By William Brown
ICBMs are not the only things soaring in North Korean skies. Comprehensive second quarter data released by China Customs last week shows a huge jump in North Korea’s trade deficit with China—sharply falling North Korean exports and flat imports, a double bad combination. And, potentially troubling to the Kim regime, the composition of trade seems to be promoting market activity rather than the decrepit, but still enormous, command economy.
Pyongyang has been able to keep a clamp on the exchange rate—won can be traded informally for U.S. dollars in markets around the country—but likely at some cost to the government’s reserves and its ability to expand money supply without sparking inflation, and perhaps with a little help from the balloons. But food and other commodity prices, meanwhile, may be on an upswing as drought followed by flooding diminishes prospects for the critical fall rice crop, and as worries about Chinese supplies may have pushed up gasoline and diesel prices. An informal inflation index produced by DailyNK has inflation rising to a 16 percent rate in July, suggesting Kim’s signal achievement of fighting inflation may be at risk.
Officially, the Chinese data show a $174 million North Korean deficit in June and $574 million for the quarter, both at record levels. Considering China has taken its crude oil exports “off the books,” the actual North Korean deficit is probably even larger — in the graphics below we have added between $115 to $50 million each quarter to North Korean imports since 2014 to account for the oil.
How North Korea finances this large deficit in the face of sanctions on its nuclear and missile activities is not well understood, making policy analysis of those sanctions next to useless. Even South Korea’s Bank of Korea, which bravely estimates North Korean GDP, says it can’t guess at the country’s balance of payments or its hard currency reserves. But for the sake of argument, and given the trade deficit with China has averaged about $200 million a quarter for the better part of a decade, it would seem reasonable to expect that about this amount of hard currency is earned or borrowed in a combination of net trade with other countries; foreign aid to North Korea including the offset for the crude oil; UN and other international expenditures inside North Korea; small amounts of inward foreign investment and loans; remittances from overseas workers and refugees or Korean immigrant families in Japan, South Korea, China and Russia; and tourism.
North Korean Exports Labor Intensive and Mining Products
North Korean exports to China fell to only $361 million in the second quarter, the lowest level since 2010, and even this was suppported by generally higher prices for most items. Major export commodities included:
None of these items would appear to be big hard currency earners for the regime, although they help provide employment. Labor intensive textiles exports have grown in recent years as the industry makes better use of its antiquated mills, allowing exporters to pay workers directly in some cases and thus improving productivity of labor and capital alike. Ore exports would seem problematic, given the UN sanctions against them, but Chinese firms were said to have invested heavily in the huge Musan iron ore complex on the border with China some years ago and may now be recouping investment costs by trucking the ore over into China. This mine previously served North Korea’s largest industrial complex, the Kimchaek iron and steel mill in Chongjin, which is now dilapidated and only marginally productive. So the iron ore earnings may be coming at the expense of higher value-added steel products once exported from that plant and are likely controversial, even in North Korea, as they are thought of as a giveaway of the nation’s natural resources. China has also invested in a copper mine, and likely in other non-ferrous metals, but results from these are spotty and now largely sanctioned. Fish products are essentially traded by fishing boats, with flows going both ways depending on the season.
Textiles lead North Korea’s imports
Imports from China also appear to be increasingly driven by consumer rather than government or investment demand. Textiles, cell phones and television imports are growing at the expense of some industrial inputs and agricultural inputs, and cereals. Petroleum product imports, plus gasoline and diesel fuels, remain sanctioned and low.
Visibility of Chinese-made consumer products among the general public is spreading the suggestion that the economy is doing fairly well—South Korea’s Bank of Korea estimated last week that North Korea’s proxy GDP rose 3.9 percent in 2016, the fastest in well over a decade and this despite the sanctions. But a large question is how far the regime will let this go, given what is clearly a big drain on limited foreign exchange. Grain imports also rose slightly in the second quarter but remain much lower than in the recent past, and may need to rise much more if the fall harvest turns out to be weak. Some grain is provided by foreign aid agencies, purchased in China and shipped to North Korea, thus counting as a North Korean import in the trade accounts, but with an offsetting credit in the (unpublished) transfers account.
William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.
Illustration by Jenna Gibson, KEI.