Sino-North Korean Trade at Record High Despite Beijing Criticism

While China uses its public voice to openly criticize North Korea's nuclear test, behind-the-scenes trade is at a record high.
February 14th, 2013
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Following North Korea’s nuclear test this week, the Chinese Ministry of Foreign Affairs (MFA) said in a statement that the Chinese government “is firmly opposed” to the test and that “China always supports the denuclearization of the Peninsula,” actively criticizing the actions of Pyongyang in more stronger terms than usual.

The test led some Chinese analysts, and more than a few Weibo (Chinese Twitter) users, to call for China to seriously reevaluate its North Korea policy. But trade figures reported by Japanese news service Kyodo last week reveal why China may be reluctant to do so. Despite crippling sanctions related to the North’s missile and nuclear programs, some of which China has agreed to enforce as a member of the UN Security Council, bilateral trade between the two has increased to a record high of $6.03 billion – twelve times the 2000 total.


Much of this growth has been driven by natural resources, with China remaining the North’s main source of oil, while the North’s primary export to China is minerals, especially iron ore. The North has also begun upgrading its poor information and communication infrastructure, with computer and component imports from China growing an average of 61% per year between 2005 and 2010.

However, there is also a significant consumer aspect that cannot be measured because much of it derives from the underground trade in everything from Chinese electronics and clothes to bootleg copies of movies and tv shows. This trade continues to thrive, despite reported border closures and increased security.

The number of North Koreans visiting China legally has also risen steadily in recent years. Both Radio Free Asia (RFA) and The Daily NK reported in early January that the number of North Korean visitors visiting China legally in 2012 increased by 18% compared to 2011. The figures were based on the Chinese government’s official “Foreigner’s entry status in January to December 2012” statistics. According to RFA, that nearly three-fourths of all North Koreans visited China for either employment (79,600 people, 44% of the total) or business (55,200 people, 31% of the total).

RFA speculates that the increase is due to a greater number of economic exchanges and joint ventures that have been agreed to between North Korea and China. John Park, a Stanton Nuclear Security Junior Faculty Fellow at the Massachusetts Institute of Technology said “it’s as if North Korea wanted to expand economic development by riding on China’s back.”

“There’s a possibility that the increased number of North Korean workers going abroad will play a crucial role in generating hard currency for the Kim Jong Un government back in Pyongyang.”

Andray Abrhamian of Chosun Exchange told NK News that he believes in recent years “North Koreans have become more interested in gaining technical skills across a variety of sectors. China, because of cost, political, security and trade relations, makes the most sense.” He also noticed on recent visits that the North Korean government appeared to be less worried about exposure to the outside world than before, at least with regards to the more privileged residents of Pyongyang.

Bradley Babson, a consultant on Asian affairs, said another reason for the increasing number of official interactions could be because North Korea is looking at its economic relationship with China as critical to meeting its economic development objectives.

“This has resulted in more official as well as business contacts. Reducing barriers to trade and investment from China as well as expanding potential remittances by allowing more North Koreans to work inside China are both part of this process” Babson said.

China has become especially important economically since tensions between South and North Korea skyrocketed in recent years. The North has launched a major push to develop Special Economic Zones (SEZs) near the Chinese border, especially the Rason SEZ, with infrastructure upgrades to road and rail links underway. The North has also revised its original draft law on the SEZ to take into account criticisms from the Chinese side, resulting in a modified set of laws made public in March 2012. These moves appear to have helped alleviate concerns, as China has reportedly promised to build an airfield and power plant, along with obtaining the rights to three new piers, with total investment potentially reaching as high as $3 billion. But concerns persist with regards to other SEZs, especially the ones at Sinuiju and Hwanggumphyong and Wihwa Islands, where basic issues remain unresolved.

While China can be accused of propping up the North Korean regime, it is also not going overboard to help either.

Though China – North Korea bilateral trade may have increased markedly in recent years, the relationship is still far from Chairman Mao’s image of being as close as “lips and teeth.” For one thing, the total volume of trade pales in comparison to Sino-South Korean bilateral trade, which stands at around $215 billion.

North Korea’s isolation from world markets leaves them at a severe disadvantage. China not only sells its oil to North Korea at a marked up price, its position as one of the only purchasers of North Korean minerals means it often purchases them at a discount. While China can be accused of propping up the North Korean regime, it is also not going overboard to help either, and China has recognized just how poor the investment environment remains.

Last summer, the “Xiyang Group,” a Chinese mining firm, went public with its complaints of dealing with the difficult regime. According to the group, it set up a joint mining venture with a North Korean company in 2007, making substantial investments which were supposed to be guaranteed for thirty years. Unfortunately, once the facility was completed the North Korean company they had entered business with tore up the contract and demanded greater concessions. The complaints were so damning that they prompted a highly unusual rebuttal from the KCNA, the North’s state media agency.

Still, while some analysts saw the most recent nuclear test as a possible breaking point for the Chinese, initial statements point to continuation rather than reexamination of their approach, at least for the time being. China has continued to expand trade with North Korea largely for strategic reasons, and despite the poor investment climate and provocations, the benefits still outweigh the costs. Some of this is based on geopolitical considerations. The most oft-heard argument is that North Korea acts as a buffer state between China and the US-allied South, but this is perhaps a bit overstated. The simpler geopolitical reason remains that, mercurial and unpredictable as it is, North Korea remains China’s only ally in the region, and is not to be discarded easily.

More often overlooked is the economic case for China propping up North Korea. China has had a voracious appetite for natural resources, especially in the past decade, but these investments can lead to a great deal of controversy and backlash (for example, at mining sites in Zambia). North Korea, despite the limitations, holds a great deal of promise: lax labor regulations, greatly reduced transportation costs, and most importantly, trillions of dollars worth of mining potential. But this leaves China in an interesting predicament. Due to sanctions, it is the only country that can take advantage of the situation, and it benefits from this by purchasing North Korean minerals at a discount.

Increased Chinese investments, even at a discount, also benefit the North because China’s stake in the future of the regime increases each year. As Jaewoo Choo points out, “China’s active involvement in the North’s economic affairs naturally increases China’s stakes there. Rising stakes will, and can, lead China to be more concerned with the political and investment environment of North Korea.”

“Chinese assets in North Korea could act as a political instrument in enhancing Beijing’s commitment to protecting the North” said Choo.

It is perhaps these facts that lead Beijing to remain so reluctant to seriously hinder the actions of the regime in Pyongyang. And, until the North does something serious enough to fundamentally alter China’s cost-benefit calculus, could explain why the cycle of provocation and sanction are likely to continue to play out into the future.

Graph Sources: 1, 2.