China’s tax windfall on DPRK border

In the last several months the Daily NK has reported on North Korea’s anti-corruption campaigns, particularly in Sinuiju and Hyesan, major DPRK/China trade hubs. Additionally, we have seen stories of how the Chinese are making life harder for resident North Koreans in the run up to the Olympics.

These measures, both of which should have an adverse impact on trade volume between the two coutries—and thus on tax revenues—made this recent report in the Daily NK all the more surprising. China’s Yanji Customs House (along the North Korean border) has reportedly seen a 226% increase in tax revenue this year from trade with North Korea.

How can China and the DPRK make life difficult for traders/entrepreneurs and still see an increase in the value of traded goods and corresponding tax revenue?  According to the article:

Jilin Newspaper in China reported on the 4th that “[…]For the first half of this year, tax revenues vis a vis North Korea totaled 34.22 million Yuan, up 226.2 percent from the year before.

The newspaper continued, “During this period, entrepreneurs in Yanji imported 64 thousand tons of iron ore from North Korea; that is a 2.3 percent increase from the same period a year ago. Accordingly, the tax amount of collected was 29.13 million Yuan, which is 66.1 percent of the total tax revenue derived from North Korea.”

The Yanji Custom House covers seven border gateways with North Korea, such as Juanhe-Wonjeongri, Shazi-Saebyul, Tumen-Namyang, Sanhe-Hoiryeong, Kaishantun-Sambong, Naping-Musan, and Guchengli-Samjangri.

According to the Yanji Custom House statistics, the Naping-Musan border gateway, where iron ore collected from the Musan mine enters China, is the first ranked for commercial traffic, and Guchengli-Samjangri, the gateway for North Korean timber, is second.

Tonghua Steel Group, Yanbian Tianchi Trade Incorporated Compay, and Zhonggang Group purchased 50-year mining rights for North Korea’s Musan mine in 2005. Since late 2007 they had been discussing a seven billion Yuan additional investment in it but that failed due to conflicting views on cooperative investment rate proportions, methods of withdrawing invested funds and other issues. As a consequence of the stalled investment, the Musan mine’s exports to China have not grown relative to last year’s figures.

So most of the trade that goes through Yanji is in raw natural resources, particularly iron ore and timber, and trade in these resources seems to be carried out by Chinese companies and is probably supported (protected) by senior policy makers on both sides of the border.  Rather than looking at politics as an explanation, it might simply be another result of rising global commodities prices.

The tax windfall could come from one of two sources: A volume (unit) import tax (ex: $1 for each ton of iron) or an ad valorem import tax (ex: tax on the monetary value of the goods).  It is not likely they impose much of an export tax to make a difference.

If China imposed a unit tax, the revenue gains would have to come from surging imports.  In this case, it would be likely that the Chinese companies had fixed-price contracts with their North Korean suppliers, and that  the increase in global commodity prices simply made DPRK iron ore comparatively very cheap.  When (if?) global iron prices fell, we would expect to see China decrease imports from North Korea.  But according to the article, iron imports are up only 2.3%—not enough to explain the surge in revenue.

It is more likely that China imposes an ad valorem tax on North Korean imports and the contracts between the Chinese companies and North Korean suppliers are set at (near) market prices.  Simply put, taxing the monetary value of increasingly valuable imports has been beneficial for the Chinese government.  Even though production at the Musan Mine has not increased much, revenues are probably way up.

Given the status of the Musan Mine as the DPRK’s largest, it is likely that funds raised from this mine are firmly under control.  It would be interesting to know the customs receipts in Dandong, Laioning Province, across the river from North Korea’s Sinuiju.  Sinuiju seems to have suffered the brunt of the DPRK’s anti-corruption drive, and it is the main railway and trade artery between North Korea China.  Most of the companies targeted for inspection were in Sinuiju.  Have Chinese tax collections/trade rebounded there?

Read the full story here:
226% Rise in Tax Revenues at Yanji Custom House
Daily NK
Lee Sung Jin
8/6/2008

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