Trade in North Korea

North Korea

DRPK of North Korea

 

Formal Name: Democratic People's Republic of Korea.
Short Form: North Korea.
Term for Nationals: North Koreans.
Capital: P'yongyang.

GEOGRAPHY

Map of North Korea

 

Size: North Korea occupies about 55 percent of total land area of the Korean Peninsula, or approximately 120,410 square kilometers of land area; it is about the size of the state of New York or Louisiana.
Topography: Approximately 80 percent of land area mountain ranges and uplands. All mountains on peninsula over 2,000 meters high are in North Korea.
Climate: Long, cold, dry winters; short, hot, humid summers. Approximately 60 percent of rainfall falls in June through September.

ECONOMY

Character and Structure: Socialized, centralized, planned, and primarily industrialized command economy. Principal means of production owned by state through state-run enterprises or cooperative farms. Prices, wages, trade, budget, and banking under strict government control. Growth rate 1984-90 averaged about 3 percent annually. Poor domestic economic performance; gross national product (GNP) down 3.7 percent in 1990 and down 5.2 percent in 1991. Total 1991 GNP US$22.9 billion, or US$1,038 per capita. Withdrawal of Soviet aid in 1991 negatively affected economy.

North Korea

Agriculture, Forestry, and Fisheries: Traditional source of employment and income but, under party rule, secondary to industry. Completely collectivized by 1958. Estimated 18 percent land, agricultural use; approximately 25 percent GNP. Principal crops: rice, corn, potatoes, soybeans, and pulses. Largely self-sufficient in food production, but reported food shortages. Growth in agriculture, forestry, and fisheries sector 2.8 percent in 1991; increase in rice and other crops offset decrease in fish products.
Industry: Machine building, military products, electric power, chemicals, mining, metallurgy, textiles, and food processing. Manufacturing concentrates on heavy industry; ratio of heavy to light industry in 1990 was 8:2. In 1991 oil imports fell 25 percent; coal production, 6.5 percent; and electricity generation, 5.2 percent. Shortages in oil, coal, and electricity in 1991 led to idled plants and 13.4 percent decrease in manufacturing output.
Labor: Labor force estimated at about 11.2 million in mid-1990; approximately 33.5 percent agricultural, down from about 43 percent agricultural in mid-1980. Shortage of skilled and unskilled labor.
Currency and Exchange Rate: 1 wn = 100 chon. As of December 1991, US$1 = 97.1 chon.

Trade Statistic

Foreign Trade: Major exports: minerals, metallurgical products, agricultural products, and manufactures, for a total of US$1.95 billion (free on board, 1989). Trade statistics according to North Korean source: imports US$2.28 billion, exports US$1.24 billion, and deficit US$1.04 billion in 1991. Estimated 1991 trade decreased by approximately 25 percent, especially affected by withdrawal of Soviet trade concessions beginning January 1991- -almost 40 percent--but trade with China up about 17 percent and increased trade with South Korea. Major imports: petroleum, machinery and transport equipment, coking coal, and grain, for a total of US$2.85 billion (free on board, 1989). Major trading partners: Russia, China, and Japan; to a lesser degree, Hong Kong, Germany, India, Canada, and Singapore. Trade with South Korea classified as internal, not international; major hardcurrency source. Lack of foreign investors. Joint Venture Law enacted in 1984, but few projects to mid-1993 and mostly Ch'ochongryn (General Association of Korean Residents in Japan) firms. Foreign investment, contractual joint venture, and foreign enterprise laws enacted October 1992 to induce investment.

FOREIGN ECONOMIC RELATIONS

Foreign economic relations have been shaped largely by chuch'e ideology and the development strategy of building a virtually autarkic economy. These factors have led to an inward-looking and import-substituting trade policy, which has resulted in a small scale of foreign trade and a chronic trade deficit. North Korea's main trade partners have been communist countries, principally the Soviet Union and China, and Japan has been a major trading partner since the 1960s.
Although still adhering to the basic principle of selfreliance , P'yongyang is flexible in its application whenever the economic need arises. After the Korean War, North Korea received a substantial amount of economic aid from communist countries for reconstructing its war-torn economy. In the early 1970s, the country accepted a massive infusion of advanced machinery and equipment from Western Europe and Japan in an effort to modernize its economy and to catch up with South Korea. By the late 1980s, P'yongyang had moved towards making exporting a priority in order to garner foreign exchange so as to be able to import advanced technologies needed for industrial growth and to pay for oil imports.
The most recent and important manifestation of a flexible and practical application of self-reliance--prompted by severe economic difficulties--is the gradual move toward an open-door policy. This policy shift, which involves North Korea's attitudes toward foreign trade, tourism, direct foreign investment, joint ventures, and economic cooperation with South Korea, has the potential to significantly change the country's foreign economic relations.

