One of the key pillars of the Kim Jong Un-era economic reforms was foreign trade. Foreign trade is vitally important to a country that has a shortage of foreign currency, and one that has to import all its oil, a substantial quantity of industrial goods, and inputs for industry and agriculture.

Major changes to the organization of foreign trade mean major changes to who makes money, how much, and through what means. They also have a serious effect on the growth prospects for the country going forward.

Hello again central planner

The reforms introduced under 2015 revisions to the Foreign Trade Act expanded the definition of potential trading enterprises. Arguably more importantly, however, trading enterprises could now set their own prices for commodities they traded outside the central plan (in North Korean legalese: “centrally-set indicators”). 

This has now been reversed. Revisions to the Foreign Trade Act adopted in September 2018, but only made public recently, now indicate that all trade prices now have to approved by the Ministry of Foreign Trade (MFT) – as they used to be under the old system.

This is a seismic change, and means that many organizations in the North Korean economy will have to now wait for central approval for all new contracts they wish to sign with foreign partners.

This may create significant bureaucratic bottlenecks, or worse, serious risk of losing their right to trade, for North Korean foreign traders who have to act in real time to take advantage of market opportunities. 

This is only one of several changes, however, that point to a recentralization of the foreign trade system. Previously, under the 2015 revisions, enterprises/organizations with approval to engage in foreign trade could have their license taken away after three years if their performance was judged to be poor.

However, under 2018 revisions to the Act, entities with permission to trade have to receive reauthorization of their trading operations yearly from the Ministry of Foreign trade regardless of performance. 

The Ministry of Foreign Trade has as a result been granted sweeping veto powers over the prices (contact negotiation) of foreign trading entities, but also annualized veto powers over their continued ability to engage in foreign trade. 

Computers, Control and Centralized Commerce

The newly revised act also places a requirement on firms to enroll in the electronic process framework of the Ministry of Foreign Trade (MFT), in order to “guarantee swiftness” with imports and exports.

This would appear to give the state greater access to information from trading enterprises about their trade operations. 

Using a centralized electronic system of records and approvals, which this new revision to the law would appear to mandate, may indeed speed up customs, but will also give the state greater access to information that may aid in the extraction of additional tax revenue.

Added to this, the newly revised law no longer recognizes lower unit’s right to create their own foreign trade plans. As the 2012 Trade Act previously mandated, the State Planning Committee (SPC) is supposed to act as the planner of foreign trade, and enterprises and other trading entities are not allowed to draw up their own plans in addition to any that the SPC might give them. 

Now, enterprises/other entities are only allowed to draw up monthly plans on the basis of the annual plans given to them by the SPC. The MFT is also now mandated to create the country’s foreign trade strategy in order to fulfil the state’s trade policies.

Previously it was only required to “lead” (i.e. regulate). There are multiple additional references to “control” being vested in central institutions – the Ministry of Foreign Trade and the State Planning Committee – where previously they were entrusted just with ‘leadership’.

To ensure that the MFT makes the right plans and “gets the price right,” it is also required to now do country, region and product (indicator) surveys, scouting for potential business opportunities overseas.

Previously, this was implicitly left to enterprises and trading entities. But now that they do not have control over prices for any of their product, and thus that all contracts have to be centrally approved, the MFT has to know whether the price is right. 

This creates inefficiency, to be sure, but will probably enable the state to capture more of the revenues from foreign trade than they were able to under the radical decentralization of the 2015 system. 

The State Planning Committee (SPC) is now also tasked with determining what cannot be exported and which items are subject to export limitations (i.e. special controls).

Previously, it was the SPC and MFT that had co-decision making power in this area, but it would appear that these powers have now been given entirely to the SPC – who do appear to out-rank them in the bureaucracy. 

Crimes and sanctions

The law is also interesting for imposing new powers to restrict trade with countries that have sanctioned or otherwise discriminate against North Korea.

These appear to have been put in place to codify the right to retaliate against the UN, the U.S., and other sanctions regimes that have been strengthened since 2015.

Finally, the law includes a whole new section on punishment and dispute resolution. These include completely new provisions that allow the MFT to stop all trade that has not been given its prior approval, and also to take away the trading rights of entities that have engaged in such transactions.

It also allows for such trading rights to be taken away where trading entities have not gotten their annual reapproval from the MFT.

Overall, this is a step backwards for North Korean reform in the foreign trade sphere. This is a vital part of the country’s economy, and these changes will likely stifle innovation, re-empower bureaucrats at the center, and enable greater revenue extraction from lower units. 

This may be good for the center in the short-term, but in the longer run, entrepreneurial enterprise managers will have far fewer incentives to produce new products for export.

Instead, the law will mandate them to merely fulfill the trade plans handed down from on high by bureaucrats in Pyongyang, who will take a larger cut of the foreign currency earned as a result. 

Edited by Oliver Hotham

Featured image: NK Pro