Q – A lot has happened on the Korean
Peninsula while you were in China, including North Korea’s nuclear test that
led to UN sanctions. What was the reaction you observed in China?
A – While I was in China, there were
reports on North Korea’s nuclear test, its long-range rocket launch, and the
closure of the Kaesong Industrial Complex. But the UN Security Council
sanctions on North Korea had not officially been adopted at that stage, so I
didn’t sense any serious changes by the Xi Jinping government. After recently
speaking to some Chinese merchants trading with North Korea, I learned there
are still a lot of goods being traded between the two countries, with the
exception of minerals. So there didn’t seem to be much of a disturbance in
bilateral trade.
In the regions around the Yalu and Tumen
Rivers, there’s more illegal trade taking place than official trade. So while
economic cooperation projects and mineral trade seem to have taken a blow,
other businesses appear to be operating at fairly normal levels. The mineral
sector was already experiencing a sharp decline in global prices since its peak
in 2013 due to the Chinese economic slowdown. Coal and steel prices in the
international market have fallen to a third of what they used to be at their
peak. Because of this, there were already estimates suggesting a significant
decline in North Korea’s net profits from mineral exports this year.
Ultimately, it is obvious that North Korea will take a big hit from these
sanctions, but they won’t play a decisive role. I suspect it won’t be as
serious as what the South Korean government is forecasting, although it will
definitely hamper the recovery trend that the North Korean economy has been
showing since 2009. People’s livelihoods will also be hit, with especially those
in the lower middle class experiencing significant economic hardship.
Q – In regards to the upcoming party
convention in May, the leading consensus was that Kim Jong Un would refrain
from provocations to promote a sense of stability in his leadership. Why has he
pushed forward with more nuclear tests and provocations?
A – There are both domestic and
international factors. Domestically, from the North Korean government’s
perspective, it wants to cultivate loyalty to the regime from its military and
people, so it needs to put on a show of being “a strong and prosperous
country.” In other words, it needs to keep on promoting these ‘myths’ that
North Korea’s regime will exist as long as it has nuclear weapons.
The international factor has to do with the
perceived U.S. military threat against North Korea. Having experienced the
Korean War, the regimes of Kim Il Sung, Kim Jong Il, and Kim Jong Un are bound
to continuously fear the threat that the U.S. military poses. Seeing the
visible threat, the North has chosen to devote itself to nuclear and long-range
missile development in order to compensate for the gap it sees in conventional
military strength. In line with that thinking, it went ahead with another
nuclear test. So in essence, nuclear tests and missiles are to maintain the
regime’s confidence, but they are also threats to the international community.
While engaged in a standoff with the U.S., Kim Jong Un is using nuclear and
missile technology as a negotiating tool to hold talks with Washington.
Q – China has agreed to participate in
sanctions against North Korea. This is a different attitude compared to
previous policies. Why have they come to this decision?
A – If you look at China’s policy toward
the Korean Peninsula, this decision is hardly surprising. After the Korean War,
Mao Zedong, Deng Xiaoping, Jiang Zemin and Hu Jintao sought to consistently
maintain the status-quo and stability on the peninsula. For example, Mao Zedong
strongly advised Kim Il Sung to cut North Korea’s military personnel by 280,000
and fully concentrate on economic development after the Korean War. In 1983,
after the Rangoon Bombing, even before the North had been identified as being
behind the act, Deng Xiaoping rejected North Korean delegates, saying China
will not cooperate with any international terrorist forces.
Furthermore, the Hu Jintao/Xi Jinping
government acted as a responsible leader in the international community during
the first three nuclear tests by agreeing to UN Security Council resolutions.
But on the other hand, for humanitarian reasons, China engaged in
economic cooperation and aid to North Korea and did not oppose the entry of
Chinese businesses to North Korea. So China had devised a plan to appease both
sides by being a responsible superpower while also being an ally to North
Korea. South Korean academics have criticized China for what they see as
apathy.
In 1961, Mao Zedong and Kim Il Sung signed
a military alliance treaty. The treaty is renewed every 20 years, and it is
very likely it will be renewed in 2021. Xi Jinping wants to use the Sino-North
Korean military alliance as leverage against the South Korean-American
alliance, the South Korea-Japan partnership, the presence of U.S. troops in
both countries as well as the U.S. THAAD system. This is a classic dilemma it
faces in the balance of power.
