North Korean Economy Watch

Joong Ang Daily
7/19/2007

The Bush administration is weighing the reinstatement of trade sanctions on North Korea that were lifted during the Clinton administration. A visiting U.S. Treasury Department official, Stuart Levey, described Washington’s policy direction to Korean government policymakers during a visit here from Sunday through Tuesday. Yesterday, a government official described those discussions to journalists, and the Treasury posted a cautious statement by Mr. Levey on its Web site.

The Treasury’s undersecretary for terrorism and financial intelligence had planned his visit before the July 5 North Korean missile tests, but the incident added urgency to the consultations. Giving no details of the content of the discussions, Mr. Levey said in his statement he and Korean officials had discussed issues including “the new United Nations Security Council resolution that requires all member states to prevent the transfer of any financial resources in relation to DPRK’s missile or WMD programs.”

Mr. Levey is also stopping in Tokyo, Hanoi and Singapore on his swing through Asia. Seoul was his first stop. The trip came at a time when Japan is planning its own sanctions, perhaps including a ban on cash remittances to the North.

A government official said yesterday that the undersecretary met with Vice Foreign Minister Yu Myung- hwan and officials from the Ministry of Finance and the Blue House. The official stressed that the meeting was not a consultation on policy toward the North. He said the topics included many international financial issues, but did not touch in any detail on Seoul’s participation in the Kaesong Industrial Complex and tourist trips to Mount Kumgang, both of which are revenue sources for North Korea.

Another official said Mr. Levey responded only with a nod to explanations of the purposes and justifications for those inter-Korean projects.

The Korean officials said the U.S. sanctions Mr. Levey mentioned had been lifted in 1999 by President Bill Clinton as U.S.-North Korea tensions eased. They included trade restrictions and licensing requirements and strict limits on the amount of money U.S. travelers to North Korea could spend there.

Korea Times
7/17/2006

KT, South Korea’s leading fixed-line telecom carrier, signed a 360 million won ($380,000) outsourcing contract last week with a North Korean agency to develop six smart software programs.

A Ministry of Unification official yesterday said the deal between KT and Samcholli General Corp. was struck last Thursday as planned (see the front page of The Korea Times, July 13 edition).

“Samcholli agreed to develop six computer programs in such fields as next-generation networks and voice recognition by the end of this year for 360 million won,’’ said the ministry official, who declined to be named.

“Under the contract, KT can refuse to pay the promised money, if Samcholli fails to meet pre-set requirements by the operator,’’ he added.

However, the two sides could not reach an agreement on the pilot run of value-added processing this year with a pair of telecom items _ polyvinyl chloride (PVC) and splitters _ for some reason.

They initially planned to ink a deal on the test run of the value-added processing, under which KT will provide raw materials while Samcholli will crank out final products in return for commission.

The 2005 winners of the Nobel Prize in Economics were selected for “having enhanced our understanding of conflict and cooperation through game-theory analysis”.  I would check out thier work in order to make sense of the current DPRK/ROK diplomatic posturing.

From the Washington Post:

South Korea on Thursday suspended humanitarian aid to North Korea until it agrees to return to international nuclear disarmament talks.

The action infuriated visiting North Korean officials, who immediately cut off high-level talks in South Korea and stormed back home.

The decision to postpone consideration of a North Korean request for 500,000 tons of rice marked the South’s first punitive action against its impoverished communist neighbor since it defied the international community and test fired seven missiles, including a long-range Taepodong-2, on July 4.

The move came as the administration of South Korean President Roh Moo Hyun has come under sharp public criticism at home for what many there viewed as a weak response by Seoul to the North’s missile tests.

South Korea on Thursday reiterated its deep opposition to a push by Japan and the United States to impose broader sanctions on North Korea through a draft resolution at the United Nation’s Security Council. Seoul has also vowed to maintain its “sunshine policy” of engagement, which has fostered the warmest ties between the Stalinist North and capitalist South since the Korean War divided them in two more than half a century ago.

But the decision to follow through with a previous threat to suspend food aid if North Korea tested missiles — a threat many experts doubted the South Koreans would stick to — displayed a new willingness by the South to use its significant economic clout to apply pressure on the North.

The North Koreans — for whom economic assistance by South Korea is topped only by China — appeared jolted by the decision. At talks being held in the South Korean city of Pusan that were originally scheduled to end Friday, Pyongyang’s delegation abruptly departed Thursday afternoon.

