Is China Ripping Off North Korea? (Part I)



Of the many accusations leveled against the late Jang Song Taek, one stands out with particular import to the North’s relationship with China. According to the KCNA account, Jang “instructed his stooges to sell coal and other precious underground resources at random. Consequently, his confidants were saddled with huge debts, deceived by brokers.” The hardly disguised translation: Chinese actors were complicit in Jang’s nefarious scheme to swindle North Korea out of its natural resources.

This leads to a simple question about the China-DPRK trade relationship: has China been taking advantage of its reclusive neighbor? The charge has been leveled before and, indeed, the underlying economic logic is simple: through a product of gross market distortions created by external sanctions and an internal refusal to embrace international norms, North Korea has little choice but to rely on China as its dominant trade partner. And, without the ability to let North Korean goods prices equilibriate in a free international market, Chinese buyers are in a prime position to set favorably low prices on what they import.

To see if the accusation has any merit, one approach is to discern whether the prices North Korea receives from China on select natural resource commodities stand out as abnormally low compared to the prices other exporters to China get; we conducted a similar exercise last year. Today we will look at anthracite (coal)—a commodity specifically referred to in the Jang indictment— and Thursday we compare prices for iron, zinc, and lead using UN Comtrade data.

Before we begin, some important caveats: making country comparisons of trade data by commodity group is problematic. There are significant variables that we cannot easily control for, most importantly  that commodities may vary significantly in quality and purity, that transport costs differ, and that the statistics themselves may not be all that accurate (I mean, we’re talking China and North Korea here).

Does North Korea have no other choice but China?

A quick look at the trade data would say yes. We have demonstrated that, under “normal” conditions, North Korea’s pattern of trade would probably look very different; South Korea would lead as dominant trade partner, with China’s share not significantly higher than Japan’s. However, in reality China claims about 70% of the DPRK’s total trade (as of 2011), the product of trade distortions outlined above. Moreover, UN Comtrade data would suggest that China is, for all intents and purposes, the only buyer of North Korea’s natural resource commodities.

ripping off nk fig1

Figure 1 shows the top natural-resource commodities China imported from North Korea in 2012. Of the roughly 2.5 billion USD in total exports to China, anthracite is by far the most dominant commodity. Trade in anthracite has expanded breathtakingly between the two countries in the last few years: exports in 2012 were 4.7 times what they were in 2009. China is also the only country that reports buying anthracite from North Korea, as is the case with iron ore, pig iron, lead ore, and precious metal ores (a smattering of countries report importing very small amounts of unwrought zinc). Indeed, China is a large consumer in the region, but under less restrictive trade conditions it should not be North Korea’s only customer: in 2012, Japan imported $17 billion in iron ore and $1 billion in anthracite from abroad; South Korea imported $8 billion and $1 billion, respectively.

What do comparative anthracite prices look like?

Anthracite would appear an obvious litmus test for whether China gets abnormally good deals from the DPRK. But do we see China benefiting unduly from this rapidly expanding trade?

china ripping off nk fig2

In fact, in 2012 North Korea looks to be in the middle of the pricing spectrum of what China pays for imported anthracite. While Australia, Peru and Russia enjoy significantly higher prices for their product, Vietnam (the largest importer to China by value share), Indonesia, and Laos appear to be the ones getting the short end of the stick. However, if we look at time-series evidence, comparing North Korea’s exports to the much more globally integrated Australia and Russia -- countries whose trade would clearly benefit from changes in international supply and demand -- a slightly different picture emerges.

china ripping off nk fig3

In Figure 3, we see that North Korea’s price gains are only partially tethered to its globally integrated comparators in both level and percent change terms. For example, while Russia’s anthracite price per ton continuously rose 32 percent between December 2010 and January 2012, North Korea’s increased 11 percent. Indeed, market forces do have some effect on North Korean prices (the series are correlated), but the data suggest that the country may be paying a price for its isolation and dependence on China.

Ultimately, the data we have on anthracite provides no smoking gun to corroborate the Jang indictment, but what about North Korea’s “other precious underground resources”? On Thursday, we will look at more compelling evidence for iron, zinc, and lead.

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