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International Sanctions and North Korea’s Economic Future Economic Sanctions and DPRK Trade Quality: Evidence from Japan and ROK Sanctions April 25, 2023

International Sanctions and North Korea’s Economic Future

Economic Sanctions and DPRK Trade Quality: Evidence from Japan and ROK Sanctions

April 25, 2023

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Economic Sanctions and DPRK Trade Quality: Evidence from Japan and ROK Sanctions

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Suk Lee
(Korea Development Institute)

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April 25, 2023

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1. Introduction

It is widely believed in the international community that the year 2016 marked a significant shift in the effectiveness of sanctions against the Democratic People’s Republic of Korea (DPRK or North Korea). Prior to this point, despite numerous foreign sanctions, the North Korean economy was perceived to be relatively unscathed domestically. This notion is supported by evidence indicating that the country's external trade appeared to have been steadily increasing since Kim Jong Un's ascent to power in 2012, before experiencing a sharp decline in 2016, ultimately leading to a complete halt in nearly all sectors.

Thus, it is challenging to contend that sanctions against the DPRK had a meaningful impact on the quantity of trade, at least until 2016. Nevertheless, the matter of quality is a different issue entirely. Given the number of countries imposing sanctions on North Korea, one might wonder if the nation can manage to maintain or even enhance the quality of its trade amidst such pressure.

The likelihood of this is low for two reasons based on both observation and logic. It is well-known that North Korea's key trading partners in the 2000s were China, South Korea, and Japan, who jointly accounted for almost 90% of its total external trade. However, in the mid-2000s, Japan ceased all trade relations with North Korea due to the abduction of Japanese citizens from 1977 to 1983, followed by South Korea, which suspended all exchange programs with North Korea, except the Gaeseong Industrial Complex project, in response to the sinking of its Cheonan warship in 2010. Consequently, China emerged as North Korea's sole external trade partner. According to some observations, the quality of trade between North Korea and China has significantly deteriorated, particularly since 2010, as the share of minerals, particularly anthracite and iron ore, has increased in exports to China. Therefore, it can be inferred that the sanctions imposed by Japan and South Korea during the 2000s compelled North Korea to become increasingly reliant on China for external trade, which has been detrimental to the quality of its trade with China. In light of these developments, it is challenging to argue that Japan and South Korea's sanctions did not negatively impact the quality of North Korea's trade.

Moreover, it is worth noting that Japan and South Korea possessed more advanced economies than China at the time, indicating that North Korea's trade losses occurred with more sophisticated economies than with less developed ones. Typically, when an economy interacts with a more advanced one, trade quality tends to increase. The reason for this is that more sophisticated economies have more intricate trade requirements in terms of trade contents and forms, which compels trade partners to adhere to higher quality standards. Therefore, given these circumstances, it is challenging to assert with certainty that Japan and South Korea's decisions did not impact the quality of North Korea's trade structure.

The economic sanctions imposed by Japan and South Korea prior to 2016 may have had a detrimental effect on the quality, if not the quantity, of North Korean trade. Therefore, it is necessary to reassess the potential mid- to long-term consequences of economic sanctions. Despite possible increases in trade, North Korea may face significant challenges in sustaining quantitative growth and achieving long-term economic growth and welfare improvement if the quality of its trade continues to deteriorate. Hence, the actual impact of the sanctions imposed by Japan and South Korea may not have been on the quantity of trade, but rather on the obstacles to long-term economic growth and welfare enhancement.

This paper aims to examine the impact of the sanctions that Japan and South Korea levied during the 2000s on the quality of North Korean trade, particularly from 2016 onwards.

The next section of this paper will present an overview of the subjects, methods, and data required to evaluate the impact of the economic sanctions imposed by Japan and South Korea in the 2000s on the quality of North Korea's trade. Based on this foundation, the third section will examine the implications of the changes observed in the quality of North Korea's trade over the period of Japan and South Korea's sanctions. The fourth section will analyze the changes in the structure of North Korea's goods trade that resulted in such changes in quality. Additionally, the fifth section will investigate how sanctions influenced North Korea's export prices, specifically focusing on South Korea's sanctions. Finally, the paper will provide a comprehensive summary of these discussions in the conclusion.

While a comprehensive analysis of the impact of North Korea sanctions on trade should ideally include both imports and exports, this paper is limited to examining the impact on exports only. This is due to the nascent state of qualitative analysis on the effects of North Korea sanctions on trade, which has constrained the scope of this study.

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2. Data and Method

This section will discuss the most suitable methods for analyzing changes in the quality of North Korea's trade, particularly its exports, which can be attributed to sanctions. Specifically, this section will focus on the methods relevant to the sanctions imposed by Japan and South Korea during the 2000s.

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Analytical Framework

The quality of traded goods can be determined by evaluating the degree of inputs utilized in their production. Therefore, the quality of a country's trade can be evaluated by measuring the degree of inputs utilized in the production of the goods it trades. Shirotori, Tumurchudur, and Cadot have developed indices for measuring human and physical capital intensity of globally traded goods, categorized by the six-digit level of the Harmonized System (HS). Consequently, the quality of trade can be estimated if the HS codes for traded items are available.

However, assessing changes in trade quality necessitates more than merely measuring the quality itself. Even if changes in quality are confirmed to have occurred during the period of sanctions, they may not have been caused by the sanctions themselves. To identify the cause of such changes, we need to consider additional variables, specifically changes in the structure of goods trade. When a country imposes sanctions, the sanctioned item may be removed from the list of traded items, replaced by another trade partner, or substituted with another item. Therefore, when tracking these changes in trade structure, it is essential to verify whether any alterations in trade quality are due to the sanctions.

It is also crucial to investigate changes in the price environment for traded goods. Generally, when a country trades the same products with different partners, the price environment for those trades will differ significantly across those partners. In the event that one country imposes sanctions on another, severing all trade relations, the sanctioned country is likely to encounter vastly different trade conditions even if it manages to find a new partner to trade the sanctioned items. This is because the new partner will present a unique price environment for the sanctioned country's trade, resulting in qualitative changes that cannot be captured by the human and physical capital intensity indices used to measure the quality of traded items. Therefore, to obtain a comprehensive understanding of the changes in North Korea's trade quality attributable to sanctions, we must also analyze the changes in the price conditions or environment for North Korea's trade.

As depicted in Figure 1, the first step in this analysis is to assess the difference in North Korea's trade quality over the period of sanctions. The second step is to monitor changes in the country's overall goods trade structure to verify whether the difference can be attributed to the sanctions. Finally, we must analyze changes in the price environment for North Korea's trade that arose around the time of the imposition of sanctions.

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