Statistic of North Korean dollar

The importance of trading with Western developed countries was expounded by Kim Il Sung as early as 1975. The origin of the open-door policy, however, was Kim Il Sung's 1979 New Year's address, in which he mentioned the need to expand foreign trade rapidly in order to meet the requirements of an expanding economy. Kim publicly alluded to some serious problems impeding North Korean exports, exhorting the population to adhere to a reliability-first principle: improving product quality, strictly meeting delivery dates, and expanding harbor facilities and the number of cargo vessels. In his 1980 New Year's address, Kim repeated this theme and announced that foreign trade had increased 30 percent in 1979 over 1978. This speech marked the first time in a decade that trade statistics had been made public--even in this limited and relative form. Unexpectedly and uncharacteristically, North Korea joined the UNDP in 1979 and accepted US$8.85 million in technical assistance. This action was further evidence of a small opening to outside economic involvement.
The year 1984 was the benchmark in officially launching the open-door policy. The Supreme People's Assembly's policy statement, entitled "For Strengthening South-South Cooperation and External Economic Work and Further Developing Foreign Trade," stressed the need to expand economic relations with the developing world as well as to promote economic and technical cooperation with advanced industrial countries. The document also repeated the export bottlenecks listed by Kim in his 1979 and 1980 New Year's addresses. North Korea indicated its readiness to accept direct foreign investment by enacting a joint venture law in 1984. And, since 1986, the country has begun to encourage tourism by accepting some tour groups from the West.
The most far-reaching change in foreign economic relations occurred in 1988 when North Korea began to trade with South Korea. Inter-Korean trade has grown rapidly, and by 1993 the two Koreas expanded into joint ventures and other forms of economic cooperation. North Korea's readiness to open its economy to the West and to South Korea is, no doubt, prompted by its need to import sophisticated Western industrial equipment, plants, and up-to-date technologies in order to modernize and jump-start the economy, and to catch up with South Korea. Given its sizable foreign debt, sagging exports, and the dissolution of the Soviet Union, its largest trade partner, North Korea does not have much choice and recognizes the need to revise its trade laws so as to encourage foreign investment.

Foreign Trade

North Korea's foreign trade is characterized by its relatively low value, chronic trade deficits, and small number of trading partners. In 1990 almost 83 percent of total trade was conducted with the Soviet Union, China, and Japan. Although modest in scale, accompanied by wide and frequent swings from year to year, and even negative growth in some years, trade levels have grown over the years. Based on estimates from the returns of trading partners, exports and imports grew from US$307.7 million and US$434.1 million, respectively, in 1970, to US$1.86 billion and US$2.92 billion, respectively, in 1990. North Korea's total exports were comparable to only 2.9 percent of South Korea's exports of US$65.02 billion in 1990. North Korea's trade value also is small in relative terms when compared with that of South Korea and other newly industrializing economies. The trade ratio (total trade value relative to GNP) in 1990 was 20.7 percent, with export and import ratios of 8.1 percent and 12.6 percent, respectively. The comparative ratio for South Korea was 56.7 percent--with 27.3 percent and 29.4 percent, respectively, for exports and imports.
Except for a few years since 1946, the trade balance has been characteristically unfavorable. North Korea attracted worldwide notoriety in 1976 when it defaulted on its payment of foreign debt to Western countries. The debt had resulted from massive purchases of capital goods from West European countries and Japan in the early 1970s, which had drastically increased the trade deficit. Imports are supposed to be paid for by increased export earnings and short-term credits, neither of which has occurred. The oil shock of late 1973 and the onset of the recession and worldwide stagflation also took their toll. Prices of North Korea's minerals declined sharply because of a worldwide recession that lowered demand. Foreign exchange reserves dwindled, leading to the debt crisis. After suspending payments, North Korea tried to reschedule the payments, but its payment record is erratic; the debts continue in the early 1990s, and unpaid interest continues to mount. At the end of 1989, the total foreign debt was estimated at US$6.78 billion: 45.9 percent, or US$3.13 billion, was owed to the Soviet Union; US$900 million to China; and US$530 million to Japan. According to South Korean sources, the total debt had increased to US$7.86 billion at the end of 1990.
Despite North Korea's flirtation with Western developed countries, the Soviet Union, China, and Japan remain its principal trading partners. In the late 1940s and 1950s, more than 90 percent of trade was conducted with communist countries. In the 1960s, this dependency began to gradually decrease, and in the mid-1970s, with P'yongyang's sudden turn to the West for imports of machinery and equipment, the slide accelerated. This dependency fell to its lowest point in 1974--only 51.5 percent of total trade; it began to rise again when North Korea, having defaulted on payment of its debt, found it difficult to obtain credit to finance imports from the West. The ratio of trade with communist countries was 72.7 percent and 71.4 percent, respectively, in 1989 and 1990.