South Korea’s Yonhap news service reported that the North Korean officials left after circulating a statement calling the rupture the result of “reckless” attempts by South Korea to raise “irrelevant issues.” Those issues, South Korean officials said, were the recent missile tests and the North’s refusal to return to six-party talks on its nuclear programs.

The North bitterly condemned Seoul’s decision to suspend food aid, saying “the South side will pay a price before the nation for causing the collapse of the ministerial talks and bringing a collapse of North-South relations.”

South Korean officials, who in recent years have rolled out the red carpet for their visiting North Korean kin, this time offered them a simple meal and welcome bereft of customary sightseeing excursions and photo opportunities. When the North’s representatives understood they would not be returning with promises for more food aid, they simply left.

“The North Korean side expressed their position that additional negotiations would be unnecessary under the circumstance that additional humanitarian aid they need would be impossible,” Lee Kwan Se, a South Korean Unification Ministry official, told reporters.

For the United States and Japan, both pushing for a strong draft resolution at the United Nations that would ban international trade of North Korean missile and other military technology, the South Korean action was a rare diplomatic bright spot.

Christopher Hill, Washington’s top envoy on North Korea, left Beijing for Washington on Thursday after it became clear that Chinese efforts to persuade the Pyongyang government to come back to the six-party talks had apparently failed.

Before leaving, Hill said there was no indication that the North Koreans had changed their position to boycott the talks, which have been stalled since last November.

Japan, which has been deeply rattled by the North’s missile tests, vowed to continue pushing for a tough resolution that would impose sanctions on the North Koreas. But China and Russia back their alterative U.N. resolution unveiled on Wednesday. That draft would censure North Korea for its missile tests, but would endorse only voluntary measures aimed at restraining Pyongyang’s ballistic missile and nuclear weapons programs.

“The Chinese are as baffled as we are,” Hill told reporters in Beijing before departing. “China has done so much for that country and that country seems intent on taking all of China’s generosity and then giving nothing back.”

By Anthony Faiola
Washington Post Foreign Service

From the Korea Times:

You may be surprised to hear that North Korea is either in violation, or the target, of more than 13 U.S. laws, which include laws dealing with transfer of missile technology to other countries and human rights issues. Three of these laws, however, have direct bearing on U.S. economic sanctions against North Korea.

The first is the U.S. Export Control Act of 1949 that became the basis for the U.S. invoking a total embargo against North Korea on June 28, 1950, only three days after North Korea invaded South Korea. The second is the Trade Agreement Extension Act of 1951 that was the basis for banning the most favored nation (MFN) tariffs on North Korea’s exports to the United States. As you know, all member countries of the World Trade Organization have to abide by the MFN regulation that requires these nations to levy the same low tariffs to all member nations of the WTO. Without MFN, there is no way for North Korea to export anything to the U.S. because higher tariffs make them impossible to compete. The MFN is so widely spread that it is now known as the normal trade relation (NTR). North Korea was denied MFN tariff status on September 1, 1951.

The third is the Export Administration Act of 1979 that allowed North Korea to be branded as a terrorist state when its agents blew up KAL 007 on November 19, 1987. At the time of the explosion, Korean Air Lines 007 was in flight from Bagdad (Iraq) to Bankok (Thailand). The explosion killed 115 passengers and crew. On January 20, 1988, North Korea was placed on the list of countries supporting international terrorism.

Placement on the list made it impossible for North Korea to borrow development funds from international financial institutions such as the World Bank and the International Monetary Fund.

On May 25-28, 1999, former U.S. Defense Secretary William Perry visited North Korea and delivered a U.S. proposal. On September 13, 1999, North Korea responded positively by pledging to freeze long-range missile tests. On September 17, 1999, President Clinton agreed to the first significant easing of economic sanctions against North Korea since the end of the Korean War in 1953 by announcing the lifting of most export restrictions applied to North Korea in response to North Korea’s willingness to cease long-range missile testing.

Details of eased U.S. economic sanctions on North Korea were announced on June 19, 2000. Key provisions included that the ban on exports to North Korea had ended, that U.S. passports were valid for travel to North Korea, and that U.S. travel service providers were authorized to organize group tours to North Korea. Among the notable U.S. sanctions that were not lifted are the denial of MFN status and the placement on the list of countries supporting international terrorism.

You may wonder what more economic sanctions can be levied against North Korea beyond the three already in place. To answer this question, you need to know the extent of North Korea’s foreign trade.

