Amid isolation, N.K. boosts China economic ties

Beijing seeks to gain from access to natural resources, tighter reins on wayward neighbor


Amid deepening international isolation, North Korea is ratcheting up economic cooperation with China through trade, investment and joint industrial projects.

A barrage of sanctions targeting Pyongyang’s atomic programs has choked off revenue streams and outside assistance. A series of provocations including an April rocket liftoff have brought many inter-Korean projects to a halt in recent years.

Closer ties are likely to benefit China, the North’s prime ally and donor. Beijing has been seeking to secure overseas natural resources and wield greater clout over its wayward neighbor, the region and the world.

Experts are closely watching developments under the new leadership of Kim Jong-un, who appears to be formulating his own recipe for escaping poverty. Despite concerns over its lopsided economic reliance on China, a sharp increase in economic activities may lead up to a market-oriented reform, they say.

“The closer cooperation doesn’t necessarily mean an economically subordinate relationship. The current projects like special economic zones are expedited by economic motives for logistics systems, infrastructure, resources and labor, rather than (China’s) intention to turn North Korea into a vassal state,” said Lim Soo-ho, a research fellow at Samsung Economic Research Institute in Seoul.

Trade

Trade volume between North Korea and China in the first five months of the year hit a record $2.6 billion, according to Voice of America. That is up about 32 percent from the same period last year.

The figure for the whole of 2011 also surged 62.4 percent on-year to $5.63 billion. That pushed up the North’s total foreign trade by 51 percent to a 22-year high of $6.3 billion, the state-run Korea Trade-Investment Promotion Agency reported in May.

Exports spiked 84 percent to $2.79 billion. Imports rose 32.6 percent to $3.53 billion. The destitute country primarily exports minerals such as coal and iron ore, as well as textiles, and imports crude oil, grains, machinery and other items.

Trade deficits, a long-standing constraint on the North Korean economy, dropped more than 35 percent to $740 million during the same period, the Seoul-based trade agency said.

“In the past, the North was not as eager as now to export to China and mainly focused on imports because it could obtain dollars from other methods such as inter-Korean exchanges. But things have changed since,” said Dong Yong-seung, a North Korea specialist at Seoul-based SERI.

The data illustrates Pyong­yang’s growing dependence on its top trade partner. Beijing’s share in the North’s external trade has steadily risen from 52.6 percent in 2005 to nearly 90 percent in 2011.

The bulk of food, consumer goods, raw materials and equipment being sold in North Korean marketplaces are made in China, defectors and analysts say.

Russia, which once claimed more than 50 percent during the Soviet era, remains in second place but its trade volume is relatively small, with $110 million last year. Other trade partners include Germany, India, Bangladesh, Taiwan, Indonesia and Thailand, Seoul-based KOTRA said. 


Mutual partnership

Further expanding Pyong­yang’s reliance on its sole ally is with Beijing’s ongoing drive to develop three provinces along the northeastern border ― Heilongjiang, Jilin and Liaoning.

The two countries also joined forces in the late 2000s to foster the Najin-Sonbong and Hwanggeumpyeong-Wihwa Islands free economic zones adjacent to the three provinces. About 70 percent of shipments are transported through Hwanggeumpyeong, near the North Korean town of Sinuiju and the Chinese city of Dandong.

Despite Beijing’s initially lukewarm response, its economic engagement intensified after a 2009 visit by Prime Minister Wen Jiabao. Kim Jong-il, the late leader who died in December, also traveled to China twice in 2010.

The North’s Presidium of the Supreme People’s Assembly also reportedly approved related laws shortly before Kim’s death to facilitate the project. The two countries also created a joint committee to oversee developments.

“The partnership has seen a shift in recent years from one-sided assistance toward mutual cooperation,” said Jeong Hyung-gon, a senior researcher at the state-run Korea Institute International Economic Policy.

Under the plan, China is currently building and renovating roads, railways, ports and other facilities in the region at its expense. The North, in response, reportedly offered development, access and mining licenses.