Korea Dom

The Soviet Union has consistently been North Korea's largest trading partner, accounting for about half of total two-way trade in the late 1980s and 55.9 percent and 56.8 percent in 1989 and 1990, respectively. It is followed by China, with 12.5 percent and 11.4 percent in 1989 and 1990, respectively. Since the early 1960s, Japan has emerged as the third largest trading partner-- 10.7 percent and 19.7 percent in 1989 and 1990, respectively. Japan remains a major continuing link with the advanced market economies. For some years in the mid-1980s, imports from Japan exceeded those of China. Most of the trade deficits originate in communist countries; an exception was in 1974-75 when an import surplus from Western countries exceeded that from communist countries.
The Soviet Union also is the largest source of import surpluses. In 1989 and 1990, trade deficits with the Soviet Union constituted 63.5 percent and 57.7 percent, respectively, of the total deficit. The corresponding ratio for China was 20.3 percent and 28.6 percent, respectively. North Korea had depended predominantly on the Soviet Union and China for its trade credits in the late 1980s, but in 1990 P'yongyang began to lean more toward Beijing. From 1987 to 1990, North Korea consistently accumulated a trade surplus with Japan.
A major factor in North Korea's renewed reliance on the Soviet Union in the 1980s--both as supplier of imports as well as the chief destination for exports--was the difficulty of marketing its products elsewhere; a second important factor was the West's reluctance to extend additional credits. In a trade agreement signed in November 1990, North Korea was required, for the first time, to use hard currency in its commercial transactions with the Soviet Union beginning in 1991. China also notified North Korea to use hard currency in their mutual trade beginning in 1992. This requirement will have a serious adverse effect on the trade value, the balance of payments, and the domestic energy situation. There are signs that the initial attempts to enforce the hard currency rule caused Soviet-North Korean trade to plummet in early 1991. For example, petroleum deliveries from the Soviet Union plunged from 410,000 tons in 1990 to 45,000 tons in the first half of 1991. In order to prevent a further decline, the Soviets conceded some unidentifiable amount of transition time before fully enforcing hard currency payments. Because of the decline in oil imports, the Soviet-aided Sngri oil refinery in Ch'ngjin was at least temporarily closed. Consequently, North Korea has increasingly turned to China and Iran for petroleum.
North Korea's principal exports are non-ferrous metals-- mostly zinc, lead, barites, gold, iron and steel, and textile yarn and fabrics, magnesium, metal-working machine tools, military equipment, cement, vegetables, and fishery products. Its main imports are advanced machinery, transport equipment, highgrade iron and steel products, crude petroleum, wheat, and chemicals. Of almost US$1.7 million of imports from the Soviet Union in 1990, machinery and transport equipment constituted by far the largest category of imports--22.4 percent; garments constituted 53.6 percent of exports amounting to approximately US$1 million that same year. Petroleum and petroleum products imported from the Soviet Union declined sharply from 21.5 percent in 1987, to 10.9 percent in 1988, and to 6.7 percent in 1990.

