North Korea News: Exports Grow But Deficit is the Bigger Problem

In recent days, North Korea unilaterally curtailed inter-Korean cooperation at the Kaesong economic zone, and now further escalated the political tension with an upcoming show-trial of an American tourist operator, Kenneth Bae, held in custody since November and accused of plotting to overthrow the state.

As part of Pyongyang’s political racketeering, it is likely that Bae will eventually be released for a concession of some kind, but both of these developments merit an investigation into North Korea’s trade relations to understand any economic rationale for closing down Kaesong and if Bae’s captivity can be traded for a commercial benefit.

First, the perspective of time on North Korea’s commercial relations will be useful on tracing the country’s trade trends over the last 10-15 years. In the 1990s, North Korea’s main export partners were South Korea, China, Japan and to a lesser extent, Russia. As per the linked analysis, the collapse of the socialist bloc in 1989-91 left North Korea without some of its most important external support systems and exposed it to the risk that it would be swept up in the historical changes that overtook the world in those few years. Overall, it was a blow from which the North Korean economy has never recovered.

North Korea’s participation in international financial markets dates back to the 1970s, but Pyongyang has already de facto defaulted on all of its long-term obligations and today, its involvement in financial markets is practically nil. All the same, North Korea has on occasion expressed interest in joining international institutions like ASEAN, the IMF, and even the World Bank, but has been unsuccessful so far. However, international membership might become one of the tools for politico-diplomatic solutions to the tensions on the peninsula, if Pyongyang is shouldered with a larger share of responsibility in the international community.

North Korea’s trade expanded significantly from $3.8 billion in 2003 to $8 billion in 2008, but with it, so did the trade deficit, from $390 million in 1990 to over $2 billion in 2006; not in the least to blame for this deficit is that North Korea imports much of the food and dietary requirements to feed its 24 million people. The data comes from a comprehensive report by the French Institute of International Relations, and the most recent figures are from 2008. However, if we take the depressive effects of the financial collapse in 2009 that are still ongoing, then it is possible to further a reasonable assumption that these trends have kept.

North Korea’s main trade partners now are China and South Korea, although notable, if minor, trade flows occur with other countries, among which Iran, Germany, Algeria and Brazil; in the same linked report, a chart is available on page 14 with this detail. Briefly, in 2008 North Korea’s exports to China accounted for 23.1% of the total, whereas South Korea was the destination for 31.1%. Venezuela took in 10.5%, Brazil, 4.2%, Lebanon – 3.1%, India - 2.4%, Greece – 2.6%, India – 2.4%, Saudi Arabia – 2.2% and Myanmar and Turkey – 1.8%.

Pyongyang imports more than it exports, which means that is has a chronic deficit in its external accounts. In terms of imports, China makes up 38.1%, South Korea – 17.7%, Algeria – 11%, Congo, Brazil South Africa and Russia each have a share of 3%, India – 2.7%, Singapore – 2.6% and Saudi Arabia – 1.8%. The largest deficit in numbers is with China at $1.2 billion, Algeria at nearly half a billion and the other major deficit countries for North Korea are Congo, South Africa, Russia and Singapore, which together make up the remaining half a billion of North Korea’s aforementioned $2 billion trade deficit. For further detail, the report includes historical comparisons between 1990 and 2000 for the North’s trade patterns.

The structure of North Korea’s exports shows a gradual trend towards a larger share of higher value-added products and a drop in the share of resource exports between 1992 and 2006. In consolidated terms, the most dramatic change is in the export of basic metals, from 32.9% in 1992 to 13.2% in 2006. At the same time, the share of electronic components and devices increased to 13.2% and general machinery and transport equipment to a combined 10%. Chemicals make up 8.5% of exports, basic and mined metals combine to form 18.3% of exports, coal, petroleum and uranium account for 4.5%, which is relatively constant compared to 1992, and food, beverage and fishing products make up a total of 9.3%. Adding these percentage will not produce 100%, as we do not possess complete or up-to-date information on Pyongyang’s external economic relations, but we might accrue the remaining 26% to the arms industry or illicit trade in drugs or money laundering.

Looking at North Korea’s imports, their structure has remained constant between 1992 and 2006, and we can hardly expect that it would change significantly to this day. As a small and mountainous country possessing of limited resources in the way of oil or arable land, metals, fuel, uranium, food and forestry, as well as industrial products make up the bulk of imports. By the numbers: mined metals – 25.3%, hard coal, petroleum and uranium – 20.7%, apparel – 13.7%, basic metals – 12.9%, food and beverage products – 7.9%, agriculture – 3.8%, forestry – 3.1%, wood products – 2.7%, industrial products – 2.2% and textiles – 1.8%. Doing the math also does not complete the pie chart, but we can cite the previous reasons of incomplete and dated information for that.

What we might say here is that the export-import balance results in a net capital outflow that might present further economic problems related to malnutrition, a fall in grain imports in January this year and a dramatic decrease in foreign aid in 2012. Simply put, an import deficit is necessary for North Korea's survival, but the inability to compensate for it via domestic production, nor aid, is also a systemic threat for North Korea's viability.

Notably absent from the analysis of North Korea’s trade flows are military exports and imports, but it is also uncertain what seemingly civilian trade flows are re-classified as military inside Pyongyang. The North’s defence industry has immense, but unknown capacity, and is capable of producing and maintaining a wide variety of hardware for all three branches of the armed forces. However, it is hard to say what and how much North Korea exports in military hardware, but some estimates put the yearly value of these exports at approximately $100 million.

It is clear that North Korea is gradually shifting the structure and value of its exports in an upward direction, but this development is still happening alongside a chronic trade imbalance that sees Pyongyang importing greater amounts of strategic raw materials that it does not possess locally, which include petroleum and food products. It is in this respect that in the event of a war of attrition, North Korea would have the same problems as Japan in WWII: insufficient resources limit operational time, which means that rapid expansion is the only hope for sustained warfare – and this is an unrealistic expectation of North Korea, given that its capacity is matched and exceeded by the surrounding powers.

Overall, Pyongyang is an opportunistic diplomatic player on the defensive, but more sophisticated political engagement with the language of economics could go a long way in finding a common perspective on the challenges plaguing the peninsula.

The prior article in this series addressed North Korea’s recent political overtures for negotiations and before that, fiscal policies, monetary policy, and the Kaesong industrial zone. The next piece will attempt to build a model for the potential of a civilian North Korean nuclear program.