As a result, the Xi Jinping government is
struggling as it tries to realize China’s dreams of playing the role of a major
power and pursuing some level of cooperation with the U.S. while trying to keep
Kim Jong Un under its influence. Even though Xi Jinping has recently enforced
sanctions on Kim Jong Un’s regime, we must take note of trends going forward.
When you look at historical trends, China has consistently been vague on North
Korean sanctions. So for now, Xi Jinping will emphasize the role of being a
responsible superpower in the eyes of the international community, then when
discussion about the South Korea-U.S. joint military drills, THAAD deployment
and other related issues heat up, there is a high possibility it will circle
back to North Korean humanitarian aid or decide not to interfere in
non-political issues. Some South Korean academics are critical of this stance,
but as a researcher on China, I see it as a strategy that reflects their
pragmatic worldview.
Q – It is important to adopt resolutions,
but realistically, carrying out the sanctions is more so. To what extent will
China’s implementation have on the North Korean economy?
A – If China fully implements sanctions,
then I see the possibility of yet another ‘Arduous March’ for the North Korean
economy. North Koreans are reportedly saying they can’t survive without China,
since most of the goods in the markets come from across the border. You can say
that the state itself is also considerably concerned about this. But as I
explained before, during the ‘Arduous March’, China also endured difficulties
of its own in aiding North Korea. China will not want to experience this again
either.
Recently, Kim Jong Un’s government has been
emphasizing domestic production more than ever. It could purely be focused on
improving the North Korean economy, though on the other hand, it might be a
political and military strategy to prepare for international sanctions. There
seems to be a strategic intent on reducing foreign dependence, much like Iran
during its time under global sanctions. It shows just how big a weight China
carries for the North Korean economy.
Though, unfortunately, when you look at the
reality of North Korean domestic production, it is at a level where they are
simply assembling imported or smuggled Chinese parts and selling them. For
example, they smuggle Chinese mobile phones, remove the trademark and sell them
off as North Korean-made goods. If we assume Xi Jinping will fully implement
the sanctions, it will depend on what degree this occurs, but the North Korean
economy will take a considerable hit.
Q – There are signs that China is blocking
some of North Korea’s mineral exports. What effect will this have on the North
Korean economy?
A- Minerals, especially anthracite and iron
ore, account for 60% of North Korea’s total exports. So you might think cutting
off mineral exports would have a huge impact on the North Korean economy.
However, mineral exports were at rock-bottom even before the sanctions. For
example, a ton of coal now sells for between 42-43 USD, whereas it was 62 USD
in January 2015. Earlier, it went for 120-130 USD per ton, so it is only a
third of what it used to be.
In the face of falling prices, there were
voices within North Korea’s inner circle that it should stop exporting to
China. Jang Song Thaek was actually criticized for ‘selling his own country’ in
the past when he exported to China at 100 USD a ton. But now it is 42 USD so you
can tell just how bad things must be. The situation now seems to be that only
North Korean trade companies with outstanding payments to China are exporting.
North Korean coal exports had already been
faltering, as China has focused on stepping up its environmental standards.
Since 2015, Beijing intensified inspection standards on North Korean anthracite
that had been identified as a significant source of air pollution. Demand
dropped for shipments that didn’t meet the new standards. On top of that, I
would like to point out that the vessels transporting North Korea’s minerals
are in many cases owned by Chinese or 3rd party nations, because a lot of North
Korean ships do not meet the standards to make entry at international ports.
So its vessels have been using ports with
more lax regulations like the Ports of Shandong and Dandong. So given all this,
it’s hard to say sanctions will have a huge effect. In other words, there are
doubts over how much of an effect cutting off mineral exports will have.
Q – So we shouldn’t believe it will have a
huge impact, as many other media reports have suggested?
A- I’m saying it’s likely that won’t happen.
Since 2010, I’ve been living by the Sino-North Korean border, and the truth is,
Chinese and North Korean traders are not hugely disturbed, contrary to reports
from the media. Chinese people with connections to North Korea say there are
“absolutely no problems” with sanctions. Of course those who made
large investments to develop the Sinuiju Industrial Zone through official
trade, like the company Yangbin, will be hit by the sanctions. Even if they want
to invest in the North, it will be hard to gather investors, so they will
definitely see real losses.
