The Chinese government surprised North Korea watchers, traders and even its own steel mills when, on February 18 it announced it would not import any of the DPRK’s coal for the remainder of the year.
The announcement appears to mark a drastic shift in policy, with Beijing historically reluctant to implement changes that could trigger wider instability within the DPRK. While a recent statement from China’s Foreign Ministry implied its traders had already hit a dollar value quota outlined in UN Resolution 2321, if the embargo is implemented fully the DPRK’s coal industry now faces a very lean ten months.
North Korean anthracite – a clean-burning form of coal used by the Chinese steel industry – has become Pyongyang’s most valuable export. In recent years, the DPRK’s coal shipments have trended upwards, and last year earned the North Korean government upwards of $1 billion. The figure accounts for nearly half of all North Korea’s exports, and a sharp and sudden reduction could have wide-ranging economic consequences.
NK News asked five experts on how China’s announcement could impact the North’s economy, trade and coal industry, and what indicators could be used to ascertain if traders are adhering to the embargo.
The following North Korea specialists responded in time for our deadline:
- William Brown, adjunct professor at Georgetown University School of Foreign Service and former Senior Advisor to the National Intelligence Manager for East Asia in the Office of the Director of National Intelligence
- Dr. Keun-Wook Paik, associate fellow of the Energy, Environment and Resources department at Chatham House
- Alison Evans, Deputy Head, Asia-Pacific Desk, IHS Country Risk
- Sheena Chestnut Greitens, nonresident senior fellow with the Center for East Asia Policy Studies
- David Von Hippel, senior associate at the Nautilus Institute of Security and Sustainability
1. How will Beijing’s announcement affect North Korea’s trade and economy, and how quickly?
Alison Evans: Generally trade volume with North Korea depends more on domestic demand in China than on international diplomatic measures, including sanctions; the Chinese central government continues to push policies aimed at reducing domestic coal consumption, both for environmental reasons and due to increasing prices.
This push would substantially harm North Korea’s income from trade in the medium term anyway, but the announced suspension – if enforced – is likely to catalyze a decline in North Korea’s economy this year. The value of this suspension could reach $1 billion, amounting to a 3% reduction in North Korea’s GDP, but the actual economic damage would likely be greater because China is one of North Korea’s few sources of hard currency.
David Von Hippel: The reduction in coal imports by China, if not offset by either exports of coal from the DPRK to another country and/or by “off-books” trade in coal to China or elsewhere, would result in a substantial decrease in the DPRK’s foreign currency earnings. As most of the DPRK’s reported imports come from China, and assuming the Chinese traders will require payment for goods sold to the DPRK, the degree to which the DPRK economy will be affected, in terms of reduction in the availability of consumer goods and, to some extent, food, will depend on to what extent the Chinese government allows the DPRK’s trade deficit with China to expand, therefore essentially subsidizing DPRK consumption, perhaps due to “humanitarian” considerations.
Reductions in coal exports would result in reduced income to DPRK coal miners, coal traders, and the communities in which they live, as well as to DPRK officials that are involved in coal mining for export. To the extent that the effect of coal export reductions are not softened by measures such as those above (and described in our article/report), the impacts on the DPRK could conceivably be noticed relatively quickly, in weeks or months, perhaps, especially in areas of the country supported by export mines.
William Brown: This implies a big cut in North Korea’s earnings, much more severe than any sanctions to date. Last year, North Korea earned $1.2 billion on these sales and, up to recently, its planners might have counted on closer to $2 billion in 2017, given big price hikes late last year. This kind of a loss cannot be made up in any given year, especially given the sanctions on other raw material exports.
The real impact on coal mining and coal miners might be slow in developing, but more interesting might be the financial impact, as could be shown in Daily NK’s exchange rate and prices index published every two weeks. If a market economy is indeed grabbing some hold in North Korea, we should see an immediate sharp rise in the dollar against won, and eventually a jump in rice prices.
I’d say a panic is not out of the question if information flow inside North Korea is improved. Pyongyang will have to figure out a way to react, which could be very interesting. On the other hand, if the prices do not react, that will be telling us something as well. Either information flow is lacking or the market is less important than what we have thought.
Sheena Chestnut Greitens: It depends a lot on whether the ban is fully implemented. If it is, we could see the North Korean economy fairly quickly run into hard currency problems: natural resource exports, including coal, were a large part of China-DPRK trade, which is the largest part of North Korea’s official trade globally.
Longer-term, the adverse effect on balance-of-payments will also be significant (again, if the ban is upheld and actually implemented).
Dr. Keun Wook Paik: If China’s North Korea coal embargo is strictly implemented, it will be very painful for the North, and the minimum six months embargo will hurt, and the 12 months embargo would deliver a real impact.
2. If the ban were not being adhered to, how might that be verified and what methods might North Korea or China use to circumvent it?
David Von Hippel: Key means to circumvent the ban include off-books coal trades, China allowing the DPRK trade deficit to increase, China providing goods to the DPRK “off book,” and the DPRK finding other markets for its coal.
Besides direct observations of and/or reports by traders, some of these changes in exports may be tracked through customs statistics, where increasing trade deficits between China and the DPRK and/or changes in exports of products from China to the DPRK may show up.
Sheena – Chestnut Greitens: In addition to currency/exchange rate fluctuations (big moves in the value of the won on the black market relative to official figures), I’d also look at how North Korea’s overall patterns of economic activity change.
