Sino-NK

The deepening of ties between China and other parts of the developing world in recent years has been met a great deal of hyperbole. Just as many onlookers describe China’s growing stake in Africa as “neo-colonial” (charges described and refuted in North Korean media) Chinese investments in the DPRK have also accrued a predatory stigma. But as SinoNK.com Analyst Scott Bruce shows in this piece, market forces may simply be determining the outcomes of seemingly lopsided trade deals between China and Korea. – Charles Kraus, Managing Editor

“Friendship Prices”: Understanding Chinese-North Korean Energy Trade

by Scott Bruce

While China is a key donor of fuel, along with food and fertilizer, to North Korea, there is also an established energy trade between the two countries. The best study of this trade is “North Korean Trade with China as Reported in Chinese Customs Statistics: 1995-2009 Energy and Minerals Trends and Implications” by Nathaniel Aden. The report found that North Korean electricity exports were being sold at discount “friendship prices” to the PRC. North Korea, however, paid a premium for crude oil imports from China, paying between 8 and 12 percent more for crude oil than the average cost of Chinese exports elsewhere.

Representatives from the Korea Resource Group (KORES) in the ROK have expressed concern that China is taking advantage of its role as North Korea’s biggest trading partner to buy up DPRK energy and minerals resources on the cheap. Their fear is that the South is “losing” resources that could be used to fund reunification and/or the redevelopment of North Korea’s infrastructure to the Chinese.

A substation in North Korea. Image courtesy of Choi Kyung-soo/The Nautilus Institute

To some degree these assessments are correct. North Korea is selling resources with the potential to fund the long-term development of the country due to an urgent, short-term need for foreign currency. In December, for example, North Korea suspended anthracite coal exports to China to ensure there was an adequate domestic supply. This shows the fine line that North Korea walks between selling energy resources for much needed foreign currency, and the need to maintain enough of a domestic supply to keep factories operational during the cold winters.

On the other hand, when we consider the business environment, “friendship prices” probably reflect the real cost of trading in North Korea. As Drew Thompson notes in his study of Chinese-North Korean joint business ventures, although China is uniquely poised to do business in North Korea, trade and investment in the DPRK are by no means easy. North Korea’s decrepit infrastructure, high corruption, and dysfunctional legal system make investment and trade difficult. These challenges limit the ability of the Chinese to do business in North Korea and merit a higher return on investment.

The difference in the price of these commodities is likely more attributable to the poor infrastructure available to ship energy into and out of North Korea, the need to rehabilitate coal mines to secure production, and the high risk of doing business in the DPRK, than predatory trade practices. To return to Nathaniel Aden’s detailed survey, North Korea sold anthracite coal to China at a premium, possibly due to the close proximity and high demand to Chinese markets.  The lesson here is that this is a market driven trade between two ostensibly communist states, not a story of neo-colonial exploitation on the part of the Chinese.

Transportation in North Korea. Image courtesy of Choi Kyung-soo/The Nautilus Institute

Sources:

• North Korean Trade with China as Reported in Chinese Customs Statistics: 1995-2009 Energy and Minerals Trends and Implications, Nathanial Aden, Nautilus Institute Special Report, June 7, 2011.
• South losing race for the North’s resources, Suh Kyung-Ho, Joong-Ang Ilbo, January 18, 2011.
• Anthracite Export to China Suspended Temporarily, IFES NK Brief, November 24, 2011.
• Silent Partners: Chinese Joint Ventures in North Korea, Drew Thompson, US-Korea Institute, February 2011.
• The Mining Industry in North Korea, Choi Kyung-soo, Nautilus Institute Special Report, August 4, 2011.