But as I mentioned before, illegal trade at
the China-North Korean border far surpasses official trade. Official trade
involves documentation such as letters of credit, but most trade around the
border do not follow international practices. Some claim that China-North Korea
trade is not between nations but merely across borders.
Also the vibe North Korean traders give is
that they don’t think much of the sanctions. They say, “We have always
lived under sanctions,” and claim they don’t fear them because they have
China. For example, when they are trying to do business with the Japanese, they
bring in the Chinese to collaborate on the deal. Simply put, they are able to
conduct trade with the Japanese under China’s name.
Q – Is there any panic buying from North
Korean trading companies to hoard raw materials ahead of impending sanctions?
A- I didn’t have time to look into that aspect
of it since it was before UN sanctions were being discussed. If the Security
Council resolution is adopted, and sanctions stay in place for a long period of
time, there’s a high probability of seeing that happen. At the time of the
‘Arduous March,’ the imbalance in supply and demand caused by panic buying
deepened the economic crisis.
If you consider North Korea’s dependence on
trade with China, I think there is a high possibility that a wide range of
illegal trading will take place. For example, Chinese businesses could set up
paper companies in countries that are on amicable terms with North Korea
and continue bilateral trade. Also, an interesting aspect of North Korea-China
trade is that a significant portion comes from smuggling and transactions that
occur while North Koreans are visiting relatives in China. As the sanctions
become more intense, I predict there will be an increase in the inflow of goods
through smuggling and humanitarian visits to relatives. In other words, there
are many ways to bypass sanctions on North Korea. It’s not implausible that
they may restart trade through avenues like Palestine.
North Korea’s trade with China is very
specialized and involves a wide range of methods. Even though initial trade
will be difficult due to sanctions on mineral exports, I expect many North
Korean institutions and businesses will continue to trade other goods to
compensate for their losses on mineral exports. Also, in terms of limiting
mineral trade, there will be limits on what extent China can control local
governments, small-and-mid-sized business, and private companies, contrary to
what the Xi administration’s official stance may be. In China they have a
saying, “There are policies in higher ranks and countermeasures in lower
ranks.” Recently, it is being said that there are those further below the lower
ranks, and they use tricks and other illicit methods.
Q – Won’t these new illicit methods begin
to multiply?
A- Yes, the chances are high. Settling
payments will be done by powerful trade firms like Galaxy Trade, which can act
as a foreign exchange center, instead of official banks. For example, if a
Chinese investor has to pay for coal imports, they can deposit the money at
Galaxy Trade which acts as an unofficial bank, and the North can come and pick
it up.
Also it could change the way that China
pays the North for its overseas workers. Currently, North Korean laborers in
China and other nations around the world receive their wages in yuan, so
instead of being paid in currency, they might choose to pay in goods. For
example, instead of giving them cash, they might buy them a truck. So what I
would like to point out is that sanctions aren’t the fundamental solution to
the North Korean nuclear and missile issue.
Q- From the state’s point of view, if they
can’t export as much as they used to, it seems like they would face problems
with the excess supply. That means they would need to absorb it within the
domestic markets, but is that possible?
The North Korean economy is on a trend of
recovery, so there is growing demand from within the country, and I do believe
it has the ability to process the surplus to some extent. I’ll use anthracite
as an example. Anthracite mining trade companies started springing up
everywhere in the North at some point. But they are outside of the planned
economy framework, in other words, they’re not part of the official economy.
After 2005, we saw anthracite exports to China surge. Previously, they only
accounted for about one percent of exports to China. In 2005, this surpassed 20
percent, and as we entered the 2010s, it jumped to 45 percent. During that
time, the North saw an explosive growth in quasi public-private coal mines.
After developing these mines, trade companies first extracted the anthracite
and placed priorities on exports, then the rest filtered back into the local
economy. This is because you get a much better price for exports.