North Korea's main imports from China are energy-related products--coal, briquettes, petroleum, and petroleum products; they constituted 38.4 percent and 38.5 percent of imports, respectively, for 1989 and 1990. Other imports include cereals and cereal preparations, oil seeds, rubber products, textile fibers, fruits and vegetables, foodstuffs, and machinery and equipment. Metallurgical exports, including magnesium, steel, and nonferrous metals, are the largest category of exports to China, comprising 37.2 percent of total exports in 1990. Other exports to China include anthracite coal, cement, fish, and seafood.
Machinery is the largest import from Japan, making up 23 percent of the total, followed by textile fibers and products, base metal and products, chemicals, plastic and rubber products, and electric and transport equipment. Making up about 40 percent of the total in 1989-90, the main exports to Japan are minerals, in particular iron and steel, zinc, magnesium, aluminum, and lead. Other export items to Japan are vegetables, marine products, textile fibers, anthracite coal, apparel and clothing accessories, and precious metals.

Foreign Investment and Joint Ventures

Direct foreign investment in North Korea had been virtually absent until 1984, when North Korea made a surprising turnabout by proclaiming the Joint Venture Law. The twenty-six-article law on joint ventures appears to have been fashioned after China's law on the same subject. Joint ventures are allowed in "industries necessary for the people's economy," specifically electronics, automation equipment, metals, machine building, chemicals, food processing, clothing-processing industries, consumer goods, construction, transportation, and tourism. Overseas Koreans, particularly those in Japan, are singled out as parties who might wish to participate in joint ventures. Foreign participants are allowed to repatriate profits. There are no stated limits on foreign equity shares. A Ministry of Joint Venture Industry was created in 1988 but in 1990 was scaled down to a bureau, presumably under the Ministry of External Economic Affairs, which handled foreign market development, foreign investment, and joint ventures.

Crane of North Korea

Attempts to accelerate the transfer of hoped-for and muchneeded advanced technology and the infusion of capital through joint ventures has had limited success. Until the early 1990s, North Korea was unable to attract major investment by West European or mainstream Japanese firms. Many factors influence the slow pace and low level of participation in joint ventures by firms other than those owned by Choch'ongryn (General Association of Korean Residents in Japan) an organization of North Korea-supporting Korean residents of Japan. In fact, the majority of joint venture deals have been concluded with Choch'ongryn firms. Of a total of 100 joint ventures reported toward the end of 1991, with a total capitalization of 13 billion yen (approximately US$96.5 million), over 70 percent involve Choch'ongryn firms.
Because the foreign debt problem still is unresolved, North Korea has not improved its shaky credit rating. As a result, Western firms consider any venture with North Korea highly risky. Although the joint venture law is liberal with regard to the repatriation of profits, the dearth of hard currency holdings make profit repatriation questionable, thus discouraging potential investors. Another inhibiting factor is the relatively small size of the domestic market, particularly in terms of per capita income. Moreover, the market's restrictive nature--with prices and distribution channels controlled by the state--make the prospect of successful penetration both dim and problematic.
Approximately ten joint ventures have Chinese participation; other partner countries include the Soviet Union and Bulgaria. The largest joint venture project is the Hamhng Rare Earth Separator Plant, which has both Chinese and Choch'ongryn participation and an investment of approximately US$10.25 million. There also are thirty overseas joint ventures; they are mostly in the former Soviet Union with a few in China. The majority of the firms are engaged in light manufacturing. The first joint venture with China, begun in 1989, was a marine fishery products firm located in Ch'ngjin that had an initial capitalization of US$1 million. The Hich'n-Gorky joint venture company run by the Hich'n Machine Tool General Works of North Korea and the Gorky Machine Production Complex of the Soviet Union was commissioned in October 1989. Other projects under way include a joint shipping company, a luxury hotel, a store selling soft drinks, a department store, an apparel plant, a restaurant, a silk fabric plant, and a gold mine. Both Kim Il Sung and Kim Jong Il attended an exhibition of goods produced by a joint venture with Choch'ongryn firms from Japan in P'yongyang on April 13, 1991; the first such event ever held in North Korea.