[Global NK Commentary] Prospects for North Korea-China Economic Relations in the Post-COVID-19 Era and Implications for the Korean Peninsula

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North Korea's Economy During the COVID-19 Period

It is true that North Korea's economy has faced difficulties due to COVID-19, to the extent that the saying, 'COVID-19 is the real sanction,' has emerged. This is not unique to North Korea but a global phenomenon. North Korea responded to COVID-19 by implementing border closure measures, which led to a sharp decline of over 80% in North Korea-China trade volume. The issue is that a decline of over 80% in a country's trade volume due to external shocks would normally constitute a critical situation leading to a national economic crisis. However, while it is true that North Korea's economy has struggled due to COVID-19, there have been no significant price surges in food or energy. In other words, at least concerning the basic necessities of life for residents, there have been no major disturbances. Admittedly, the price of seafood temporarily surged due to the maritime blockade, and prices of imported goods such as flour, soybean oil, and sugar, which North Korea relies on entirely, more than doubled during the COVID-19 period. However, these imported goods are intermediate inputs used in the production of items like candy and snacks. Most importantly, if the economy were in crisis, the exchange rate would skyrocket, but it has instead declined. Conversely, a strengthening of the North Korean won has been observed.

Four Issues Surrounding North Korea-China Trade During the COVID-19 Period

Given this, what is the reason for the stability of the North Korean economy during the COVID-19 period, despite its difficulties, without significant price fluctuations? This paper will primarily examine this question by focusing on four key issues surrounding North Korea-China trade during the COVID-19 period.

First, how long will the border closures continue? In reality, the North Korea-China border was not completely sealed during the COVID-19 period; rather, it has seen repeated easing and tightening in accordance with the epidemic prevention policies of both countries. Notably, this trend has been more strongly linked to North Korea's internal political events, both large and small, than to China's policies. In other words, the border closure was self-imposed by the North Korean authorities, not by China, and North Korea can flexibly open its borders if it deems it an economic crisis. A representative example is that the prices in North Korea's Jangmadang (farmers' markets) began to rise significantly not immediately after COVID-19 in February 2021, but around January 2021, in anticipation of the 8th Party Congress. This was because the North Korean authorities maximally sealed the borders in the lead-up to the 8th Party Congress. Nevertheless, in terms of long-term trends, North Korea, along with the global trend of finding it difficult to maintain a 'Zero COVID' policy, was converging towards a gradual border opening. Evidence for this includes the North Korean authorities beginning to ease border closures for ships in March 2021. In July and August of the same year, they reopened not only state trade routes between Nampo and Dalian but also informal shipping routes around Sinuiju and Donggang, and this trend continues to the present. Meanwhile, land-based train trade between Dandong and Sinuiju resumed in January of this year but was temporarily suspended due to the Omicron outbreak; however, it is expected to resume soon if the situation improves. Indeed, these developments are reflected in the prices of imported goods in North Korea's Jangmadang.

Second, were there no responses to sanctions during the COVID-19 period due to border closures? Although trade volume between the two countries sharply declined during this period, various changes aimed at responding to sanctions were observed. Items not subject to sanctions, such as molybdenum, newly emerged as export items, and the processing and manufacturing sector showed a tendency to focus on high-value-added industries. For instance, until 2017, just before the sanctions were strengthened, fabrics for garment processing were among the top 10 import items from China to North Korea, indicating a high proportion. However, from 2018, when sanctions on garment processing were tightened, tobacco and watch parts became central to North Korea's top 10 import items from China, while shoes, wigs, watch parts, and tobacco dominated North Korea's top 10 export items to China (see Tables 1 and 2). These items have higher processing fees than garments.

<Table 1> Trends in North Korea's Top 10 Import Items from China (Million USD)

Source: Compiled by the author based on KITA data

Note: HS Code 4-digit

<Table 2> Trends in North Korea's Top 10 Export Items to China (Million USD)

Source: Compiled by the author based on KITA data

Note: HS Code 4-digit

Third, did the North Korea-China border closures during the COVID-19 period only bring fatal consequences to the North Korean economy? Conversely, it can be considered that the phenomenon of substituting domestic products was strengthened. This is because, although not prominently reflected in official statistics, my research indicates that items recently imported informally via ships were primarily raw materials for products that have already been 'domesticated' in North Korea. Representative examples include sugar, flour, and soybean oil. These are intermediate goods for food production. Additionally, there were significant amounts of raw materials for fabric processing, soap, and detergents. In other words, this can be seen as an effort to increase domestic production to substitute imported goods.