Given these conditions, a blockage on
outbound shipments due to sanctions becomes great news for North Koreans in the
middle to lower class, since they end up with extra resources that they once
lacked. The demand for coal in the North is very significant. If you look at
the population of 23 million, you can probably say that every single one of
them needs coal. Also, as markets become more vibrant and people’s standards of
living improve, the demand for coal also goes up. If you drive a truckload of
coal up to an apartment, it will be sold in no time. That’s how much demand
there is.
So I gave you an example using coal, but
what I’d like to emphasize is that projections that North Korea will be hit
hard by sanctions is in part accurate but in part wrong. Of course, it will
place restrictions on its recovery trend seen since the 2010s, so overall it is
a blow to the economy.
Q- I heard that you’ve done a lot of research
on the North Korean real estate market. I’ve heard in the North, people aren’t
able to procure the materials they need to build homes, so where do they get
the materials from?
A- These days, if you just head over to the
Sinuiju area in North Pyongan Province, you can see a lot of apartments along
the Amnok River. There’s been a huge increase in the past two to three years.
From what I could tell while I was there, Chinese investment plays a major
role, and they invest in the very essentials for construction: steel and
concrete.
Once the apartment is built, the two sides
split the profits 7 (China) to 3 (North Korea). But it looks like there’s no
good way for the investors to tell whether the North is actually only taking 30
percent of the profit. A lot of Chinese investors don’t really know what’s
going on in the North, so they can’t tell how much the actual profit comes to.
Even if their partners in the North lie to them, there is no easy way to tell.
Q- What kind of people make these investments?
From the Chinese end, it’s usually
individuals, and from the North it’s trading companies. If the North had enough
money, it would be able to carry out these activities unilaterally by importing
cement, steel, other materials and then doing the construction work, but
without enough money, they need to receive assistance from China on the raw
material costs.
Q- Some say that if the sanctions continue,
North Korea’s housing market will slump. What do you make of these claims?
A- I think you could also predict the
opposite. They have cement factories in the North, and they make steel in
Chongjin. If the sanctions reduce imports like cement and steel from China, it
may have an impact, but since the North has its own production capabilities for
cement (and steel) in Chongjin, if they use that, it may create a boom.
You can refer to what happened in Iran’s
case. While it was under international sanctions, it saw its domestic basic
industries and smaller companies grow. Similarly, if the North’s real estate
market doesn’t completely lose its flame, I think it may see these effects. In
other words, it might see its domestic market develop. So of course, in overall
terms, it will see an economic slump, but there might be some areas that do not
experience the same difficulties.
Q- One of the papers that you recently
published with Professor Park Jong Cheol from the GNU’s Institute for
Unification and Peace Studies is about China’s oil pipeline that runs to North
Korea.
A- Some argue that China could seal off its
pipeline running to the North, but I think technically it would be too
difficult. China also wouldn’t see much benefit from doing so. In order to make
sure your pipelines don’t clog, you need to send around 40,000 to 50,000 tons
along the pipe each month. If the pipeline gets blocked, it will involve a
significant amount of money to have it restored. There’s also something else
I’d like to point out. Media seem to be interested in whether China will send
oil or not, but if the Chinese government actually seals off the pipeline, Kim
Jong Un will pay even less attention to China’s interests.
Mt. Baekma near Sinuiju is where the
Sino-North Korean pipeline ends, and they have the Bonghwa chemicals factory
and special Baekma oil processing facility there. This is where they bring in
crude from China and refine it, and you can see people from Pyongyang’s trade
companies and others standing in line to obtain the processed petroleum
products. From here, they take the products west to supply that region. These
days, you can see gasoline stations not only in Pyongyang but other areas as
well. Some individuals even buy homes that are next to roads so that they can
secure a space to store gasoline, diesel, and other petroleum products and sell
them later in the markets. So you see a significant amount of oil being
distributed within the North.
Based on these observations, it seems that
the North is not only getting its supply from China but also Russia, the Middle
East and other places. China, of course, would make up the lion’s share, but it
doesn’t seem to have an absolute dominance over it. You can bring in oil not
only through pipelines but oil tankers as well, so we can surmise that the
North is bringing crude in through various means. Thanks to the shale boom,
commodity prices have nosedived, and global demand is falling short of supply.
For smaller countries in the Middle East and Russia, illicit trade with the
North would be an attractive market at this point.
