North Koreas Trade with China: Aggregate and Firm-level Analysis

Abstract

This dissertation uses firm-level as well as aggregate data to investigate the economic relationships between North Korea and China. More specifically, it analyzes the effects of North Korea-China trade on the economic growth of North Korea. It further discusses the impacts of sanctions by South Korea and Japan on North Korea-China trade. Finally it estimates the determinants of the performance of firms that are trading with North Korea in China Chapter 2 uses cointegration tests and Vector Error Correction Model (VECM) to examine causality between Sino-North Korean trade and economic growth of North Korea from 1970 to 2012. To carry out empirical analysis, VECM is constructed, which is comprised of four variables, GDP, exports, imports, and investment. Investment is used as the key explanatory variable of economic growth, and imported capital as a proxy of investment. The cointegration equation suggests that the mechanism of North Koreas economic growth is basically similar with that of low income, market-oriented countries, in the sense that trade and foreign capital inflows do matter for its growth. The estimation of the VECM shows that, in the long-run, exports, imports, and investments Granger-cause income through error correction mechanism, but not vice versa. With respect to short-term causality, however, the variables have little causal relations with each other except for causality flows from imports to exports. This shows that traditional barter-type settlement is still prevalent in Sino-North Korean trade. Chapter 3 addresses the question whether North Korea–China trade dilutes the effects of the unilateral sanctions imposed by South Korea and Japan, and if so, to what extent and in what way. It finds structural adjustment of North Koreas export pattern in size and trade type for the purpose of diluting the effectiveness of the unilateral sanctions, imposed by South Korea in particular. It also finds that South Koreas economic sanctions significantly boost North Koreas exports to China, and the export increase has been large enough to cover the loss from South Koreas sanctions. In particular, North Korea has increased both exports to the Chinese domestic market (through general trade) and exports transferred in China (through bonded trade). These findings show that North Korea has mitigated the economic damage of sanctions by employing a broad range of techniques for trade diversion. The changes would take place because incentives of both North Korean regime and foreign firms meet well particularly after South Korean sanctions. Finally, Chapter 4 identifies the determinants of Chinese firms performance by using the survey data of the firms that trade with North Korea in Dandong, China. The survey was conducted in 2012 and 2013 to assess the impact of the sanctions imposed by South Korea in 2010. 138 firms engaged in trade with North Korea are used in the analysis out of 174 sample firms. With special attention paid to the firms relationships with their North Korean partners, it finds that the business ties with army-affiliated North Korean counterparts have a stronger positive effect on the performance of Chinese firms than the ties with other counterparts. In particular, the business ties between the Han zu companies and the army-affiliated North Korean partners are found to be the most influential. This empirical finding suggests that North Koreas military first polices de facto regulates resource allocation mechanisms in North Koreas export sectors, after the imposition of South Korean sanctions. It also finds that Chinese firms that have more partners and formal dispute resolution channels tend to achieve more favorable outcomes in cross-border exchanges with North Korea, because these features function as hedge against the risk from North Koreas unstable Wa-Ku system. The following chapters are all self-contained and can be read independently.