China’s investment focusing on resources and infrastructure in the North has jumped more than 40-fold to $41 million in 2008 from $1.1 million in 2003, according to SERI. The latest official data was not immediately available but experts predict the numbers have gone up even further over the last couple years.

“North Korea is exporting ever more underground resources in line with the infrastructure establishment in the Najin-Sonbong and Hwanggeumpyeong areas, and its other exports are also related to primary and secondary industries,” he added.

Since November, China has been providing training and tours to its own economic zones for about 100 North Korean economic bureaucrats and academics in charge of cultivating Najin-Sonbong and Hwanggeumpyeong.

They took lectures on SEZ management models and development strategies at universities in Jilin and Liaoning and visited bustling industrial districts in Beijing, Dalian and Suzhou, according to Chinese news reports.

In another development, some 50 Chinese enterprises doing business in the North also formed a guild and held an inauguration ceremony in April in Pyongyang, Radio Free Asia reported last week.

The “Chosun China Companies” is designed to speak for its members’ interests and invigorate trade between the two nations, it said. The firms are largely involved in commerce, mining, automobile and bike manufacturing, and the service sector.

As of end-2011, 205 Chinese firms operate in North Korea, according to the Open Source Center run by the U.S. Department of State. That takes up more than 58 percent of the entire 351 joint ventures with foreign firms. Japan came next with 15 businesses and South Korea with 10.

The recent string of steps marks a striking departure from the model of economic cooperation adopted at the inter-Korean Kaesong Industrial Complex, said Bradley Babson, a former World Bank consultant who now chairs the DPRK Economic Forum at the U.S.-Korea Institute at Johns Hopkins University.

Among the notable differences is the possibility for various business models in the new economic zones such as joint ventures and investor benefits including use of various currencies, greater tax incentives, legal protections and managerial discretion regarding labor, he said.

“Whether the more liberal provisions that have been adopted for the economic zones on the Chinese border will find their way into future evolution of the Kaesong zone, will be an important question to monitor over the next couple of years,” Babson wrote on the forum’s blog. 


Tighter reins

However, concerns remain here that the North’s asymmetrical economic dependence on China may dwindle or neutralize Seoul’s only effective leverage over inter-Korean ties.

Some experts also question the wisdom of the South continuing to maintain stalled exchanges, citing the possibility of Pyongyang becoming a “fourth province in northeastern China.”

“There is a high possibility of a sharp decrease in China’s influence on North Korea if other internal and external factors improve the North Korean economy,” said Yang Un-chul, director of unification strategy studies at Sejong Institute.

“If North Korea enhances relations with the South, U.S. and Japan via a political breakthrough, trade with China will most likely see a dramatic decline.”

The increasing cooperation between the two communist states coincides with a virtual freeze in inter-Korean economic cooperation.

The Lee Myung-bak government halted nearly all personnel and materials exchanges with the North following its sinking of a warship in 2010. The military-focused regime, which denies its responsibility, launched artillery shells months later on a South Korean border island in the West Sea.

The Kaesong Industrial Complex is the only up-and-running economic program between the two Koreas at present. Though it has weathered several political blows in recent years, it has shown little expansion since the conservative president took the helm in February 2008.

“While bilateral economic cooperation between the two Koreas is subject to political pressures from both sides, the Kaesong Industrial Complex has withstood severe strains in recent years and has potential for further expansion under the new South Korean administration that will be elected in December,” Babson said.

Despite international sanctions and chronic food shortages, Pyongyang’s autocratic government showed considerable resilience and unwavering nuclear ambitions.

That is partly because of China’s political and economic backing, which some experts say may complicate the enforcement of the bans and help cool the cash-strapped North’s potential zeal for reform.

“Beijing’s responsibility for the success or failure of sanctions against North Korea is great,” Mark Hibbs, a senior associate in Carnegie Endowment for International Peace’s nuclear policy program, said in the Washington-based think tank’s posting.

“China has halted significant exports to Pyongyang’s nuclear and ballistic-missile programs, but its approach to sanctions is minimalistic and informed by Beijing’s interest in maintaining something like the political status quo in Northeast Asia.”

By Shin Hyon-hee (heeshin@heraldcorp.com)