North Korean Economy under US-North Korea Negotiations and Economic Sanctions

 

Introduction

 

The "US-North Korean summit meeting" was held on June 12, 2018, and the situation on the Korean peninsula began to move greatly toward easing the tension. However, the international community's assessment of the summit is low. For the international community who believes that Kim Jong-Io succumbed to the pressure of economic sanctions and responded to denuclearization negotiations, the summit that did not conclude any detail of the denuclearization to be tackled by North Korea—contents, procedures, and timeline—is meaningless. Did, however, the chairman give in to denuclearization negotiations, because of succumbing to economic sanctions? Did maximum pressure really work? If so, the North Korean economy may have been exhausted by sanctions and the society in danger of collapse due to the accumulation of dissatisfaction. Accounts of travelling and visiting in Pyongyang, however, are packed with descriptions of the "Dawning Street" (려명거리) with high-rise condominiums and of families enjoying meals and shopping[1]. What could provide explanations to these inconsistencies?

 

Status-Quo of Fulfillment of Sanctions, through China-North Korea Trade

 

Economic sanctions of the United Nations Security Council have been further strengthened by the fact that China, which is said to be the lifeline of the North Korean economy, participated fully and the sanction included crude oil and petroleum products: Resolution 2375 (adopted on September 3, 2005) and 2397 (adopted on December 22 same day). Looking at the transaction status of those items banned by the two resolutions based on China's trade statistics, imports and exports are suspended, respectively in January and March 2018[2]. From April onwards, the figures for each item are no longer publicized, but it seems that the sanctions of these items are still taken in place. As a result, imports from China to North Korea from January to November 2018 were 1,917.55 million dollars, a decrease of 88.6% from the same period of the previous year[3]. North Korea's foreign currency earnings declined sharply in 2018, going down to only the 10% of the figure in 2017. The amount of China’s export to North Korea was 2,010.63 million dollars—a decrease of 33% from the same period of the previous year—and North Korea's trade deficit against China amounted to 1,811.887 million dollars. This deficit could be covered by revenues from cross-border tourism of active Chinese visitors to North Korea, notably Rason, Shinuiju. Essential items that North Korea has been dependent on China, such as production parts and raw materials, are likely to have been procured through the border trade deductible framework, as it was the case when the country imported corn, or a product once sanctioned[4]. Details, however, are unknown.

 

Crude oil and petroleum products are believed to have been two categories that were affected largest by export restrictions by China. With the year of 2013 when 578 thousand tons was exported being the final year, any export of these products have not been recorded to date. The international community do not have utter conviction around the cease of trade between the two countries. However, in reality, China do not have the capacity to export towards China[5]. Exporting countries of crude oil are obliged to report on the volume of monthly export; no report has been submitted from China to the sanctioning committee. Regarding petroleum products, the Resolution 2397 restricted the maximum export volume of year 2018 to 500,000 barrels per year (60 thousand tons); and the resolution mandated monthly reports regarding the export volume of the products. The cumulative total export volume by China and Russia of the year in September 2018 were only 27,978 tons (12,874 tons for China, and 15,104 tons for Russia)[6]; and the volume would not exceed the limit.

 

This bids a question: North Korea imported 290 thousand tons (2.4 million barrels) of petroleum products from China in 2004, and over 95% of which was fuel such as gasoline and light oil[7]. How has North Korea been dealing with the shortfall? Not only Pyongyang, but even also local cities such as Hamhung, and Wonsan saw a sharp increase in the number of taxis[8]. The gasoline price in Rason in August 2018 was stabilized at 9 yuan per kilogram, and thousands of North Korean fishery boats are said to be gathering for squid fishing at the Yamatotai (대화튀) of the Sea of ​​Japan[9][10]. Off-shore delivery of petroleum products is also difficult to conduct amid the surveillance by countries concerned. How does North Korea procure fuel?

 

Economic Independence through C1 Chemistry and Remedial Measures

 

North Korea’s stable procurement of fuel in the absence of import of crude oil depends, as the country public admits, on C1 Chemistry, or production of synthetic fuel by coal gasification. Ethanol synthesis through coal gasification is not limited to the production of synthetic fuels. It also enables the production of various chemicals such as fertilizer, resin, and olefin. Non-coke steelmaking technology has also been established to produce iron and steel, "main iron (주체철)" is being produced in North Korea. Import substitution of steel could lead to the domestic production of machineries. The "Rodong Sinmun (로동신문)" reports mass production of tractors with a domestic content rate of 98.7% and the production of domestically produced 5-ton stacked trucks[11].

 

The development of C1 chemistry also contributed to increased food production through securing fertilizer and agricultural materials. According to FAO, the Kim Jong-un regime has achieved nearly 5 million tons of cereal production, achieving self-sufficiency; and the volume of rice harvest has also achieved nearly 2 million tons (polished rice)[12]. Behind the increase of grain production, we cannot dismiss the Field Responsibility System introduced under the Kim Jong-un regime and its encouragement of farmers further producing agricultural products. Farmers receive payments in kind on the basis of quality and quantity of labor, and they would have the capability to sell the payments at the price exceeding the official prices. The conferral of production organization rights and sales rights to farmers also seems to have functioned as an incentive for increased production.

