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North Korea-China trade on restoration path, but Pyongyang faces challenges

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North Korean leader Kim Jong-un, second from left, is seen at a groundbreaking ceremony for a greenhouse farm in South Hamgyong Province's Hamju County in a screen capture of Korean Central Television's broadcast on Feb. 19, 2022. Yonhap
North Korean leader Kim Jong-un, second from left, is seen at a groundbreaking ceremony for a greenhouse farm in South Hamgyong Province's Hamju County in a screen capture of Korean Central Television's broadcast on Feb. 19, 2022. Yonhap

Economic sanctions, COVID risks loom over reclusive state

By Kim Bo-eun

HONG KONG ― North Korea is steadily restoring trade with China after bilateral commerce dived in 2020 and 2021 as the reclusive state closed its border to prevent the spread of the coronavirus.

Trade with China totaled $318 million in 2021, down by 41 percent from the previous year and by 90 percent from levels before the pandemic, according to China Customs data.

Last year's total was the lowest with its northwestern neighbor since Kim Jong-un assumed leadership in December 2011.

But after mainly relying on shipping routes over the two years, railway transport resumed in January, with $60.9 million worth of trade crossing the border in February.

"Trade is still 80 percent less than what it was before North Korea decided to close its borders in 2020," said Soo Kim, a former U.S. Central Intelligence Agency analyst specializing in North Korea, who now works for the U.S. think tank, RAND Corporation.

"So we should not read too optimistically into these upticks until we start to see a gradual and consistent increase in the trade figures over time."

But despite the plunge in trade with its economic lifeline, North Korea was able to survive with increased agricultural production in 2021.

Its economy, though, remains vulnerable to shocks such as coronavirus-induced trade contractions and economic sanctions, data showed.

Agriculture is estimated to account for around a quarter of North Korea's economy, but its rudimentary agricultural infrastructure leaves it highly vulnerable to weather.

Given the moderate conditions last year, agricultural output grew, but North Korea relies on imports for key items for farming, such as equipment and fertilizers, and restrictions on trade continue to expose the economy to risks.

A combination of sanctions imposed due to the regime's weapons programs and border controls amid the pandemic led to a plunge in imports of machinery, industrial parts and raw and subsidiary materials.

This is seen to be weighing on the economy and is set to have longer term effects on production in heavy as well as light industries.

This comes at a time North Korea is in dire need of new investments in machinery, as existing equipment is outdated and in need of repair, according to reports.

Industrial machinery is included on the list of items that are banned from being imported into North Korea.

"Based on trade data, it is presumable that North Korea is focusing on normalizing agricultural production and preventing the spread of Covid-19, and that other industrial production is weak," a Korea Institute for International Economic Policy (KIEP) report on 2021 North Korea-China trade stated.

While resumption of trade with China bodes well for North Korea, analysts pointed out developments would need to be observed for some time.

"North Korean exports did not increase much, spelling trouble since they must be losing foreign exchange," said William Brown, an expert on North Korea's economy, formerly with the US government.

"For the economy to become sustainable, they need to develop export industries, difficult with all the sanctions but possible."

The KIEP report said North Korea's poor amount of exports reflects the difficulties it has in industrial production, and its failure to develop new export items after strengthened sanctions were applied on its exports in 2018.

North Korea's scale of exports is insignificant and items are few, with the imbalance of imports to exports seen as a core problem for North Korea.

Under sanctions, the economy currently exports items such as watch parts and wigs, according to KIEP.

"North Korea is in a deep industrial recession, brought on by the UN sanctions that stopped much of their exports, especially to China, and by the virus induced border closures which have stopped needed imports. This makes them vulnerable to shock, either of a real or financial nature," added Brown, who is a professor at University of Maryland Global College.

"But with production down, there is no surplus to invest, so the prognosis is very poor unless they reform and improve their efficiency levels ― that is, making more with less."

Kim Jong-un's market policies have not been consistent, but the incumbent leader has been more permissive than his father Kim Jong-il, and North Korea's economy has benefited from increased market activity by its population, a research paper from the Korea Development Institute said.

Marketization has been tolerated within the boundaries of a state-run economy and the regime is seen to have turned a blind eye to citizens earning income from second jobs over the past decade, which had burgeoned with North Koreans making substantial income from activities outside their official job with the state.

"It is interesting that most of the jobs bringing in high income in North Korea are related to market activities. In fact, only 2 per cent of respondents replied that they made the most money from official jobs," said the Korea Development Institute report.

"If agricultural activities and cattle feeding are regarded as official jobs, 5 percent of respondents worked in non-market activities from which the largest income derived. In contrast, 95 percent of respondents chose market activities as their main source of income. This corroborates the findings in current literature on North Korea's marketization."

A freight train stands at Dandong Railway Station in Liaoning Province, China, on April 17, 2021. Yonhap
A freight train stands at Dandong Railway Station in Liaoning Province, China, on April 17, 2021. Yonhap

However, over the past year, the North Korean leader has resorted to strengthening the regime's control over the economy under increased isolation owing to sanctions and pandemic control efforts.

Kim Jong-un emphasized in February the need for socialist campaigns and to promote the ideology of "self-reliance" for the country to get through the difficulties faced under sanctions and antivirus measures.

Some experts have stated that the closing of borders ― aside from virus control ― is also intended to strengthen state control over the economy by eliminating activities, such as smuggling.

"(Kim Jong-un) may consider smaller, informal 'markets' ― basically allowing the North Korean people to utilize their resourcefulness to survive," added RAND Corporation's Soo Kim.

"They do not (yet) pose an immediate threat to Kim's rule, and the markets shift the burden of responsibility of provision from the Kim regime to the individuals."

Pyongyang stated recently that it is in talks to resume trade with Russia, but analysts said this is unlikely to take place immediately given Moscow's focus on Ukraine, and that even if trade was to resume, that it would not significantly benefit North Korea.

Russia accounts for only 2 percent of North Korea's trade, with little demand in the other direction.

"Reference of these talks about trade with Russia appear to serve as a message to show off relations with Russia and indicate signs of external cooperation," the KIEP report said.

The report said North Korea could attempt to resume cooperation with some economies in Europe and Southeast Asia this year.

North Korea, though, is preparing to normalize trade with China, with plans to have quarantine facilities for incoming freight completed in the latter half of the year.

But the coronavirus will continue to pose risks for North Korea's fragile economy this year, as its population has not been vaccinated.

North Korea remains the only country in Asia that has not introduced vaccinations, despite supplies from the international community.

"There is the chance that the virus will enter North Korea ― after all it has been rampant in next door Jilin province in recent weeks and, unlike the Chinese population, North Koreans are unvaccinated. So there is a potential for a severe shock against which they seem poorly prepared," Brown added.

Kim Bo-eun

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