Author: Kevin Gray, University of Sussex

Much has been made of the recent cooling of diplomatic relations between China and North Korea and Beijing’s increased emphasis on Seoul. Deteriorating relations since 2012 were confirmed most recently by South Korean President Park Geun-Hye’s prominent position at China’s 70th anniversary celebrations of the end of World War II. For those looking forward to North Korea’s rapid demise and to the reunification of the peninsula on Seoul’s terms, this growing distance between Beijing and Pyongyang has been greeted with cautious optimism.

But in terms of gauging the sustainability of the North Korean regime, it is worth looking beyond these outward manifestations of public diplomacy towards the question of how these political dynamics have affected economic exchange between the two countries.

In reality, economic relations between China and North Korea have remained largely unaffected by these tensions. Bilateral trade has risen sharply over the past decade, from a total of UStpf=board/list&board_code=11.7 billion in 2006 to US.54 billion in 2013. As with China’s trade elsewhere with the developing world, mineral resources have formed a significant part of this growing trade. In 2013, exports of coal and iron ore accounted for 47 per cent and 10 per cent respectively of total exports to China.

North Korea’s deepening trade relations with China should be understood in the context of South Korea’s so-called ‘May 24th’ sanctions, put in place in 2010 following the alleged sinking of the South’s Cheonan corvette by the North. Pyongyang responded to the loss of foreign exchange earned through inter-Korean trade by rapidly reorienting its trade relations towards China.

Trade with China has also been accompanied by increased investment. Whereas Chinese investments were in the past limited to small-scale operations — restaurants, shops, fisheries — they have increasingly taken place in the natural resources, manufacturing and distribution sectors.

But there has been a downturn in trade since 2013 of around 2.8 per cent. This can be partially explained by the fact that, for some unspecified reason, Chinese Customs stopped recording crude oil exports to North Korea in 2014. Yet the first seven months of 2015 have shown a much sharper decline in trade of 13.59 per cent.

There is little evidence to suggest, however, that this decline has been a result of political tensions. As a recent report by the Korea Institute for International Economic Policy (KIEP) has argued, the downturn is a result of the broader slowdown in the Chinese economy and the corresponding decline in demand for raw materials.

With regards to coal, North Korea has been able to partially counter the impact of declining prices through increasing the volume of exports. But the value of iron ore exports for the first seven months of 2015 has seen a much sharper decline of 71.6 per cent — a greater decline than the fall in international prices would suggest. This appears to also be a result of internal domestic factors. As the Korean Development Bank has recently suggested, North Korean iron ore production appears to have been negatively impacted by the severe spring droughts experienced over the past two years.

Given North Korea’s dependence on hydropower, droughts have negatively impacted energy production and halted production at Musan iron ore mine, the largest in the North Korea, leading the mine to lay off approximately 40 per cent of its workforce. So although declining prices do pose a longer-term challenge to North Korean mineral exports, the sharp decline in iron ore production in 2015 can be seen, weather permitting, as temporary.

While mineral exports have declined, clothing exports under consignment-based processing arrangements (whereby materials are exported to North Korea by Chinese corporations, processed by North Korean labour and then re-exported back to China) have seen a steady increase. Between 2013 and 2014, clothing saw an increase of 38 per cent, with further increases in 2015. Though the smaller scale of this trade will not offset the decline in mineral exports, it does underline the attractiveness and potential of North Korea’s competitive wage advantages for Chinese businesses.

Arguably, a stronger case can be made that worsening political relations have impacted on China’s developmental cooperation with North Korea. Since the late 2000s, Beijing and the provincial governments of Liaoning and Jilin have pursued joint cooperative projects with North Korea under the Changchun–Jilin–Tumen Pilot Area and Liaoning Coastal Economic Belt Development Plans. These projects appear to have lost steam in recent years, although this is likely due to the poor returns on existing large-scale investments.

Still, as KIEP have further argued, Chinese investment in North Korea has continued to grow, albeit taking the form of a relative shift away from government-backed projects towards investment by profit-oriented Chinese small and medium enterprises. As such, economic exchange between the two countries is increasingly being conducted in accordance with market principles.

There is little evidence to suggest that political tensions have played a role in the recent downturn in trade between China and North Korea. Indeed, the exchange has become so significant to China’s economically depressed border cities and regions that Beijing is unlikely to take any steps to significantly disrupt it. Given the ongoing marketisation of the North Korean economy, this increased exchange is likely to expand and will continue to confound expectations that Beijing will move to sever relations with Pyongyang anytime soon.

www.eastasiaforum.org/2015/09/29/china-isnt-about-to-abandon-north-korea/