Contrary to what you may have heard or believe, latest United Nations trade data indicate that North Korea has trade relations of imports, exports or both with no less than 108 countries, which exclude South Korea because inter-Korean trade is not recorded as trade data in the U.S. trade database. North Korea’s major trading partners in 2004 were, in order of the amount, China ($585,651,972), Japan (164,101,115), Germany ($100,739,000), Brazil ($73,412,125), and Mexico ($47,662,978) for exports, and China ($799,450,316), Russia ($204,818,560), Brazil ($169,921,763), India ($121,080,999), and Netherlands ($120,525,232) for imports. The total amount of North Korea’s exports for 2004 was $1,256,533,361, while the total amount of North Korea’s imports for the same year was $1,937,738,240, with the trade deficit of $681,204,879, representing no less than 54.2 percent of total exports.

Now you have an idea. The new economic sanctions may take the form of a multi-national ban of trade with North Korea. The new economic sanctions may also include a complete ban of any transfer of money to North Korea from many Koreans who live in Japan and support North Korea.

There is no doubt that a complete ban of North Korea’s foreign trade, if imposed, would easily lower the current North Korean GNP to the 1999 level when hundreds of thousands, if not millions, of North Koreans starved to death.

In view of the large number of countries engaged in trade with North Korea, it would be impossible to impose a complete ban on North Korea’s foreign trade without naval blockade, which may escalate tensions on the Korean peninsula so rapidly that China and South Korea may not be willing to go along with multilateral economic sanctions.

Washington Post
Colum Lynch and Anthony Faiola
7/06/06

Japan imposed limited economic sanctions on the North, including a measure prohibiting its officials, ship crews and chartered flights from entering Japan.

A draft U.N. resolution, formally introduced by Japan, would also require states to prevent the transfer of money, material or technology that could “contribute” to Pyongyang’s ballistic missile program or advance its capacity to develop nuclear explosives or other weapons of mass destruction.

In addition, Japanese officials indicated they might be prepared to halt millions of dollars in remittances that are sent annually to North Korea from Koreans living in Japan.

As for China’s response:

Several observers warned that even if Beijing agreed to some form of censure, it would remain reluctant to impose tough economic sanctions out of fear that such measures could destabilize North Korea and spark a crisis on their shared border.

“I don’t think China will take at this moment stronger political or economic action against North Korea,” said Chu Shulong, a political science professor at Tsinghua University and expert in international security. “We Chinese believe basically, fundamentally it is not our problem, the missile launch problem. It’s a problem between North Korea and the U.S., it’s a problem between the DPRK and Japan, it might be a problem between North Korea and South Korea. But basically it’s not a China problem.”

North Korea experts said the options for the Bush administration remain limited, particularly if the Chinese and South Koreans were reluctant to impose tough economic sanctions. Instead, many said, it was more likely that Japan and the United States would seek to continue isolating North Korea by slowly tightening economic sanctions.

In the old days, the DPRK nurtured its independence by alternating its allegiance between China and Russia, playing the big boys off each other.  Today, China clearly holds more influence in the DPRK in terms of trade and direct political influence.  In fact, China and the DPRK are involved in several hydro-power projects on the Yalu river.  Perhaps energy subsidies are a way for Russia to regain a foothold in the DPRK and protect its direct link to Pyongyang and potential land links to Seoul. 

On an economic note, this kind of behavior is typically called “dumping” in the west and it is not allowed under WTO rules.  But both parties are clearly better off if the deal goes through.  This should tell us something about our Anti-dumping trade rules in the west as well. 

But this is all just silly speculation on my part.  Here is the article from the Joong Ang:

July 04, 2006
KHABAROVSK, Russia ― Russia has been in discussions with North Korea to supply it with surplus electricity, Russian officials at a state-owned electric power company recently told the JoongAng Ilbo. In return, North Korea would provide Russia with natural resources.

“We have been discussing exporting surplus electricity from the far eastern district of the country to North Korea,” Victor Minakov, president of Vostokenergo, the far eastern branch of the United Energy System of Russia, said in an interview last week in Khabarovsk.

“The fastest and most efficient way to resolve North Korea’s electricity problem is to supply electricity from Russia,” Mr. Minakov said.

According to Mr. Minakov, negotiations have been delayed because Russia initially asked North Korea to pay cash for the electricity, and then asked it to cover the expenses for building power transmission lines, neither of which the North could afford.

However, the negotiations resumed after Pyongyang offered to pay for the electricity with natural mineral resources. “Representatives from the Russian energy company will visit Pyongyang at the end of this month for further discussions on detailed matters,” Mr. Minakov said.