North Korea has weathered other economic shocks by being creative and adaptable in finding new ways to generate revenue. This move by Beijing, however, is significant enough that, if is really being implemented and sustained for the duration of 2017, it would put enough pressure on the North Korean economy that we should see them start looking for other sources of revenue – licit or illicit.
Alison Evans: Even if China’s central government wishes to adhere to the suspension, Chinese customs may not have the on-the-ground capacity to enforce it.
Particularly in Dandong, we are likely to see efforts to circumvent any sudden ban through alternative methods of transporting goods.
Dr. Keun Wook Paik: If the embargo is handled as a gimmick or smoke screen, the track of trading or supply will be detectable.
Assuming that the majority of the coal supply will be supplied to China by ship, the trading will be easily chased by satellite tracking. If North Korea or China intend to continue undercover trading of sanctioned coal, they will come up with a new plot (though I cannot guess what it will be).
William Brown: A complete ban might be easier to enforce than the partial ban proposed by the UNSC in November which Beijing might have found to be difficult to enforce.
But small amounts of trade won’t matter. China’s Customs service is very good about reporting coal trade in its monthly releases, even showing in December that it imported much more than it should have, given the November sanctions.
So, I expect, one way or the other, we will know generally what is happening. I also expect, however, that Beijing will be reluctant to talk about it, considering it to be its own business with North Korea.
3. What would be the consequences to the North’s coal industry in terms of output, trade and use within the DPRK, and could North Korea sustain its coal mines in the face of a ban?
Dr. Keun Wook Paik: If the sanctions are applied strictly, the impact on North Korea’s coal industry will be significant, as the new market finding under the international sanctions will be very difficult.
However, I assume North Korea will not expect the sanctions will last that long, and will continue the production for the time being. If the embargo continues well over six months, North Korea will struggle to find the improvised options.
The problem is that there are not many alternatives to minimize the damage to their coal industry.
David Von Hippel: Some of the coal now destined for exports, perhaps 15 to 25 percent, could be sold in and used by DPRK consumers, but probably not all of the export coal. This means that some mines would likely close.
Depending on whether or not the DPRK finds new foreign markets for the approximately 5 to 6 million tonnes of coal remaining in its 2017 allotment under UNSC sanctions, China’s announced ban on further coal imports in 2017, coupled with the UNSC sanctions, amounts to a decrease of approximately 10 to 18 million tonnes of coal exports in 2017 relative to exports in recent year, which is a substantial fraction of estimated DPRK coal output.
So unless off-books exports are substantial, a significant slow-down of production and/or closing of some mines seems likely.
William Brown: Coal is certainly in demand in North Korea so the question revolves around at what price and how well the planning authorities can require it to be mined and distributed through the state system, at the state’s fixed prices and wages.
Stalinist planners might even like the cut-off, thinking they can regain control and send it to fertilizer plants and power plants that need the coal, instead of exporting it.
Sheena Chestnut Greitens: Well, they could obviously continue to take the coal out of the ground and stockpile it in hopes that the ban is lifted or that it can be worked around via smuggling and illicit channels.
Given the lack of infrastructure and transportation alternatives to exporting to China, though, the DPRK’s coal export options would be quite limited (there’s some possibility Russia could absorb some of the exports, but it’s unclear whether Russia would be willing to do so and also whether they’d absorb the same volume that China had been importing.)
Alison Evans: North Korea may be able to find alternative markets for its coal exports.
However, I think it is more likely that coal not exported to China would first be consumed in the domestic market, only at a lower price, as with other goods not exported to China in H1 2016.
4. Limited coal exports are not unprecedented, the DPRK didn’t export to China before the year 2000. How might North Korea be able to adapt to the ban?
William Brown: Before 2000, North Korea received lots of aid from the outside world. Its coal trade was essentially barter: anthracite exports for bituminous imports. These exports now are far more important to its economy so the impact will be much greater. With fewer exports, and with no credit or aid, imports of vital industrial and consumer goods will drop.
If Pyongyang’s policy makers, most importantly Kim Jong Un, think through their predicament, however, they should be able to gradually offset the loss by increasing exports of textiles and other labor-intensive products. But this will require better incentives and improved productivity that will only come through market liberalization and relaxed central controls. So, this must be a big headache for Pyongyang’s policymakers. Will they push to return to more centralization, and the command economy, or will they continue to liberalize? Not an easy choice.
David Von Hippel: The DPRK may have had other sources of foreign currency income in previous years when coal exports to China were small, and/or may have made domestically more of the products that it now imports from China, and/or may simply have consumed fewer imported goods.
To the extent that China does not help by providing more goods either off-book or on an effectively concessional basis (see above), the DPRK may adjust to the reduced income from coal imports by reducing consumption of imported goods (possibly with humanitarian consequences), seeking other markets (licit and illicit) for its goods, boosting other industries (for example, clothing manufacture for export to China), or increasing labor exports (for example).
The impact of China’s ban and the UNSC sanctions on the DPRK weapons programs depends on the extent to which the DPRK chooses to share the burden of the ban/sanctions between the military and civilian economy.
Sheena Chestnut Greitens: I’d expect that Pyongyang will look for new revenue-generating sources, licit and illicit, to make up the immediate difference.
We may also see some outreach to Beijing, Seoul, or Washington to try to restart the nuclear talks to get an economic thaw.
Dr. Keun Wook Paik: The point is the coal export is the biggest revenue source from the North Korea’s exports, and China was the savior.
If China is not on North Korea’s side, it will suffer hugely. North Korea’s adaptability to the ban will be very limited, (and it might pursue) illegal trade, with military weapons, drugs, and fake currency notes.
Featured image: Alex McLean
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