Relations among Koreas and China

The trade relations between China and the two Koreas have been changing dramatically in recent years. It would be interesting to figure out how the changing trade relations would affect the future of the relation between South Korea and North Korea.

This is the issue that I will be addressing during my presentation at the KDI Journal of Economic Policy Conference that the Korea Development Institute is hosting later this month on June 22.

Let me, first, go over some trade figures. In 2009, total exports and imports were, respectively, $1.2 billion and $2.4 billion for North Korea, while they were $314 billion and $237 billion for South Korea. The combined amount of exports and imports during 2009 was about $551 billion for South Korea, which was more than 150 times the combined amount for North Korea which was $3.6 billion. In 2009, North Korea had a trade deficit of $1.2 billion, which was equal to the amount of the country’s entire exports, while South Korea enjoyed a trade surplus of $77 billion. During the same year, the percentage of exports to China relative to total exports was 64.7 percent for North Korea but 38.2 percent for South Korea, while the percentage of imports from China relative to total imports was 77.5 percent for North Korea but 25.2 percent for South Korea. In plain English, more than 3 out of 4 total imports of North Korea in 2009 came from China.

The high percentage of trade between any two countries does not necessarily mean that they are bad. Trade among advanced economies can be high, when these countries specialize in making complementary components of high-tech products and thus help each other in the process. This is exactly what is happening to the trade between South Korea and China, especially in high-tech electronic products. South Korea and China both benefit from close trade relations. This is not the case for North Korea, however.

I reviewed all 992 items traded between North Korea and China since 1995. The amount of trade between North Korea and China remained low until about 2000. When the volume of trade began to increase, the most popular exports from North Korea to China were resource-based products such as coal, ore concentrates, and agricultural products that do not require technology to produce. North Korea’s imports from China have also been dominated by resource-based products although imports of low to medium technology products began to increase since 2008. There were virtually no exports and imports of high technology products such as electronics, telecommunications, pharmaceuticals, and aerospace. Why does this matter? It matters because economic growth requires not only the growth of exports, but also “a move up the technology ladder” in export products. No matter how you look at it, North Korea is in bad shape.

Think about this. North Korea imports from China much more than it exports to China. North Korea will eventually be, if not already, under great pressure of having to pay for its imports of necessities. As China’s problem of being paid for its exports to North Korea worsens, it would be interesting to see what changes China will make in evaluating the relative importance of the two Koreas to China. At least from the view of economics, it is difficult to imagine that China would value North Korea ahead of South Korea. The changing trade triangle that predominantly favors South Korea over North Korea may tempt, if not force, the new generation of Chinese leaders to re-consider its continuing support of North Korea. <Korea Times>

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