The far eastern area of Russia, reportedly has around 300,000 kilowatts of surplus electricity, and the government plans to further improve productivity there by building more power plants. Russia and North Korea has been negotiating on the supply of electricity since 2001.

Russia plans to build a 370-kilometer (229-mile) power transmission line between Vladivostok, Russia, and Chongjin, North Korea, to supply 300,000 to 500,000 kilowatts of electricity. Building power transmission lines and converters would take three years, and cost at least $200 million.

“It costs much less to supply electricity from Russia to North Korea than from South Korea to the North or through the programs of the Korean Peninsula Energy Development Organization,” Pavel Korovko, vice president of Vostokenergo, said on June 27 at a seminar in Khabarovsk.

The Korean Peninsula Energy Development Organization was dissolved recently after failing to build light water reactors in North Korea under the terms of a 1994 agreement between North Korea and the United States.

Its not free, but it is published.

Check it out here

Their web page is here, but it looks like they have not updated it in a while.

According to their website,

[KBC is]  among the first to identify the opportunities that North Korea could offer to enterprising companies. As a result, KBC clients benefit from our considerable experience and well-established contacts with this hard-working and largely industrial nation which finds itself on the threshold of fuller integration with the world economy. We believe the significant economic changes that have started to unfold will create major business opportunities for foreign companies with the right strategy.

In the DPRK market, we work with (and for) our customers to secure business and investment opportunities, manage relations, provide effective business solutions and oversee the process of entering the North Korean market.

Specifically, they offer a newsletter.  The sample issue they have displayed is quite old, so I am not sure if it is still published.

They also promote business delegations (with golf) and trade exhibitions, such as the Pyongyang International Trade Fair (PITF),  and the International Technology and Infrastructure Exhibition in Pyongyang

And on the implementation side, Korea Business Consultants offers a full range of financial, legal and transportation services, including:

• Project finance, legal advice and analysis of tax and investment laws of the DPRK.
  Investment seminars to attract inward investment: planned for 2002 – with DPRK support and involvement.
• Participation in DPRK’s expanding and regular Trade Fairs and Exhibitions.
  Trading partners to facilitate the trade of commodities/metals and a full range of other DPRK goods.
• Network of partners in London, Luxembourg, Hong Kong, Seoul, Shanghai, Singapore, Switzerland, Seattle and Toronto.

From the Korea Times:

Seoul to Promote Knowledge Sharing With N. Korea
By Kim Sung-jin
Staff Reporter

The government Thursday said it will continue to promote various projects to exchange economic knowledge with the reclusive North Korea.

Vice Finance and Economy Minister Bahk Byong-won said Thursday that private economic cooperation between the South and the North has become brisker than ever with the Kaesong Industrial Complex and North Korean tourism projects getting into full swing, but inter-government cooperation is still very limited.

“What we need more than anything else to further advance the cooperative inter-Korean economic relations is an extension of knowledge-sharing programs with the North,” Bahk said. He made the remarks at a conference on knowledge sharing for the economic development of North Korea at the Westin Chosun Hotel in downtown Seoul.

Participants in the conference included the Asia Foundation’s country representative in Korea Edward Reed, head of political section of the Delegation of the European Commission to Korea Maria Castillo Fernandez, former Swiss Agency for Development and Cooperation’s (SDC) North Korean office resident director Rudolf Strasser and Korea Institute for International Economic Policy (KIEP) president Lee Kyung-tae.

As Bahk noted, government-level economic exchange programs between the South and the North are still very limited although Seoul and Pyongyang agreed on revising a plan to dispatch economic inspectors across the demilitarized zone (DMZ) at the Inter-Korean Economic Cooperation talks held on Cheju Island between June 3 and 6.

“The Korean government will make consistent efforts to widen knowledge sharing with the North as well as with the international community,” Bahk said.

“We also hope that academia, non-government organizations and international organizations will play a leading role in extending inter-Korean knowledge sharing programs,” he added.

Annual inter-Korean economic transactions, including the transaction of merchandise and services such as tourism, have made a significant improvement over the past five years regardless of the political tension on the Korean Peninsula. They expanded to $1 billion in 2005 from some $200 million prior to the inter-Korean Summit held in 2000.

Meanwhile, the Korea International Trade Association (KITA) said Thursday that inter-Korean economic transaction, or trade, expanded 30 percent in the first five months of this year, thanks to vibrant industrial activity in Kaesong just across the inter-Korean border.

