-03/511351_2.html.
27. Chunang Daily, May 24, 2012.
28. URL: http://www.rzd-partner.ru/news/2012/02/15/373933.html.
29. Hangere Sinmun, September 18, 2012.
30. Jae Cheol Kim, “The Political Economy of Chinese Investment in North Korea,” Asian Survey, Vol. 46, # 6, 2006, pp. 901 and 909.
31. Ibid., p. 904.
32. Drew Thompson, “Silent Partners: Chinese Joint Ventures in North Korea,” The U.S.-Korea
Institute at SAIS Report, February 2011, p. 53.
33. The Hwanggumpyong and Wihwa islands lie in the Yalu River in the area of Dandong,
China, and Sinuiju, North Korea.
34. URL: http://www.atimes.com/atimes/Korea/MG08Dg02.html.
35. “State Grid Corporation’s Project to Provide Cross-Border Power Supply to DPRK Enters
Activation Phase,” China National Radio, October 26, 2012.
36. URL: http://nkleadershipwatch.wordpress.com/2013/02/01/taepung-investment-group-formally-dissolved/
37. The Kaesong Industrial Park in North Korea, 60 kilometers from Seoul, went into operation in 2004 and is managed by the Hyundai Asan company and the government-controlled
Korea Land Corporation, ROK. The first phase of the Kaesong operations plan provides for the
construction of an industrial zone to manufacture labor-intensive goods using South Korean
capital and latest technologies in management and equipment and North Korean low-paid
skilled labor and land.
38. Cooperation in the processing of customers’ raw materials, that is, manufacture of products
from imported materials and sending them back to the material suppliers’ country.
39. The Korean Energy Development Organization (KEDO) on the Korean Peninsula was
established in 1995 to implement the 1994 framework agreement between North Korea and the
U.S.; it built two light-water nuclear reactors and supplied fuel oil to North Korea. The project
was terminated in 2005.
40. 2007 Inter-Korean Trade. URL: www.unikorea.go.kr/en/
41. The ROK retained this role until 2009.
42. “South Korea’s Trade with North Korea Falls into the Red,” February 25, 2010 (NK News
Brief # 10-2-25-2). URL: http://ifes.kyungnam.ac.kr/eng/ m05/s10/content.asp?nkbriefNO=34
7&GoP=1.
43. KBS World, May 25, 2010.
44. Yonhap, February 9, 2013. Data provided by the ROK Customs Service.
45. Most of the goods produced at Kaesong are textiles, machinery, and electronics.
46. Yonhap, January 10, 2013.
47. This is almost 2% of North Korea’s trade with China and just over 6% of its trade with the
ROK.
48. URL: http://www.rusembdprk.ru/rossiya_i_kndr/torgovoekonomicheskoe_ sotrudnichestvo/
49. URL: http://www.rusembdprk.ru/rossiya_i_kndr/regionalnye_ svyazi/
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50. Korean engineers and workers are employed as lumberjacks in Russia (primarily in Amur
Region and Khabarovsk Territory), and commercial lumber is supplied as payment to North
Korea. Between 2007 and 2010, they produced 1.72 million cubic meters of roundwood in
Amur Region (564,800 cubic meters in 2007, 421,400 cubic meters in 2008, 374,000 cubic
meters in 2009, and 359,700 cubic meters in 2010). The output of commercial lumber by North
Koreans in Russia has been declining for several reasons recently.
51. http://press.rzd.ru/smi/public/press?STRUCTURE_ID=2&layer_id=5050&id=266566.
52. Approximately up to 5 million tons of bulk freight can be transported annually between
Khasan and Rajin.
53. URL: http://www.interfax.ru/txt.asp?id=288966&sec=1483.
54. Hangere Sinmun, June 1, 2012.
55. Yonhap, North Korea Newsletter, # 203, March 29, 2012.
56. Korea Trade-Investment Promotion Agency. North Korea’s Trade Trends 1999-2000,
KOTRA, Seoul, 2001, pp. 73 and 91.
57. URL: http://www.forbes.com/sites/simonmontlake/2012/11/18/pyongyang-calling-for-egypt
ian-telecoms-tycoon-naguib-sawiris/
58. URL: http://www.businessweek.com/magazine/north-korea-new-land-of-opportunity-0119
2012.html.