Fourth, why was the price of refined oil relatively stable during the COVID-19 period? Is this solely due to China? While the decrease in refined oil prices can be attributed to reduced imports and economic slowdown due to COVID-19, leading to decreased demand for oil, the gradual easing of maritime blockade measures has increased ship operations. Furthermore, demand for refined oil inevitably arises during the farming season. Moreover, considering that there are no significant price differences between regions, it is difficult to conclude that the logistics system was so severely disrupted during the COVID-19 period that movement was significantly restricted, although logistics did contract. This suggests that the possibility of increased inflow of Russian oil cannot be ruled out. For wheat, Russian imports were actually more prevalent previously.

Prospects for North Korea-China Economic Relations in the Post-COVID-19 Era and Implications for Inter-Korean Relations

Regardless of when COVID-19 is resolved, the long-term trend indicated a gradual opening of borders between North Korea and China. Moreover, although North Korea-China trade volume sharply declined, changes in response to sanctions were also observed. The problem is that North Korea sanctions have been strengthened to an unprecedented degree since 2016. Conversely, if China and Russia had not participated in the North Korea sanctions at that time, how would the situation have changed? The scope for cooperation with North Korea would likely have been much broader than it is now. This implies that even after COVID-19 is resolved, the scope for potential trade and economic cooperation between North Korea and China will remain extremely limited. The 2019 Hanoi Summit, in particular, served as a testament to the inseparable link between denuclearization and sanctions against North Korea. This signifies that China's participation in the strengthened sanctions resolutions since 2016 implies practical limitations on close economic ties between North Korea and China. The focus on tourism, based on people-to-people exchanges, which gained prominence following Chairman Kim Jong-un's visit to China in 2018 and President Xi Jinping's visit to North Korea in 2019, also appears to be due to these limitations.

However, does this mean that the possibility of enhanced North Korea-China economic cooperation in the future is low? The situation is different now compared to 2016. Amidst intensifying US-China strategic competition, the war between Ukraine and Russia has begun, and if it develops into a protracted conflict, a favorable situation could unfold for North Korea. That is, North Korea could strengthen its economic cooperation with China and Russia more than it does now. Particularly, if China and Russia are also subject to UN Security Council sanctions, it is questionable whether they can maintain the current framework of sanctions against North Korea while continuing cooperation. The possibility of breaking the sanctions framework and expanding the scope of economic cooperation with North Korea cannot be ruled out. The recent fact that the US attempt to expand sanctions against North Korea, despite its repeated provocations, was thwarted by China and Russia, leading to the rejection of the sanctions resolution, supports this possibility. North Korea could strengthen cooperation with Russia on imports such as petroleum products and grains. With China, it could gradually expand the scope of trade in items that do not violate sanctions. In particular, tourism cooperation, which increased significantly until just before COVID-19, has the potential for further expansion. Moreover, since Chairman Kim Jong-un's visit to China in 2018, North Korea-China tourism is no longer limited to the border regions. North Korean tourism is expanding to target all of China. Furthermore, the Geumgangsan International Tourist Zone and the Sambong International Tourist Development Zone in Samjiyon are international tourist development zones that require large-scale foreign investment, but they are currently stalled due to sanctions. The possibility of expanding development in these areas cannot be ruled out. The intensification of US-China strategic competition could lead to closer North Korea-China economic relations, ultimately deepening North Korea's economic dependence on China. This, in turn, could weaken the impetus for resuming inter-Korean exchanges. However, from a long-term perspective, the expansion of tourism could lead to the revitalization of private exchanges, acting as a factor that induces North Korea's openness. Therefore, the possibility of South Korean private sector participation in North Korea-China tourism can also be considered, and there is potential for expansion into trilateral (North Korea-South Korea-China) or multilateral economic cooperation in the future. Tourism, in particular, is a useful area for multilateral cooperation that can serve the interests of neighboring countries such as South Korea, China, and Russia. However, this requires the cooperation of China.

■ Jeong Eun-i_ Research Fellow at the Korea Institute for National Unification. She received her Master's and Ph.D. in Economics from Tohoku University, Japan, in 2004 and 2007, respectively. After working as a senior researcher at the Export-Import Bank of Korea, she currently serves as a research fellow at the Korea Institute for National Unification and a visiting professor at the Center for Korean Peninsula Studies at Peking University. Her research interests include North Korea's real estate issues, North Korea-China trade, and financial issues related to North Korean mobile phones.

■ Managed and Edited by: Park Jeong-hu_ EAI Research Fellow

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