North Korea Sanctions Itself

Reuters, citing a study by the Korea Development Institute (KDI), reports that “North Korea’s international trade dropped last year for the first time in more than a decade.” The report suggests that this was mostly the consequence of sanctions, but a closer look at the evidence it was The Great Confiscation that really brought trade across the Chinese border to a standstill by paralyzing the economy, markets, and trade, and banning the use of foreign currency in the final months of 2009. As trade with South Korea, Japan, and other nations has declined in recent years, the great majority of North Korea’s international trade has shifted to China. The KDI report notes that “the largest impact came from a sharp decline in trade with China.” But if trade with China has declined, there’s little evidence that this is because China has tried in good faith to comply with U.N. Security Council Resolution 1874. Reports from last year suggests that the new resolution had little if any impact on China-North Korea trade, and China has largely turned a blind eye to North Korean arms trafficking.

Instead, the decline in trade is more likely due to the regime’s own increasingly desperate efforts to destroy a rising underground market economy in North Korea, efforts that began with the state banning and confiscating Chinese imports in July, continued with the closure of its largest unofficial market in September, and culminated in The Great Confiscation — a series of draconian diktats that destroyed the working capital of millions of traders and the saving of millions of desperate citizens, banned the use of foreign currency, and destroyed confidence in the domestic currency. Despite some reports that that the crackdown on foreign currency has been eased out of necessity, according to this report, the regime is still cracking down on the use of the Chinese Yuan, and that this has caused food prices to soar.

A Daily NK source explained, “Lately, cadres have been claiming that the Chosun (North Korea) economy could be occupied by China, so dealing in Yuan is banned. He added that he does not know whether this is just a pretext, or whether the North’s officials really are worried. Additionally, of course, the amount of foreign currency in the country cannot meet the overall demand. This is stoking inflation.

There are three measures the authorities are employing to block the inflow of Yuan. First and most obviously, they are blocking the channels of direct Yuan inflow. Since the redenomination, North Korean border guards have been cracking down on smuggling and drug dealing. One unintended result of the crackdown is that currency smuggling and drug dealing are now being led by border guards, but supplies of Yuan are still dropping as a result of the measure.

Secondly, due to regulations against the use of cell phones for reasons, nominally, of national security, dealings between North Korean traders and Chinese wholesalers have been seriously circumscribed. Now, less than half the previous amount of cross-border trading is being initiated via mobile phone.

Lastly, in the market, a ban on the circulation of foreign currency is still in force. As foreign currency dealing is more risky now, the costs associated with that risk are being added into the exchange rate while, simultaneously, the value of the North Korean won is deteriorating for a number of reasons.[Daily NK]

Another important factor in the decline of trade must certainly be the regime’s politically motivated interference with access to the Kaesong Industrial Complex, which we can assume is now in a state of slow but steady decline due to the vastly increased political risk of investing there.

The KDI report also notes that the decline in imports “indicates a foreign exchange shortage in the North.” Yet U.N. Security Council Resolution 1874 exempts humanitarian aid and “lawful economic activities,” and as a practical matter, hasn’t affected most Chinese exports to North Korea. Thus, to the extent the decline in North Korea’s imports reflects the effect of sanctions, it likely means a decline in North Korean imports of things we don’t want it to import anyway — yachts and fancy cars, to name two — and the increased difficulty of generating foreign exchange by selling weapons.

(One complicating factor in this picture is China’s tendency to block all food exports when domestic food prices rise. This can cause food prices to rise in North Korea, which imports much of its food supply from China.)

Today, the South Korean government is worried about the sudden deterioration of North Korea’s food situation, citing declining food production and something South Korea’s leftist governments never mentioned: “disproportionate food distribution among different classes or regions.” But between the summer of 2008 and the beginning of The Great Confiscation in November 2009, there were no strong indications that North Korea’s food situation was much worse than usual. Although the 2009 harvest was a poor one, the statistics also show that it wasn’t significantly worse than in previous years. North Korea’s food situation did not change significantly after May 2009, when North Korea tested its second nuke and the U.N. responded with UNSCR 1874. Instead, reports of a rapidly deteriorating food situation and resulting public discontent are a very recent development that is largely attributable to The Great Confiscation.

U.N. sanctions certainly seem to have damaged to the Palace Economy, and to have scared away investors who don’t know or don’t care how their money will be used. That will make the world a safer place. But any damage to the Peoples’ Economy is largely the result of the regime’s own brutality and stupidity. For years, those two economies have largely performed as separate entities as the regime used the hard currency it generated for its own priorities and depended on international aid to feed the expendables. To the extent the hard times for the Palace Economy and the Peoples’ Economy are related, it’s likely because the former attacked the latter with confiscatory intent.