 

Such remedies were also introduced in the private sector as the socialist responsible management system of enterprises, and a wide range of management rights was granted to corporate offices[13]. As a result, many small and medium-sized enterprises switched from planned production to custom production, producing consumer goods that satisfy people's demand as well as increasing sales[14]. It provides explanation to accounts that shops in North Korea now has a variety of domestically-produced goods instead of imported goods from China.

 

Conclusion

 

As detailed above, while the North Korean economy is undergoing severe economic sanctions, the economy has started to establish independency that would not be affected by economic sanctions, through establishing domestic production systems of raw materials, fuel and equipment[15]. It is not because he gave in to the pressure of economic sanctions that the chairman sat for the negotiation. As the unheralded third generation of the authority, the chairman would inevitably have to face the collapse of the regime due to the popular dissatisfaction, unless he improves the populace’s livelihood with economic advancement. Suppressing the potential contenders in the country to strengthen the regime’s ruling, the only economic advancement they could have access to is one with constant fear for US attacks. North Korea had had no option but to opt for the Byungjin line; the completion of “nuclear” geared the country into the economy-centered route, and the country seemed to have decided to embark on negotiation with the United States with “nuclear” as a card on the table.

 

The Pyongyang Joint Declaration of September 2018 bid de facto end of the Korean War; and the ending of the war, such as landmine removal and the withdrawal of the observation posts in the Joint Security Area has begun. The Vietnam Summit may lead to an official declaration of end of the Korean war by the United States and the DPRK and the accompanying security guarantee of North Korea.  This may also kickstart the current deadlocked negotiation between the United States and North Korea and see a start of talks on the details of denuclearization. With sanctions being relaxed simultaneously, logistics and energy cooperation within the region would start[16]. President Trump's upcoming decision will be awaited.

 

***The views expressed herein do not necessarily represent the opinions of NKR or Yonsei Institute for North Korean Studies.

 

References

East Asia Trade Study Group. "Survey on the Recent North Korean Economy, 2017." Japan External Trade Organization, March 2018.

East Asia Trade Study Group. "Survey on the Recent North Korean Economy, 2016." Japan External Trade Organization, March 2017.

Kim, Suk mi. "Interview Note: Visit to Wonsan, a City Vibrant with Tourism Development." Joseon Economic Data. Volume 6, No. 4 (December 2018).

Kim, Suk mi. "The Advent of the "Powerful Socialist Civilized Nations "and the Change of Lifestyle." Joseon Economic Data. Volume 5, No. 4 (December 2017).

Mimura, Mitsuhiro. "Contemporary Korean Economy." Nippon Hyoron sya, September 2017.

Moon, Ho-il. "Transformation in Management of Production Division - Socialist Corporate Responsibility Management System and Farm Responsibility System." Edited by Masahiko Nakagawa. International Sanctions and Korean Socialist Economy. Institute of Developing Economies, August 2017.

Ogawa, Yuhei "Open the Era of the East Asia Mediterranean." East Asian Studies. No. 18 (September 2015).

Ogawa, Yuhei. "Food circumstances of Korea." Industry and Economy. Volume 14 No. 3/4 (March 2000).

Ogawa, Yuhei. "Northeast Asia Regional Economic Cooperation under New International Situations." East Asian Studies. No. 22, 23 (March 2018).

Park, Jae-hun. "Reportage: Economic Condition in Regional Cities, Autumn 2018." Joseon Economic Data. Volume 6, No. 4 (December 2018).

Saito, Yoriyuki. " Sustenance of Socialist Economy Control System and Implementation of New Economic Policies in North Korea." Northeast Asia Area Study. No. 27, March 2016.

 

 

 

[1] An example could be found in a report by Kim (2017)

 

[2] Global Trade Atlas

 

[3] Monthly statistics of trade, Republic of China(www.customs.gov.cn/customs/302249/302274/302277/index.html)

 

[4] Chosen-zoku in the border-line area of China (Korean Chinese) are allowed to conduct trans-border transaction without tax of up to 8,000 CNY per person, and as long as it is within the limit, one could conduct transaction without recording it on trade statistics. Details could be reached in Ogawa (2000 and 2015)

 

[5] Exports are recorded on trade statistics, yet all the records are for bonded crude oil: re-exportation of imported oil from a third country (Russia). It does not mean China has the surplus to export.

 

[6] UN.SCSO(https://un.org/sc/suborg/en/sanctions/1718/implementation-reports)。

 

[7] Global Trade Atlas

 

[8] Refer to [Kim 2018] and [Park 2018]

 

[9] Mimura, “on the status-quo of Rason,” East Asia Economic Information Vol.ⅡNo.32, October 2018

 

[10]Nihon Keizai Shinbun, October 30, 2018. According to the Fishery Agency, 4893 boats from North Korea were warned of security alert from May through October 25, 2018 (the Fishery Agency of Japan HP:www.jfa.maff.go.jp/attach/pdf/index-73.pdf)

 

[11] [East Asia Economic Information] p. 26

 

[12] FAOSTAT(www.fao.org/faostat/en/)。

 

[13] [Moon, 2017] p.p. 77-80

 

[14] [Moon, 2017] p.p. 72-76

 

[15] Report by the Chairman Kim Jong-un at the 7th Congress of the Workers' Party of Korea ([East Asia Trade Study Group 2017] p. 107)

 

[16] Regional economic cooperation of energy and logistics with North Korea incorporated would lead to regional security [Ogawa, 2018]

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