Trade Between North Korea and China: Firm-Level Analysis

ABSTRACT

Using the unique survey data involving 138 Chinese firms, this study examines the determinants of the performance of the Chinese firms doing businesses with North Korea. The business ties between the Chinese firms and their North Korean counterparts affiliated with the army are positively correlated with the former’s performance. This finding suggests that North Korea’s “Military First” policy acts as a guiding principle of the resource allocation in the country’s export sector. We also found that South Korean sanctions against North Korea were ineffective in banning North Korean goods from gaining access to the South Korean market possibly because of the circumvention of Chinese firms.

KEY WORDS:

• business relationships
• China
• firms
• North Korea
• trade

JEL CLASSIFICATION:

• P3
• P31
• L14
• F51

Notes

1. This article is based on the third chapter of Jung (2014). We revised the chapter not only by providing a more detailed discussion on the relationship between firm’s performances of political connections but also by checking the robustness of the main empirical results using various performance measures of the firms.

2. General (ordinary) trade refers to imports intended for the Chinese domestic market, as well as exports that are primarily based on local Chinese inputs; transit (bonded warehouse) trade refers to trade that only transits China and is re-exported to a third county Based on Chinese Customs statistics, the shares of general and transit trades in Dandong’s total trade with North Korea trade in 2005 stood at 52.4% and 15.9%, respectively.

3. Recent estimates of the number of Chinese citizens in North Korea vary. China’s official Xinhua News Agency published a figure of 4000 Chinese residents in 2008. The Chosun Ilbo, a South Korean newspaper, gave a higher estimate of 10,000 people in 2009. They live mostly in Pyongyang and in areas near the Chinese border.

4. Wa-Ku is a Japanese word that refers to “frame or boundary of discretion.”

5. For example, a certain trading company possesses a Wa-Ku that allows the coal export up to 10,000 ton per year.

6. Based on North Korea’s official account, Kim Jong-il initiated the “Military First” policy in 1995 when he expressed “his will for Military First policy aimed at completing the Juche-oriented revolutionary task, with the People’s Army as the pillar of the revolution and the main driving force of the revolution” while visiting the guard post, Tabaksol (Choe 2003).

7. Kang (2002) pointed out that military affairs take precedence over others and strengthening the military industry should be treated preferentially.

8. Convenience sampling possibly introduces a bias into the results. However, random sampling may induce non-response biases given the possibility that a few questions in this particular survey may be perceived by the respondents as sensitive.

9. In a newspaper interview, the mayor of Dandong stated that 500 registered border-trading companies were doing business with North Korea in the city (Chinese Daily 2001.3.9). Our survey includes both 101 registered firms and 75 individual businesses, which cover at least 10% of 500, the total number of firms.

10. In the survey, we categorize investment into five types, namely, joint management, joint investment, equipment investment in light manufacturing, equipment investment in extractive industries, and investment in hiring North Korean workers.

11. Moneyhan (2003) quoted the following statement: “A 1994 State Ethnic Affairs Commission report to the Communist Party of China (CCP) Central Committee states that minority nationalities are complaining that all the rich are Han people and that the Communist Party could not care less about the minorities. This problem, if ignored, surely will deepen nationality contradictions.”

12. The official statistics by Chinese Customs on the Chinese’s economic aid in 2012 was US$135 million, which accounted for nearly 2.2% of the total trade between the two countries. However, Nanto and Manyin (2010) reported that China’s economic assistance to North Korea accounts for approximately half of all Chinese foreign aid. Several North Korean experts suggested that trade with North Korea provides considerable economic support to the country (Koh et al. 2008).

13. This result is consistent with Kim (2017) in which the data from both trading and investment firms are used and profitability is utilized as a dependent variable.

14. An endogeneity problem may exist in the relationship between the firm performance, such as sales revenue, and the number of business partners. This condition is one reason why we use the changes in the firm performance instead of the firm performance itself. One can argue that the changes in the firm performance are less likely to affect the number of business partners than the firm performance itself.

15. Several firm managers we interviewed also stated that altering the country of origin was widely practiced in bonded warehouses in Dandong.

16. The question on bribery is, “Do you have experiences of paying a few irregular ‘additional payments/gifts’ to your North Korean partners?”.