Between January and May, inter-Korean economic transactions amounted to $428.63 million, up 34.4 percent from the same period last year.

In the cited period, North Korea-bound South Korean goods jumped 35.4 percent to $264.97 million, and imports from the North increased 32.9 percent to $163.66 million.

Inter-Korean economic transactions are forecast to expand sharply next year as the number of South Korean manufacturers moving into the Kaesong industrial complex will reach 300 with the completion of the first phase of the industrial park construction project, up from current 15.

Seoul plans to help Kaesong house as many as 2,000 South Korean firms by 2012 when the complex is fully developed.

From Yonhap:

South Korea will intensify efforts in technical assistance and training for North Korea in order to help the communist state’s economy grow further, a government official said Thursday.

“We should help the North to enhance its understanding of economic principles and their operation mechanism, which will guarantee us more substantial and enduring results from economic assistance to North Korea,” Vice Finance Minister Bahk Byong-won said in a speech at a forum titled “Knowledge Sharing for Economic Development of North Korea.”

“Material assistance without economic knowledge and managerial capacity cannot contribute to sustainable economic growth,” he said.

Bahk said excessive transaction costs caused by the lack of adequate knowledge about economic principles, practices and international economy on the North Korean side have posed bigger threats to economic development than anything else.

“Some have suggested that inter-Korean cooperation has proceeded at a slow pace, but despite a rapidly changing environment, inter-Korean economic cooperation has shown remarkable strides,” he said.

Inter-Korean trade volume, which stood at US$2 million-$3 million before the 2000 inter-Korean summit, reached $1 billion last year, making South Korea the second-largest trading partner of North Korea, the official said.

Also, personnel exchanges and movement between South and North Korea have never been more frequent than recently, he said.

Bahk said economic cooperation between the Koreas, which has been regarded as one-sided, has also shifted to the one that is reciprocal and serves mutual interests, he said.

“South Korea, international organizations and nongovernmental organizations should seek to create synergies by exerting concerted efforts through sharing information among ourselves with regard to the knowledge-sharing experience with North Korea,” Bahk said.

The South Korean government will not spare any effort to vitalize knowledge sharing with North Korea for its economic development in close partnership with the international community, he said.

from the Korea Times:

The top U.S. envoy in Seoul has expressed serious concerns about the status of products made in the Kaesong Industrial Complex, North Korea, labeling them “poison” to the currently negotiated free trade agreement (FTA) between South Korea and the United States, a source said Monday.

The products made in the Kaesong Industrial Complex could poison the negotiating process of the South Korea-U.S. FTA and later the ratification process in the U.S. Congress, the source quoted U.S. Ambassador to Seoul Alexander Vershbow as saying during the Korea-U.S. Business Council meeting in Seoul last week.

Vershbow requested that Seoul exclude the goods made in Kaesong from the FTA negotiation agenda and asked Korean officials to explain to Korean lawmakers the U.S. position since it could dampen the FTA talks, the source said, asking not to be named.

Though Seoul was aware of U.S. opposition to the idea that products made in Kaesong are considered Korean products in trade, it did not expect Vershbow to be so negatively disposed to Seoul’s proposal.

The Seoul government has been trying to include the Kaesong products with other South Korean goods in the FTA negotiations with the United States as in its FTAs with Singapore, ASEAN and EFTA.

The Kaesong Industrial Complex is the flagship of inter-Korean business cooperation where 15 small and mid-sized South Korean companies operate, employing some 7,000 North Koreans.

Meanwhile, the ambassador hinted at the possibility of South Korea joining the visa waiver program (VWP), which allows visitors from countries to enter the United States for up to 90 days without a visa.

In response, Trade Minister Kim Hyun-chong said that if the United States includes South Korea in the VWP, it will be welcomed by South Koreans and helpful for the successful conclusion of an FTA between the two countries.

However, a participant in the meeting, who wanted to remain anonymous, said that he got the impression that the U.S. ambassador tried to use the visa waiver as a wild card to lead the FTA negotiations in favor of the United States.

“From a legal viewpoint, the FTA has nothing to do with the visa waiver. The Korean government must keep this in mind,” he said.

Eligibility requirements for nations to join the visa waiver program include a visa refusal rate of 3 percent or less for two consecutive years.

The annual meeting of the 19th Korea-U.S. Business Council ended last week, announcing its full support for the Seoul-Washington FTA.